COBRA Overview

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) was signed into law on April 7, 1986. Under COBRA, employers that sponsor a group health plan must allow qualified beneficiaries (i.e., covered employees and their spouses and dependent children) the opportunity to elect to continue their coverage under plans at their own cost if they lose coverage after the occurrence of a "qualifying event." Depending on the nature of the qualifying event, continuation coverage may last for 18, 29, or 36 months.

Reason for the law

COBRA was enacted in response to governmental concern with reports of the growing number of Americans without any health insurance coverage and the decreasing willingness of the nation's hospitals to provide care to those who cannot afford to pay. Congress was particularly concerned that certain spouses and dependent children may be deprived of health benefits due to an unexpected change in family status.

Employers should keep in mind that courts will often cite this legislative history as proof that COBRA is a remedial statute that should be interpreted in favor of the qualified beneficiary in gray areas of the law (of which there are many). Therefore, when the law is not clear, employers should proceed with caution before taking an aggressive stand against providing continuation coverage to an individual.

The COBRA health care continuation rules apply to the health plans of all employers except:

1. churches (but not other tax exempt organizations);
2. small employers (see below); and
3. the federal government.

However, federal employees are entitled to continuation coverage under the Federal Employees Health Benefits Amendment Act of 1988.

Small employer exception

COBRA does not apply to a group health plan for any calendar year if the employer maintaining the plan employed fewer than 20 employees on at least 50 percent of its typical business days during the preceding calendar year. The 2001 final regulations provide guidance for counting employees for purposes of the small employer exception.

If more than one employer is maintaining a group health plan (except for MEWA arrangements), all of the employers maintaining the group health plan must meet this test. That is, each one must have fewer than 20 employees on at least 50 percent of the typical business days in the preceding calendar year.

The continuation coverage arising from qualifying events in previous years when an employer was subject to COBRA is not cut off if the employer becomes eligible for the small employer exemption. The employer must continue to make such COBRA coverage available for the appropriate periods.

For purposes of the small employer exception:

• a controlled group is considered one employer;
• each employer subscribing to a multiple employer welfare arrangement (MEWA) is considered to maintain a separate plan, so that the exception applies separately to each subscribing employer with fewer than 20 employees--even if another subscribing employer has 20 or more employees;
• a multiemployer (i.e., a collectively bargained) plan is subject to COBRA if any employer required to contribute to the plan employs 20 or more employees.

Plans subject to COBRA include (but are not limited to):

• HMOs (health maintenance organizations) and PPOs (preferred provider organizations);
• insured and self-insured plans providing medical benefits;
• retiree health plans;
• cafeteria plans providing medical benefits;
• on-site facilities providing more than first aid;
• vision, hearing, and dental plans;
• prescription drug plans;
• alcohol and drug plans;
• mental health plans; and
• certain health care flexible spending accounts (FSAs).
• Life insurance, traditional disability plans and long term care plans are not subject to COBRA.

Qualified Beneficiaries

Qualified beneficiaries who lose coverage under a group health plan as the result of a "qualifying event" are entitled to elect continuation coverage. A "qualified beneficiary" is an employee covered under an employer's group health plan in situations where the qualifying event is a termination (other than for gross misconduct) or a reduction in working hours. A qualified beneficiary also includes the spouse and dependent children of the covered employee if they were covered on the day before the qualifying event occurred.

Qualifying Events

"Qualifying events" are certain types of events that would cause the qualified beneficiary to lose health coverage.

The types of qualifying events that affect covered employees are:

• voluntary or involuntary termination of employment for any reason other than gross misconduct; and
• reduction in the number of hours of employment.

The types of qualifying events impacting spouses are:

• death of the covered employee;
• voluntary or involuntary termination of the covered employee's employment for any reason other than gross misconduct;
• reduction in the covered employee's hours of employment;
• divorce or legal separation of the covered employee; and
• entitlement to Medicare for the covered employee.

The types of qualifying events affecting dependent children are:

• death of the covered employee;
• voluntary or involuntary termination of the covered employee's employment for any reason other than gross misconduct;
• reduction in the covered employee's hours of employment;
• divorce or legal separation of the covered employee;
• entitlement to Medicare for the covered employee; and
• loss of dependent child status under the plan rules.

COBRA prescribes notification responsibilities that apply to employers, plan administrators, and, in certain instances, covered employees and qualified beneficiaries. (In many cases, the employer and plan administrator will be the same person or entity.)

Initial Notice - Department of Labor (DOL) Letter

When an employee becomes covered under a group health plan, the plan must furnish to the employee and the employee's spouse a written, general notice of their rights under COBRA.

