COBRA Compliance Checklist for Employers

Don’t get bitten by COBRA! Use this checklist to stay in compliance.

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If your small business has 20 or more employees, COBRA compliance is likely non-negotiable

The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law that requires covered group health plans to provide continuing coverage for a limited time to qualified beneficiaries.

Enacted in 1986 as an amendment to the Employee Retirement Income Security Act (ERISA), COBRA is overseen by several government agencies — including the United States Department of Labor (DOL), Department of Health and Human Services, and the Internal Revenue Service (IRS).

COBRA laws are complex, and this can make compliance hard to come by. The IRS has reportedly estimated that over 90% of employers are out of compliance with COBRA at any given time. Covered employers can face penalties for failing to comply with COBRA, including IRS excise tax, ERISA fines, civil lawsuits, costly legal fees, and damages.

To help you achieve COBRA compliance, we prepared a checklist that explores the following:

  • Definition of covered employer
  • Definition of qualified beneficiaries
  • Qualifying events
  • Duration of COBRA coverage
  • Covered benefits
  • Premiums, payments, and short-term subsidy
  • COBRA notice procedures
  • Reasons for terminating coverage early
  • Distribution of COBRA notices
  • Additional factors, including state mini-COBRA laws

Over 90% of employers are out of compliance with COBRA at any given time.

Covered employer

You must offer COBRA continuation coverage if you:

  • Have a group health plan, and
  • Had 20 or more employees on at least 50% of your typical business days in the prior year

The employee count should include both full-time and part-time employees.

Qualified beneficiaries (QBs)

QBs are covered employees, former employees, current and former spouses, and dependent children who would otherwise lose health coverage because of certain life events, also called “qualifying events.”

Qualifying events

What constitutes a qualifying event varies by QB.

Qualifying Events for Covered Employees

Qualifying Events for Covered Spouses and Dependent Child

  • Termination of (the covered employee’s) employment for reasons other than gross misconduct
  • Reduction in the covered employee’s work hours
  • The covered employee becomes eligible for Medicare
  • Divorce or legal separation from the covered employee
  • The covered employee has died

Also, when a dependent child loses coverage under the plan due to turning age 26 (as mandated by the Affordable Care Act), it is a qualifying event — which makes them eligible for COBRA continuation coverage.

Duration of COBRA coverage

How long QBs should receive COBRA continuation coverage depends on the qualifying event. Generally, the duration is up to:

  • 18 months, for termination of employment or reduction in work hours
  • 29 months, for QBs who the Social Security Administration deems disabled
  • 36 months, for other qualifying events — such as divorce, legal separation, death of the covered employee, or Medicare entitlement

Covered benefits

The DOL says, “The continuation coverage must be identical to the coverage currently available under the plan to similarly situated individuals who are not receiving continuation coverage.” Typically, this is the same coverage that the QB had prior to the qualifying event.

COBRA premiums, payments, and subsidies

In general, “Qualified individuals may be required to pay the entire premium for coverage up to 102% of the cost to the plan,” according to the DOL. Employers can use the 2% to help defray the cost of administering the continuation coverage. You can also choose to pay all or part of the QB’s premiums.

For disabled individuals receiving the 11-month extension (i.e., 29 months instead of 18 months of coverage), you can charge them up to 150% of the coverage cost for the 11-month extension.

After making their initial COBRA premium payment, QBs must have the ability to pay their premiums in monthly installments. Under COBRA law, QBs must receive a grace period of 30 days (from the established due date) to make their monthly payments.

Short-term COBRA Subsidy, by the American Rescue Plan Act (ARPA) of 2021

Signed into law on March 11, 2021, the ARPA requires employers to pay 100% COBRA premiums for covered employees and other QBs who become eligible for COBRA coverage because of involuntary job loss (for reasons other than gross misconduct) or reduction in work hours. The subsidy also covers the 2% administrative charge. This requirement starts on April 1, 2021 and ends on September 30, 2021. During this time, the QB pays zero in COBRA premiums.

