How to Avoid Getting Bitten by COBRA Regulations

Complying with COBRA Regulations—Complicated but Necessary | Harrison Newman | Corporate Synergies
Complying with COBRA calls for attention to detail. Ignoring even one requirement can result in a heap of trouble.

COBRA benefits provide continued group health plan coverage after certain qualifying events, like termination of employment, and are a healthcare safety net for employees until benefits from a new job kick in. But for employers, staying compliant with COBRA regulations can be a benefits compliance headache.

Sure, COBRA is for employees who no longer work at your company. You might think of these workers as long gone; complying with COBRA might not be a priority. However, any employee who leaves on bad terms, either because they’re frustrated by the company or because they were terminated, may be more likely to file a lawsuit against an organization if it mishandles COBRA. In fact, employers have recently seen an increase in the number of COBRA lawsuits filed against them for leaving out required information.1

Outside of litigious former employees, COBRA is generally confusing to comply with and can carry heavy penalties. These can add up—courts can assess up to a $110 per day penalty for each deficient COBRA notice per person.2

Here are commonly overlooked details:

Not Understanding if Your Organization is Subject to COBRA, or Employee Eligibility

First, it’s important to understand which employers have to offer COBRA. The federal law says that employers with at least 20 employees in the prior calendar year must offer COBRA coverage starting the day employer-sponsored group health plan coverage ends. COBRA coverage can last up to 18 months under typical circumstances, or 36 months if certain events occur, e.g., the employee becomes entitled to Medicare, gets divorced or dies.

But it’s not enough just to follow the federal law. It’s easy to overlook the fact that states can also mandate employers to continue coverage. These “mini-COBRA” laws, which typically affect smaller employers, provide greater benefits to employees than the federal COBRA law. For example, the New York mini-COBRA law mandates 36 months of continued coverage for employers with fewer than 20 employees.3 In New Jersey, with some exceptions, the state’s mini-COBRA law applies to employers that employ between 2 and 50 eligible employees, and provides employees with:

  • 18 months if an employee is terminated or their hours are reduced
  • 29 months if an employee becomes disabled
  • 36 months for the dependent spouse or child of an employee who dies; goes through a divorce, legal separation, dissolution of a civil union or domestic partnership or otherwise loses dependent status.4

Many other states have continuing coverage laws in place as well. And as if understanding the state and federal laws that apply to your employees isn’t enough (and, it can be especially difficult if your employees live in multiple states)—there are also time-sensitive deadlines you must meet in order to stay in compliance with COBRA laws.

Not Complying with Notice Guidelines

One issue that’s landed some employers in hot water is failing to send notifications, or not including the right information in these notifications. Let’s start with the basics—employers that sponsor group health plans must send an “initial notice” or “general rights notice” to covered employees and their covered spouses within 90 days of the date that coverage under the plan starts or, if later, the date that is 90 days after the plan first becomes subject to COBRA.

With some exceptions, once an employee separates from the company, the plan administrator (or employer, if the employer and plan administrator are the same) must send a COBRA “election notice” within 14 days of receiving notice of a qualifying event, such as being terminated from employment or leaving the company. This notice describes the employee’s rights to elect COBRA.

For both types of COBRA notices, the penalty for non-compliance (i.e., in addition to the potential litigation costs) is up to $110 per day. For most employers, we recommend that these notices are mailed to employees and covered spouses by first-class mail with a post office certificate of mailing in order to ensure that everyone sees them.

The Department of Labor outlines exactly what should be included in these notices and even supplies templates called “model notices” to help employers comply with these guidelines.5

Not Understanding What’s Covered

COBRA allows employees to pay for the same group health plan coverage they enjoyed during employment—but at their own expense. Unless the employer agrees to pay for all or a part of the COBRA premium, employees are responsible for the full premium amount (plus a 2% administration fee). Under COBRA, the term “group health plan” coverage is defined broadly, and includes medical coverage and, depending on plan design, could also include prescription, vision and dental coverage. Life insurance, long-term care insurance and other similar types of insurance aren’t considered “medical coverage” and aren’t included in COBRA.

Health Reimbursement Accounts (HRAs) qualify as group health plans, so employees must still offer reimbursement for their expenses under COBRA. Health FSAs are generally included within the definition of “group health plan” and are subject to COBRA, unless the account is “overspent” as of the date of the qualifying event. In such cases, an employer’s COBRA obligations are more limited.

Details, Details, Details

We often get questions about COBRA and certain business scenarios. One is how COBRA works with severance packages. It’s not uncommon for employers to pay employees’ COBRA health insurance premiums on a pretax basis for a few months as part of a severance package. But if the employee is considered “highly compensated” by the IRS, and the employer’s health insurance plan is self-insured, the employee may be subject to paying tax on COBRA coverage as required under certain nondiscrimination rules under Section 105(h) of the Internal Revenue Code, which generally require that a self-insured employer can’t discriminate in favor of highly compensated employees. Employers can avoid this issue by paying the employee for their COBRA premium on an after-tax basis.

Another point of confusion is how COBRA is administered during a company merger or acquisition.

There are a number of issues to consider, including what type of acquisition, sale or merger a business goes through, and the employee’s status as a result of that event. These factors determine which entity in the M&A deal pays for COBRA, and which employees are eligible unless the parties to the deal have memorialized these terms in their relevant asset purchase or stock purchase agreement.

How to Stay Compliant

As you might gather, managing COBRA properly can be onerous. Often employers fall into one of three categories when it comes to administering COBRA benefits:

  • Managing it in-house
  • Relying on a broker
  • Relying on a COBRA specialist

Whether your organization takes on administering COBRA in-house, or relies on your employee benefits broker or other COBRA specialist, the potential liability for getting COBRA wrong is significant. The best way to administer COBRA, and to avoid the headaches, is to utilize an experienced specialist that keeps up with the latest regulations.

1National Law Review, “Check Your COBRA Notices in Order to Avoid Potential Lawsuits”
3New York Department of Financial Services, “FAQs: New York State Continuation Coverage”
4New Jersey Dep’t of Banking and Insurance, “Advisory Bulletin: State Continuation of Coverage”
5 U.S. Department of Labor, “COBRA Continuation Coverage”

Harrison Newman
Harrison Newman specializes in reducing employer benefit costs through in-depth research, strategic plan design, claims data analysis, and diligent carrier negotiations.


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