Notice to plan administrator

The second round of notice-giving is triggered when a qualifying event occurs. Employers must notify plan administrators within 30 days of a covered employee's death, termination, reduction in hours of employment, entitlement to Medicare or initiation of bankruptcy proceedings by an employer.

The covered employee or qualified beneficiary must notify the plan administrator within 60 days of a divorce or legal separation or the date on which a child ceases to be a dependent under plan rules.

Notice to qualified beneficiaries

Plan administrators must provide a notice of the right to elect continuation coverage to each qualified beneficiary within 14 days of receiving notice that a qualifying event occurred. A plan administrator may satisfy this responsibility by sending the notice by first-class mail to the last known address of the beneficiary.

Notification to the spouse of the covered employee is treated as notification to all other qualified beneficiaries residing with the spouse.

Duration of Coverage

COBRA generally provides a maximum continuation period of 18, 29, or 36 months of continuation coverage depending on the type of qualifying event. A qualified beneficiary's maximum continuation period begins on the date of the qualifying event.

18-month qualifying events

If the qualifying event involves a termination (other than for gross misconduct) or a reduction of hours, all qualified beneficiaries are entitled to 18 months of continuation coverage.

29-month period for disabled qualified beneficiaries

If a qualified beneficiary is determined under Title II or XVI of the Social Security Act to be disabled within the first 60 days of COBRA coverage, the continuation period is 29 months for the disabled qualified beneficiary and any nondisabled qualified beneficiaries with respect to the same qualifying event. In order to obtain the additional 11 months, any of the qualified beneficiaries must notify the plan administrator within 60 days of the determination of disability and before the end of the 18-month continuation period.

If, during the additional 11 months, the Social Security Administration determines that the qualified beneficiary is no longer disabled, the employer may terminate continuation coverage for all qualified beneficiaries as of the first month that begins more than 30 days after the date of such determination. The qualified beneficiary must notify the plan administrator within 30 days of such determination.

36-month qualifying events

The following qualifying events entitle qualified beneficiaries to 36 months of continuation coverage:

1. death of the covered employee;
2. divorce or legal separation of the covered employee;
3. covered employee becoming entitled to Medicare; or
4. loss of dependent child status under the plan.

Multiple qualifying events

When a 36-month qualifying event occurs during the 18-month continuation period (or 29-month disability period) following an initial qualifying event that involves termination or reduction of hours, the qualified beneficiary is entitled to 36 months of COBRA coverage from the date of the initial qualifying event.

A special rule applies when a covered employee's Medicare entitlement occurs within 18 months of a qualifying event involving his or her termination (for any reason other than gross misconduct) or reduction in hours.

Consequences of COBRA violations

Employers and plan administrators that violate COBRA's health care continuation rules are subject to IRS excise taxes and private lawsuits under ERISA.

IRS excise tax

The excise tax for violating COBRA is $100 per day per beneficiary during the noncompliance period, with a maximum tax per family of $200 a day. The tax does not apply if the violation is corrected within 30 days and was due to reasonable cause rather than willful neglect.

ERISA fines and damages

Under ERISA, plan administrators that violate either of COBRA's notice requirements (160) may be assessed fines of $110 per day per individual during the period of noncompliance. The fine is paid to the aggrieved individual.

Further, employers and plan administrators may be liable for past and future medical expenses during the qualified beneficiary's continuation period. A court will place an aggrieved qualified beneficiary in the same financial position the beneficiary would have been in had COBRA coverage been properly provided. Finally, a court may award aggrieved individuals their attorneys' fees.

Role of the Federal Government

Continuation coverage laws are administered by several agencies. The Departments of Labor and the Treasury have jurisdiction over private sector health plans. The United States Public Health Service administers the continuation coverage law as it affects public sector health plans.

The Labor Department's interpretative and regulatory responsibility is limited to the disclosure and notification requirements. If you need further information on your election or notification rights with a private sector plan, write to the nearest office of the Pension and Welfare Benefits Administration or:

The Internal Revenue Service, which is in the Department of the Treasury, is responsible for publishing regulations on COBRA provisions relating to eligibility and premiums. Both Labor and Treasury share jurisdiction for enforcement.

The U.S. Public Health Service, located in the Department of Health and Human Services, has published Title XXII of the Public Health Service Act entitled "Requirements for Certain Group Health Plans for Certain State and Local Employees." Information about COBRA provisions concerning public sector employees is available from the:

Federal employees are covered by a law similar to COBRA. Those employees should contact the personnel office serving their agency for more information on temporary extensions of health benefits.