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The Small Business Guide to COBRA Compliance

June 29th, 2023 | 6 min. read

By Shelby Betts

Navigating the complexities of COBRA compliance can be a daunting task for small businesses. As an employer, you may find yourself overwhelmed by the intricacies of COBRA regulations, leading to unintentional non-compliance. In this blog article, we will address some of the most common questions and concerns frequently raised by small business employers regarding COBRA compliance. By shedding light on these issues, we aim to help you understand the importance of COBRA compliance and provide guidance to ensure your small business meets its obligations under this critical federal law. Let's dive in so you can be clear on how it impacts your business.  

What is COBRA (Consolidated Omnibus Budget Reconciliation Act)? 

COBRA stands for the Consolidated Omnibus Budget Reconciliation Act, a federal law enacted in 1985. It is designed to provide certain individuals and their families with continued access to health insurance coverage after experiencing qualifying events that would otherwise result in the loss of coverage. Under COBRA, group health plans sponsored by employers with 20 or more employees, as well as plans sponsored by state and local governments, are required to offer temporary continuation coverage to eligible individuals. This coverage helps bridge the gap between losing employer-sponsored health insurance and finding alternative coverage. 

To put it simply, when you have more than 20 employees and you offer health insurance to your employees, you must offer all eligible employees the ability to extend their health insurance coverage (employee paid) for six months after they leave your company. Employees in the following scenarios require a COBRA notice and continuing insurance:  

  • Termination of Employment: When an employee's job is terminated, except in cases of gross misconduct. 
  • Reduction in Work Hours: If an employee's work hours are reduced, leading to a loss of eligibility for the employer's health plan. 
  • Death of the Covered Employee: When the covered employee passes away, resulting in the loss of coverage for their dependents. 
  • Divorce or Legal Separation: If a covered employee's spouse loses coverage due to divorce or legal separation. 
  • Loss of Dependent Child Status: When a dependent child no longer qualifies for coverage under the health plan. 

COBRA allows eligible individuals and their dependents to continue the same health insurance coverage they had while employed or covered by the employer's plan. The coverage typically lasts for a specified period, usually 18 to 36 months, depending on the qualifying event. 

COBRA plays a crucial role in ensuring that individuals and families have access to essential healthcare services during periods of transition. It provides a safety net that helps maintain continuity of coverage and protects against sudden gaps in health insurance, albeit at a potentially higher cost due to the full premium responsibility falling on the individual or family. 

However, it's very important to note that COBRA coverage is not free. If an ex-employee elects to keep their insurance coverage, they are responsible for paying the full cost of their premiums, including the cost of the premium that was previously paid by you as their employer.   

It sounds like COBRA means that even fired employees get to keep their health insurance coverage? Is this accurate? 

Yes, COBRA allows terminated employees to keep their health insurance coverage for a limited period of time. The duration of COBRA coverage depends on the qualifying event that led to the loss of coverage. Generally, the following timeframes apply: 

  • Termination of Employment: If an employee is terminated (except for gross misconduct), they may be eligible for COBRA coverage. In this case, COBRA coverage typically lasts for up to 18 months. 
  • Reduction in Work Hours: If an employee's work hours are reduced, resulting in a loss of eligibility for the employer's health plan, COBRA coverage is available. The coverage period under COBRA in this scenario is also up to 18 months. 
  • Other Qualifying Events: Certain qualifying events, such as divorce, legal separation, death of the covered employee, or loss of dependent child status, can extend COBRA coverage beyond the initial 18-month period. In these cases, COBRA coverage can last for up to 36 months. 

It's important to note that COBRA coverage is intended to be temporary, providing individuals and their families with a safety net during the transitional period. During the COBRA coverage period, beneficiaries generally receive the same health insurance coverage they had while employed, albeit at their own expense. However, the premiums for COBRA coverage can be significantly higher as the individual is responsible for paying the full cost of the premiums, including the portion previously covered by the employer. 

It's essential for individuals eligible for COBRA to carefully consider their options, including exploring alternative coverage options such as individual health insurance plans or coverage through a spouse's employer-sponsored plan, as COBRA coverage can be expensive. 

Am I required to issue COBRA notices? 

If you offer health insurance and you have more than 20 employees, you are required to issue notices which are usually printed letters sent in the mail to the employee’s address.  

Employers play a crucial role in ensuring COBRA compliance and providing eligible individuals with access to continued coverage. To meet their responsibilities, employers must first provide COBRA notices to employees and their qualified beneficiaries, informing them about their rights to continue health coverage under COBRA. These notices must be clear, comprehensive, and provided in a timely manner. Additionally, employers are responsible for offering continuation coverage that is identical to the coverage provided to active employees and their dependents. This includes ensuring that the premiums charged for COBRA coverage are reasonable and reflective of the full cost of the plan. Moreover, employers must maintain accurate records related to COBRA, including documentation of notices sent, enrollment information, and premium payments. Proper recordkeeping is crucial for demonstrating compliance and for addressing any potential audits or inquiries. By fulfilling these obligations, employers help to ensure that eligible individuals have the opportunity to maintain vital health insurance coverage during transitional periods. 

