Employer-provided health coverage is a great benefit for employees, but what happens to that coverage when a company parts ways with an employee? Larger employers have a responsibility to maintain these benefits for a period of time after the employee is terminated—although they don't have to continue paying for them.
The 2021 American Rescue Plan includes relief for workers who are eligible for COBRA coverage if they are laid off or had their hours reduced. Premium assistance (100% of benefits) will be available from April 1, 2021, through Sept. 30, 2021. In addition, the election period has been extended to allow individuals who previously experienced a qualifying event to enroll in subsidized coverage.
What Is COBRA?
The Consolidated Omnibus Budget Reconciliation Act (COBRA) gives employees continued health benefits if they are terminated or their hours are reduced when those benefits are tied to the company they worked for. COBRA benefits apply to termination, voluntary termination by the employee, reduction in hours, death, divorce, and other life events.
When Does COBRA Coverage Begin?
The Employee Benefits Security Administration (EBSA) enforces COBRA laws and sets three basic requirements for determining whether an employee is entitled to coverage:
- The company's plan must be covered by COBRA.
- A qualifying event must have occurred such as the death of an employee or termination.
- The person receiving the benefit must be qualified.
Your business is covered by COBRA if you have more than 20 employees (for more than 50% of the year) and you offer company-paid health plan coverage, You must offer COBRA coverage to employees who are terminated as well as those who leave voluntarily. You don't have to pay the cost of the coverage for terminated employees, but you must keep them on your health plan for a certain period of time at the same rates as other employees.
Who Counts Toward COBRA Coverage?
Both full-time and part-time employees are counted in this calculation, though part-time employees are counted based on the percentage of the time they work compared to a full-time employee.
For example, if a part-time employee works 20 hours a week and your full-time employees work 40 hours a week, the part-time person would count as 50% of a full-time person. If another part-timer works 30 hours a week, that person would count as 75% of a full-timer. Add up all the full-time and part-time employees to see if your business meets the minimum for the requirement.
You must include covered employees, former employees, spouses, former spouses, and dependent children in the COBRA coverage you provide if the person receiving the benefits is "qualified." The U.S. Department of Labor (DOL) says, "A qualified beneficiary is an individual who was covered by a group health plan on the day before a qualifying event occurred that caused him or her to lose coverage."
When Does an Employee Qualify for COBRA?
An employee, spouse, or child qualifies for COBRA coverage when they have a qualifying event, which is defined as an event that causes the person to lose group health coverage.
For employees, the event is usually termination, but it can also be if their hours are reduced to the point where they lose eligibility for the company's group health plan.
Qualifying events for a spouse or dependent child include:
- Termination of the employee (for any reasons except for "gross misconduct").
- Reduction in hours worked by the employee.
- Death of the employee.
- Divorce or legal separation.
- Medicare entitlement of the employee.
- Loss of dependent status of a child.
Your company might also be required to offer COBRA coverage to dependent children if the company's health plan stops coverage for them at a certain age. But you don't have to offer COBRA coverage to employees who are terminated for "gross misconduct."
COBRA and Medicare
COBRA regulations are different for Medicare recipients; it's a case of checking on eligibility and enrollment.
The spouse and dependent child of a covered employee may be eligible for COBRA coverage if the employee becomes entitled to Medicare and they lose coverage.
If an employee who is eligible for Medicare loses their job, they have the option to enroll in Medicare before or instead of electing COBRA. If they elect COBRA coverage and decide later to enroll in Medicare Part A or B before the COBRA coverage ends, the COBRA plan may terminate their coverage.
If the employee is eligible for both COBRA coverage and Medicare, Medicare is the primary payer and will pay first, and COBRA will pay second. This differs by plan so check with the plan provider.
The COBRA coverage you provide to employees must be the same as that provided to current employees under your company's health plan. If the employee elects COBRA coverage, they must be kept under your group insurance.
You must maintain and pay for COBRA coverage for up to 18 months in the event of a termination or a reduction in hours. COBRA coverage might be required for up to 36 months in other circumstances such as when there is a second qualifying event after the first one.
How Do I Notify Employees About COBRA?
COBRA rights must be included in the information documents you give employees about their health coverage.
You must include specific information on the notice to employees when you terminate them. The information must include how they can elect the coverage and when they must make a decision. The EBSA has a sample notice you can use for this purpose.
You must present this information and the opportunity to enroll when you talk to an employee about termination or a reduction in hours. The same opportunity must be given to the dependents of an employee who has died.
The employee has 60 days to choose whether to elect COBRA coverage, beginning on the date when they receive the notice. If the person fails to sign up and pay the required premiums during the election period, they can be dropped from coverage.
Notifying the Group Health Plan
Employers and employees must notify their group health plan if certain events occur. There are two types of qualifying events for this purpose:
- The employer must notify the plan within 30 days if the qualifying event is a covered employee's termination/reduction in hours, death, or Medicare entitlement.
- The covered employee must notify the plan if they have a change in status, such as divorce, legal separation, or a child's loss of dependent status.
Gather information about COBRA coverage and add it to your termination checklist because you must give specific notification documents to the employee, such as the Employee Guide to Health Benefits Under COBRA.
Who Pays for COBRA Coverage?
The employee must pay for the coverage, which can be up to 102% of the cost. The person receiving the coverage must also pay all deductibles and make all coinsurance payments. Any increases in cost for coverage must also be paid by the person with coverage.
It is becoming less common for employees to choose COBRA coverage because they have other options, such as their state Marketplace opened through the Affordable Care Act (ACA).
The Employer's Guide to Group Health Continuation has a chart that explains more about qualifications and processes.
Seek Advice on COBRA
COBRA can be complex and every situation is different. Before you move forward with any decisions on the matter, consult your benefits administrator or contact the DOL if you have specific questions. If your company's health insurance plan is through a plan administrator, they will have information about COBRA regulations.