What Is COBRA Insurance and How Does It Work?

When an individual’s employment ends or pauses, that doesn’t mean their health concerns stop, too. The Consolidated Omnibus Budget Reconciliation Act (COBRA) provides an option for former employees to temporarily extend their health insurance and help avoid an abrupt decline in their quality of life.

But COBRA (often referred to as “COBRA insurance”) also raises questions for employers, especially given the chance of costly daily penalties for failing to comply. In fact, the IRS can apply a nondeductible tax penalty of $100 per day ($200 for two or more affected family members) to companies that fail to offer COBRA insurance.

With the stakes high for organizations and their people, it takes a clear understanding of how COBRA works to avoid its bite. Let’s examine the application of this law, who it covers and what those who need to use COBRA insurance can expect.

What is COBRA?

COBRA is a federal law requiring certain employers to give employees and their families the option to temporarily extend health benefits that they would otherwise lose.

Signed into law by President Ronald Reagan in 1985, COBRA became effective in 1986 and covered far more than just health coverage, such as:

• railroad employees
• private retirement plans
• disability protocol
• the postal service
• and more

However, COBRA is best known for how it requires and enforces the option for individuals to extend their health care coverage. Ultimately, COBRA helps prevent a difficult situation from becoming devastating.

Who is eligible for COBRA?

In general, employees at organizations with 20 or more full-time workers that offer a group health plan are eligible for COBRA insurance. However, several states maintain their own “mini-COBRA laws,” which have the potential to extend coverage at small organizations, too.

Identifying when and if an employee is eligible under COBRA or a state law is vital to helping someone continue to receive the care they may need. Let’s dive further into what triggers COBRA coverage and how someone qualifies.

Plan coverage

Again, COBRA does not provide a special kind of insurance. Rather, it gives employees and their families the opportunity to extend their coverage when it would otherwise end. Likewise, COBRA’s “continuation coverage” is identical to whatever health insurance it’s extending.

Keep in mind employees don’t automatically enroll in continuation coverage. Typically, they’ll need to enroll through their insurance carrier or a designated COBRA administrator.

According to the Centers for Medicare & Medicaid Services, COBRA insurance lasts 18 months for most individuals. But some qualifying events may allow for COBRA coverage to extend to 29 or even 36 months.

Qualifying beneficiaries

A qualified beneficiary refers to any employee who received COBRA-eligible health insurance the day before a qualifying event occurs. This status also extends to an employee’s:

• spouse
• former spouse
• dependent children

Qualifying events

Since COBRA coverage acts as a safety net when someone would otherwise lose their health insurance, the law’s qualifying events reflect this. An employee may qualify for COBRA if they:

• are terminated for any reason, excluding misconduct
• lose the scheduled hours that initially let them receive their health coverage

COBRA also applies to spouses and dependents. They, too, have the option to extend their coverage under COBRA if the covered employee endures the situations above or if they:

• qualify for Medicare
• undergo a divorce or separation
• pass away

Dependent children may also qualify for COBRA if they lose their categorization under an insurance plan’s rules.

How does COBRA insurance work?

While COBRA effectively extends health insurance, it doesn’t mean affected individuals receive the same accommodations. While the nature of the coverage itself won’t change, the cost can potentially skyrocket if an employee didn’t previously pay the entirety of their insurance premium.

Let’s consider the specific insurance COBRA extends, as well as how long it lasts and who funds it.

Benefits covered under COBRA insurance

COBRA coverage only extends general health, dental and vision insurance. This means employees who use COBRA can still use benefits related to:

• hospital care
• prescription drugs
• surgeries
• and other medical needs

Conversely, COBRA doesn’t extend life insurance or long- or short-term disability. (Neither of these options provide health care; they provide financial relief in certain situations.)

Extensions and terminations

In most cases, individuals have 60 days to enroll in COBRA continuation coverage, which usually lasts 18 months. However, a qualified beneficiary may also receive a disability extension of an additional 11 months (29 total) if their disability is validated by the Social Security Administration.

Dependents who are qualified beneficiaries can receive COBRA for an even longer period. For example, an individual who loses their dependent child status could qualify for up to 36 months. The same is true if another qualifying event — such as a death or divorce — occurs during the preexisting coverage.