The IRS will reimburse the employer (in the form of a payroll tax credit), for the total COBRA premium assistance provided.

According to Health Affairs, Employers or plans that fail to provide the COBRA subsidy may be subject to a tax of up to $100 per qualified beneficiary (no more than $200 per family) for each day of violating these requirements.”

man taking notes

COBRA notice procedures

One of the most challenging aspects of COBRA compliance is understanding the different notice requirements. Each notice has its own rules, including who should receive it and when.

Here’s an overview of common COBRA notices and employers’ obligations.

Summary Plan Description (SPD)

Each covered employee and spouse must receive a summary plan description, which is a written document that provides essential information about the plan — including the types of benefits offered by the plan, QBs’ rights under the plan, and how the plan works.

Typically, employees and spouses must receive the SPD no later than 90 days after they become plan participants.

COBRA General Notice

Each covered employee and spouse must receive a COBRA general notice describing their COBRA rights. You must give them this notice within the first 90 days of coverage.

Each covered employee and spouse must receive a COBRA general notice describing their COBRA rights. You must give them this notice within the first 90 days of coverage. One way to satisfy this requirement is to include the general notice in your SPD and then give the SPD to QBs by the 90-day deadline.

You can find model general notices on the DOL’s website.

Qualifying Event Notice

When a qualifying event takes place, either the employer or the QB must notify the plan administrator of the occurrence.

You (the employer) are responsible for notifying the plan administrator in these cases:

  • You’ve terminated the covered employee
  • You’ve reduced the covered employee’s work hours
  • The covered employee has become eligible for Medicare
  • Your company has filed for bankruptcy

The covered employee or other QB is responsible for notifying the plan administrator in these cases:

  • Divorce
  • Legal separation
  • Loss of a child’s dependent status under the plan

The notice must generally be given within 60 days after the qualifying event or the date coverage would be lost because of the qualifying event — whichever comes last.

Election Notice

The plan administrator must give the QB an election notice within 14 days of being notified by the QB about the qualifying event. If the employer is responsible for notifying the plan administrator about the qualifying event, then the plan administrator has 44 days to give the QB an election notice.

The election notice informs QBs of their right to continuing coverage under COBRA and steps for electing COBRA coverage.

Notice of Unavailability of Continuation Coverage

If you deny a QB’s request for COBRA continuation coverage, you must give the QB a “notice of unavailability of continuation coverage” within 14 days of receiving the request. The notice must explain why the QB is not entitled to continuation coverage.

Notice of Early Termination of Continuation Coverage

If you will be terminating COBRA continuation coverage for a QB before the maximum period (i.e., 18, 29, or 36 months) ends, you must give the QB a notice of early termination. The notice must explain when and why coverage will terminate plus any other coverage options the QB may have under the plan or applicable law.

According to the DOL, QBs must receive the early termination notice “as soon as practicable after the decision is made.”

Early termination reasons

You can terminate COBRA coverage early if the QB:

  • Fails to make timely payments
  • Became qualified for Medicare after electing COBRA coverage
  • Obtained coverage under another plan after electing COBRA coverage
  • Is no longer deemed disabled and therefore does not qualify for the 11-month extension
  • Engages in misconduct, such as fraud

You can also terminate COBRA coverage early if you no longer maintain a group health plan.

Distribution of COBRA notices

Make sure you deliver COBRA notices in the legally required format, whether it’s hand delivery, first-class mail, certified mail, express mail, or electronically.

When sending notices electronically, be sure to follow the DOL’s guidelines for electronic delivery of ERISA disclosures. This includes getting prior consent from non-employees (e.g., spouses).

Additional COBRA factors

COBRA has a lot of components, and you’ll need to determine which ones apply to your small business. Along with the previously stated factors, you may need to consider:

  • State mini-COBRA laws, which cover businesses with fewer than 20 employees
  • COBRA interaction with flexible spending accounts, health savings accounts, and health reimbursement arrangements
  • COBRA interaction with federal and state family and medical leave laws

For more information on your COBRA responsibilities, see the DOL’s Health Benefits Advisor for Employers.

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