How long do ex-employees have to accept coverage under COBRA?  

An ex-employee has 60 days to accept coverage under COBRA. 

Per the Department of Labor’s most recent article, “If you are entitled to elect COBRA coverage, you must be given an election period of at least 60 days to choose whether or not to elect continuation coverage. Each of the qualified beneficiaries for a qualifying event may independently elect COBRA coverage. This means that if both you and your spouse are entitled to elect continuation coverage, you each may decide separately whether to do so. The covered employee or spouse must be allowed to elect on behalf of any dependent children or on behalf of all of the qualified beneficiaries. A parent or legal guardian may elect on behalf of a minor child.” 

What happens if I’m not COBRA compliant? 

It’s estimated that 80% of small businesses are not COBRA compliant.  

So what? 

The penalties for not being COBRA compliant can vary depending on the specific circumstances and the actions of the employer. Here are some potential penalties: 

  • Department of Labor (DOL) Penalties: The Department of Labor is responsible for enforcing COBRA compliance. If an employer is found to be in violation of COBRA requirements, the DOL can impose penalties. As of September 2021, the maximum penalty for a single violation was $110 per day per affected beneficiary. However, it's important to note that penalty amounts can change over time, so it's crucial to refer to the most up-to-date information from the DOL. 
  • Legal Consequences: Non-compliance with COBRA can also lead to legal consequences. Employees or qualified beneficiaries who were denied their COBRA rights or experienced harm due to non-compliance may choose to pursue legal action against the employer. Lawsuits can result in monetary damages awarded to the affected individuals, as well as the potential for the employer to be responsible for the legal fees associated with the lawsuit. 
  • Reinstatement of Coverage: If an employer fails to offer COBRA continuation coverage to eligible individuals, they may be required to reinstate coverage retroactively. This means that the employer would need to provide the coverage that should have been offered from the time of the qualifying event, potentially resulting in increased costs and administrative burden. 

Seeking guidance from legal and HR professionals who specialize in employee benefits can help employers ensure compliance with COBRA requirements and mitigate potential penalties. 

What are common mistakes business owners make when it comes to COBRA? 

Inadequate or Late Notice: One of the primary responsibilities of employers is to provide timely and accurate COBRA notices to eligible individuals. Some business owners may fail to provide these notices altogether, while others may provide them late or with insufficient information. Failure to provide proper notice can result in non-compliance and potential penalties. As a general rule of thumb, we recommend sending out your COBRA notices on the day you terminate an employee. This ensures they receive a timely notification of their rights to insurance. 

Misunderstanding Eligibility Criteria: Employers may overlook or misunderstand the specific eligibility criteria for COBRA coverage. This can result in failure to offer continuation coverage to eligible individuals who have experienced qualifying events, such as termination of employment or divorce. It is crucial for employers to be well-informed about the qualifying events and the individuals who are entitled to COBRA coverage. 

Inaccurate or Incomplete Recordkeeping: Maintaining accurate records is essential for COBRA compliance. Some business owners may neglect proper recordkeeping, such as not documenting the notices sent, premium payments received, or enrollment information. Inaccurate or incomplete recordkeeping can make it challenging to demonstrate compliance and respond to audits or inquiries.  

Inconsistent Premium Calculation: COBRA allows employers to charge a premium for continuation coverage, which should be reflective of the full cost of the plan. However, employers may miscalculate the premium amount or charge an inconsistent premium, resulting in non-compliance. It is crucial for employers to accurately determine the premium and apply it consistently to all qualified beneficiaries. 

Lack of Understanding of Timeframes: COBRA has specific timeframes for providing notices, electing continuation coverage, and making premium payments. Failing to adhere to these timeframes can lead to non-compliance. Employers need to be aware of the applicable timeframes and ensure they meet the deadlines. 

Insufficient Training and Knowledge: Lack of awareness and understanding of COBRA regulations among business owners and HR staff can contribute to compliance mistakes. It is crucial for employers to invest in appropriate training and stay updated with the latest COBRA requirements to ensure compliance. 

Consider an HR expert

To avoid these compliance mistakes, employers should consider seeking professional guidance from legal and HR experts who specialize in employee benefits and COBRA regulations. Additionally, utilizing reliable COBRA administration software or outsourcing COBRA administration to a trusted third party, like a payroll provider or health insurance broker, can help ensure compliance and alleviate administrative burdens. 

If you are concerned about your own compliance, consider reaching out to Whirks to identify how we can help take this tricky and annoying task off your plate.  

For more information about health insurance options for your employees, check out How much do employee benefits cost or check out our additional compliance and HR resources here.