An employer may terminate COBRA continuation coverage if the qualifying beneficiary:

• stops paying their premiums
• receives coverage under another plan
• loses their disability status from the Social Security Administration
• becomes entitled to Medicare
• demonstrates misconduct, such as insurance fraud

Additionally, a business may terminate COBRA coverage if it stops offering any applicable health plans. If the company simply switches insurance providers, however, they must still offer it to qualifying beneficiaries.

Who pays for COBRA coverage?

While an employer could technically pay for a portion of the insurance premium extended by COBRA, only qualified beneficiaries are required to pay them. If an individual stops paying for these premiums (which can cost up to 102% of their total price), the affected employer reserves the right to cease coverage.

What is the duration of COBRA coverage?

COBRA lasts 18 months for most individuals. However, certain circumstances, like a disability designation, allow employees to extend their coverage for an additional 29 months. And qualifying beneficiaries who are dependents may receive coverage for up to 36 months in some cases.

In between jobs

Provided an employee wasn’t terminated for gross misconduct, they may qualify for COBRA coverage for up to 18 months. This gives an individual temporary assurance as they find their next opportunity. Qualifying beneficiaries should keep in mind that this coverage will cease once they enroll in another health insurance plan, such as through a new employer.

After quitting a job

Individuals have 60 days to enroll in COBRA coverage as soon as a qualifying event occurs. Resigning — or a voluntary termination — doesn’t necessarily disqualify an individual from extending their insurance under COBRA.

COBRA insurance costs

COBRA itself doesn’t inflate or alter the cost of insurance. However, it may influence what a qualifying beneficiary pays for their insurance and expand upon that price with supplemental administrative costs.

Consider how COBRA influences the cost of administering and receiving insurance for all parties involved.

Cost of participation for employers

Employers are not obligated to pay any premium associated with extending coverage for an individual under COBRA. In fact, the law even allows businesses to charge qualifying beneficiaries 2% in administrative fees.

However, an employer can endure a penalty in the amount of $110 per day for failing to give a qualifying beneficiary notice of their COBRA coverage. Additionally, employers can receive a daily IRS excise tax of $100 ($200 for more than one affected family member) for COBRA-related violations.

Cost for employees

While employers can opt to cover a portion of insurance premiums, ultimately, the qualifying beneficiary is responsible for up to 102% of the plan’s cost. (State mini-COBRA laws may require qualifying beneficiaries to pay even more.)

In most cases, this means the qualifying beneficiary pays for 100% of the premiums and 2% in administrative costs. If an individual qualifies for the disability extension, it could require them to pay up to 150% of their premiums.

COBRA for employees

At its core, COBRA gives employees a chance to avoid completely losing their health insurance. However, this doesn’t mean COBRA is the best choice by default.

Given the 60-day enrollment window, an individual may find they can receive more affordable coverage on the Health Insurance Marketplace. Qualifying beneficiaries should research all options at their disposal before assuming COBRA coverage, especially if their employer won’t cover any of their premiums.

Conversely, if an employee is already used to their current provider and the in-network physicians, a different plan could eliminate affordable access to those preferred facilities. Qualifying beneficiaries should understand the coverage they’re about to lose and what they could gain from a different plan before making a choice.

COBRA requirements for employers

Employers need to understand not just the federal requirements of COBRA, but also the various state mini-COBRA laws that could add an extra regulatory hurdle.

According to the Society for Human Resource Management, the most common employer mistakes around COBRA involve:

• failing to offer COBRA
• ignoring state laws
• late or missed notices
• mistreating COBRA recipients
• charging an incorrect premium
• misunderstanding how Medicare affects COBRA

To avoid COBRA noncompliance, businesses should establish uniformity in their benefits administration and succession practices. This also requires organizations to retain all documentation related to their insurance offerings and create a process that allows them to promptly contact individuals who qualify for COBRA coverage.

Only the smallest companies tend to avoid this burden, and even if they do, there may be a state law that posits its own requirements. Employers should always consult a licensed legal professional before assuming COBRA or a similar law doesn’t apply.

How the right software simplifies COBRA administration

Employers should invest in a COBRA administration tool that flags potential risks and eliminates the guesswork from compliance. This tech should ideally exist within a single HR software so it can communicate seamlessly with other HR tools.

