Top 10 COBRA Mistakes (and How to Avoid Them)

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) requires that employers provide former employees and dependents who lose group health benefits with an opportunity to continue group health insurance coverage for a limited period of time. Compliance with the complex rules regarding COBRA coverage can be difficult and mistakes can be costly. Penalties for non-compliance can include IRS excise taxes and ERISA statutory fines.

#10 — Assuming COBRA Doesn’t Apply To You

A threshold issue for COBRA compliance is whether COBRA even applies to you as an employer. The general rule is that COBRA applies to group health plans maintained by employers that have 20 or more employees. This includes private-sector employers, as well as state and local government employers. The rule includes a built-in exemption for those employers that have fewer than 20 employees. Employers may be aware that there is an exemption, but may not know exactly how it works. Depending on the circumstances, determining how many employees you have for COBRA purposes can be a complicated calculation.

In general, COBRA will apply to employers that have 20 or more employees on more than 50 percent of the typical business days in the previous calendar year. This means that the calculation will apply for the entire calendar year; it does not change if the number of employees goes up or down. So, it can be dangerous to assume that you don’t have to offer COBRA if your staff levels decrease.

Also, take care to count employees of companies that are under common control and both full-time and part-time employees. A part-time employee counts as a fraction: divide the number of hours the employee worked by the number of hours required to be full-time.

#9—Assuming COBRA Doesn’t Apply To Your Plan

Once you have determined that COBRA applies to you as an employer, the next step is to figure out whether your health plan is subject to COBRA. As noted above, COBRA applies to group health plans maintained by employers. A group health plan is an arrangement established to provide medical care to employees and their families and can be provided in a number of ways, including through insurance or a self-funded arrangement. A key point to note is whether the plan provides medical care.

Examples of health plans that may be subject to COBRA include:

  • Medical, dental, vision and prescription drug plans;
  • Drug and alcohol treatment programs;
  • Employee assistance plans or wellness programs that provide medical care;
  • On-site health care;
  • Health FSAs and HRAs; and
  • Self-funded medical reimbursement plans.

Examples of health plans that may NOT be subject to COBRA if they do not offer medical care include:

  • Long-term care plans;
  • Accidental death & dismemberment plans;
  • Group term life insurance plans;
  • Long-term and short-term disability plans;
  • Wellness programs or employee assistance programs that do not provide medical care;
  • Exercise or fitness centers; and
  • On-site first-aid facilities.

Another potential pitfall to keep in mind is assuming that cancelling or terminating a health plan means that COBRA obligations terminate as well. If an employer terminates one plan, but continues to provide any group health plan, the obligation to provide COBRA coverage continues.

Determining COBRA obligations in this type of situation can be especially complex when there is a merger or acquisition involved.

#8 — Not Knowing Who Gets COBRA And When

Employers and plan administrators should know who is entitled to COBRA coverage. Problems can arise if COBRA is not offered to someone who is eligible or if it is offered to a person who is not eligible to elect COBRA coverage.

Under the COBRA rules, a “qualifying event” triggers COBRA coverage for “qualified beneficiaries” (QBs).

A QB is an individual covered by a group health plan on the day before the qualifying event. A QB can be:

  • The employee;
  • The employee’s spouse; and/or
  • The employee’s dependent child(ren).

In some cases, a retired employee (and his/her spouse and/or dependent children) can be a QB. In addition, a child born to or placed for adoption with the covered employee during the COBRA coverage period will become a QB.

Depending on the plan’s eligibility rules, agents, independent contractors and directors could also be QBs.

A qualifying event is a specified triggering event that:

  • Is listed in the COBRA statute;
  • Causes a loss of coverage under the plan; and
  • Occurs within the “maximum coverage period” (this is discussed below) while the plan is subject to COBRA.

The triggering events that will give rise to COBRA coverage depend on who is affected. The following chart shows which events are qualifying events for each type of individual:

Qualifying Event Triggers COBRA Coverage For:
Termination of covered employee’s employment (for reasons other than gross misconduct)
  • Covered employee
  • Spouse
  • Dependent children