What is COBRA?

What is COBRA?

COBRA stands for the Consolidated Omnibus Budget Reconciliation Act, which was implemented as an amendment to ERISA (the Employee Retirement Income Security Act of 1974). In most circumstances, COBRA entitles workers and other covered individuals to the option of continuing to receive their employer-sponsored group health insurance coverage for a limited time after that coverage would otherwise end.

The intent of COBRA is to ensure that employees and their dependents still have health insurance for a brief period after either employment ends or a change within a job that results in loss of coverage for the employee. The idea is to allow enough time for the employee or other beneficiary to secure a new health insurance plan, allowing for continuous health insurance without a break in coverage.

The upside of COBRA for employees is the ability to maintain continuous health insurance. The downside is that most individuals in this situation will face a significant increase in their insurance premium. This is because the employee becomes responsible for the full premium, including the portion formerly paid by the employer. The individual may also be asked to pay up to two percent of the cost of the coverage as an administrative fee.

The major benefit in continuing coverage—besides the obvious fact that unforeseen healthcare expenses will be paid for—is that a break in coverage can make it more difficult to get coverage later on.

When Does COBRA Apply?

In general, for COBRA to apply, several conditions must be met.

1. The employer must be covered by COBRA. COBRA covers private employers with 20 or more employees that offer group health insurance benefits.
2. Something must occur that would otherwise terminate health insurance coverage. (This is sometimes referred to as a “qualifying event.” We will cover more on this below.)
3. The person in question must be qualified under COBRA as well. Typically, this simply means that the individual must be a covered employee, spouse, or dependent of that employee who is also a beneficiary of that employee’s insurance benefits.

A “qualifying event” triggers the COBRA regulations, requiring covered employers to offer a continuation of health insurance coverage to employees and others on their insurance plan when circumstances occur that would usually mean the coverage ends. Qualifying situations include:

• Job termination. It doesn’t matter whether the job loss was voluntary or not.
• Changes in work circumstances that eliminate health insurance. For example, this might be a change in hours from full-time to part-time status that results in the health insurance benefit being lost.
• Death of the covered individual. In this case, COBRA would apply for others who were covered by the benefit, such as the spouse or dependents.
• Divorce. In this case, divorce would cause a covered individual (spouse and/or dependents) to lose coverage, so COBRA would apply for them.
• Medicare eligibility for covered employee. When the insured individual becomes eligible for Medicare, the spouse and/or dependents can use COBRA to obtain temporary insurance coverage while finding alternative permanent health insurance coverage.
• Age ineligibility of dependents. For dependents of the covered individual, there are age limits determining how long he or she can stay on the plan. When that age limit is reached, COBRA can be utilized to continue coverage on a temporary basis until other coverage can be secured.

COBRA typically requires that health insurance coverage be provided for up to 18 months in cases where the health insurance termination is due to the termination of the employment relationship. For the other cases above, the coverage can last up to 36 months.

Employers must provide notice to employees of their COBRA options.

When Does COBRA Not Apply?

This protection has been a lifesaver for many individuals who face the sudden loss of health coverage. However, there are also exceptions. For example, COBRA will not apply when:

• The individual is terminated for gross misconduct. This form of termination can result in total and immediate loss of coverage for the employee as well as for his or her spouse and dependents.
• The health insurance plan is no longer in existence, such as when a company shuts down and discontinues coverage completely. Employees in this situation will immediately lose health insurance coverage because COBRA protections only extend to existing plans for former employees or other plan beneficiaries.
• The organization is not covered by the Act, regardless of the employee’s situation. For example, these entities may not be subject to COBRA:
  • Church-related organizations,
  • Federal employers with federally-sponsored coverage, and
  • Employers with less than 20 employees.
• The employee (or other beneficiary) does not specifically elect to receive it. Coverage is not automatic; it must be elected during a limited time frame after regular coverage ends.
• The individual in question does not pay the premiums due within the coverage election period or grace period.
• The individual becomes eligible for another employer group health plan or for Medicare.
• The covered spouse voluntarily elects to drop coverage for the spouse or dependents (as opposed to losing coverage).

It’s important to note that despite the fact that the individual will qualify to receive the group insurance rate, continuing health insurance in this manner is not always the cheapest option. Whether or not the coverage offered under COBRA is cheaper than alternatives depends on each person’s situation.

This article touches on the COBRA basics. There are many more details to understand, such as qualifying events that may extend COBRA coverage beyond the initial coverage period, details of the required notices, and more. Is your organization meeting your COBRA requirements?

This article does not constitute legal advice. Always consult legal counsel with specific questions.

About Bridget Miller:

Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.