This allows businesses to truly automate their compliance strategy, since the right tool can automatically notify HR of COBRA-eligible events. This tool should also offer an easy-to-view dashboard so administrators can easily see upcoming deadlines and address potential errors.

Explore Paycom’s resources to learn about HR compliance, benefits administration and more.

COBRA: FAQ

Why is COBRA compliance important?

COBRA compliance is a double-sided challenge. Employees relying on COBRA may already be stressed, and uncertainty around their health care adds another concern. Their questions are inevitable; HR needs to be ready to answer them quickly, confidently and accurately.

For employers, COBRA violations carry steep penalties. The IRS applies a nondeductible tax penalty of $100 per day per violation ($200 for two or more affected family members). And the Employee Retirement Income Security Act requires a $110 daily penalty for not notifying employees about COBRA.

These repercussions are the low end of COBRA noncompliance. The Society for Human Resource Management (SHRM) reveals the average business pays between $100,000 and $1 million to settle COBRA lawsuits, usually in the early stages of litigation.

Are there alternatives to COBRA?

While a covered employer must offer the COBRA benefit, an employee doesn’t have to enroll in it. Some individuals may qualify to purchase health care coverage through:

• health insurance marketplace
• children’s health insurance
• Medicaid
• Medicare

Employees need to verify their eligibility for these options independently.

What are common COBRA mistakes?

COBRA compliance is multifaceted. Like any law, there’s a possible misstep for every requirement. And COBRA doesn’t only force HR professionals to consider federal guidance. Many states maintain their own COBRA rules — or “mini-COBRA” laws — that add an extra regulatory hurdle.

Common COBRA mistakes involve a combination of negligence and mistiming. According to SHRM, most errors arise from:

• failing to offer COBRA
• ignoring state laws
• late or missed notices
• mistreating COBRA recipients
• charging an incorrect premium
• misunderstanding how Medicare affects COBRA

Businesses — not their insurance providers — are liable for violations. Punctuality and preparation are key to preventing COBRA’s bite. Even small errors can trigger an avalanche of compliance exposure.

How do employers ensure they are COBRA-compliant?

COBRA creates a heavy administrative weight for any HR team, especially given the sheer volume of required notices and deadlines. Automation is a straightforward way to ease this burden and help reduce the likelihood of miskeyed, incompliant data.

With easy-to-use COBRA administration software, HR professionals receive notifications of qualifying events requiring action. Consider technology that also:

• mails required correspondence
• collects and remits premiums
• sends monthly statements
• tracks key dates

With sensitive information, any security weakness is an unneeded compliance opening. Employers should confirm their COBRA tech operates in a secure, single system of record. When employee information flows seamlessly across every HR tool, it reduces overall data entry and compliance exposure.

How do employers keep up with changes to COBRA?

On top of preexisting requirements, HR professionals also need to be ready to overcome emerging COBRA challenges. This would normally involve combing state websites and frequently checking relevant news outlets. Luckily, effective software doesn’t just alleviate high-volume tasks; it also helps HR stay agile and informed about new updates.

A tool that monitors legislation and flags potential risks takes the guesswork out of compliance. Plus, consistent and organized data makes it easier for HR to understand how a recent shift impacts its workforce. Instead of worrying if they’re compliant, the right tech helps HR professionals prove to employees that they are.

What should employees know about COBRA?

Again, COBRA helps protect employees by allowing them to keep health coverage if they otherwise lose it. How the law impacts each individual — from new hires to established managers — may vary. In short, employees should speak to HR about how COBRA affects them before it’s an emergency.

How do employers answer COBRA questions?

HR professionals can build trust with employees by incorporating COBRA into their regular benefits communication. Providing a summary of new regulations is one option, but can be time-consuming. As an alternative, HR can simply encourage workers to ask questions.

A survey can gauge employees’ concern around laws affecting them and encourage them to form their own questions. And once employees have inquiries, giving them a tool to easily submit and route their questions keeps their private matters out of email and off paper.

Above all, people need to feel confident their organization is there to help, even if they leave it. Remember, a company’s culture is derived from every worker’s experience, not just those who are currently employed.