How Does COBRA Work?

The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) is a federal law requiring private-sector employers with 20 or more employees to allow former workers to continue their health insurance coverage under the company's group plan. This way, they don't lose benefit protection and continue to have group health care coverage.

The Basics of the Law

Three types of American workers are eligible for COBRA, including terminated employees, employees with reduced working hours, or those who become eligible for Medicare less than 18 months from the qualifying date. Coverage for a spouse, partner, or any dependents may last up to three years after the employee's Medicare eligibility date. COBRA counts part-time worker “equivalents”, meaning the hours of two or more part-time workers can be combined to make a single full-time worker to meet the 20-worker minimum. Employees who choose COBRA coverage make full premium payments at the group plan rate. An employer may levy up to a two percent charge for administration. So, whether an employee quits, is laid off or is fired, certain responsibilities under the law don't end when the employee walks out the door.

Employers are responsible for notifying former employees of the right to elect COBRA coverage under your group plan, with most including information as part of an employee's exit paperwork. The law sets specific time periods for additional formal notifications. Employers have 30 days after the employee's last day at work to notify the administrator — usually the insurance company – and the administrator has 14 days after that to notify the employee who is entitled to COBRA coverage.

Former employees' dependents and other qualified beneficiaries have an independent opportunity to elect COBRA coverage, even if the former employee chooses not to opt for personal coverage. Qualified beneficiaries are those individuals who were covered under the employee's health insurance as of the last day of work, such as a spouse, parent, or child.

The bottom line is employees who elect COBRA coverage must have access to the same insurance as current employees. That includes health exchange information and options available under health care reform. It is considered good-faith compliance with the election notice requirements under COBRA.

Who pays for COBRA coverage?

The employee pays the full cost of the insurance premiums. COBRA coverage can be terminated if premium payments are late. Timely payments must be made within 30 days after the due date or within a longer period set out under the plan. Those who choose to take COBRA coverage have 45 days to make the first payment.

The Department of Labor fines employers $110 for every day a COBRA notice is delinquent, so compliance is important. There are tax penalties of up to $100 daily for each affected former employer and each violation. The IRS levies a minimum noncompliance tax of $2,500, with a maximum tax of either ten percent of the amount the employer paid during the previous year for group health insurance, or $500,000. The IRS can hold employers personally liable for noncompliance with COBRA statutes. In addition, the company must pay any legal and accounting fees during the audit procedure.