The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows individuals to continue their group health plan coverage in certain situations. Specifically, COBRA requires group health plans to offer continuation coverage to covered employees and dependents when coverage would otherwise be lost due to certain specific events, such as a termination of employment, a divorce or the loss of dependent status under the terms of the plan.

COBRA sets rules for how and when continuation coverage must be offered and provided, how employees and their families may elect continuation coverage and when continuation coverage may be terminated.

Employers may require individuals to pay for COBRA coverage. Group health coverage for COBRA participants is usually more expensive than coverage for active employees, since many employers pay a part of the premium for active employees.

What employers are subject to COBRA?

Employers who employed 20 or more employees on more than 50 percent of the business days in the prior calendar year are subject to COBRA.

Small-employer plans, church plans and governmental plans are not subject to COBRA. However, state and local governments are required to comply with parallel continuation coverage requirements under the Public Health Service Act. Individuals covered under the Federal Employees Health Benefit Program are provided with similar, but not identical, rights to continue coverage.

What is a small employer plan under COBRA?

A small employer plan is a health plan maintained by an employer that normally employed fewer than 20 employees during the preceding calendar year.

An employer is considered to have normally employed fewer than 20 employees during a particular calendar year if, and only if, it had fewer than 20 employees on at least 50 percent of its typical business days during that year. For purposes of determining whether or not an employer has 20 or more employees, all employees of all related employers under common control with the plan sponsor must be counted. Employers with a parent-subsidiary or brother-sister relationship with 80 percent common ownership are treated as one employer under COBRA.

Small employer plans are not subject to COBRA for the years in which they qualify for this exception. However, if a plan has been subject to COBRA and becomes a small employer plan, the plan remains subject to COBRA for qualifying events that occurred during the period when the plan was subject to COBRA.

For purposes of COBRA, who is an employee?

For purposes of determining whether an employer is subject to COBRA, employee means only common law employees. Therefore, self-employed individuals, independent contractors and directors are not counted when determining whether an employer is subject to COBRA. The term employee means any individual working for the employer, including part-time and full-time employees, regardless of whether the employee has enrolled in the health plan or is eligible for health insurance.

For purposes of determining how many employees an employer employs, part-time employees may be counted as a fractional employee, with the fraction being equal to the number of hours worked divided by the number of hours that an employee must work in order to be considered full time. However, an employer may not consider a full-time employee as an individual working more than 40 hours a week for purposes of this calculation.

What is a health plan under COBRA?

A health plan is a plan maintained by an employer or employee organization to provide health care to individuals who have an employment-related connection to the employer or employee organization or to the families of such individuals. Individuals with an employment-related connection include employees, former employees and their family members.

A plan is considered to provide health care whether it does so directly or through insurance, reimbursement or other means, and whether it does so through an on-site facility or cafeteria or other flexible benefit arrangement. Insurance includes one or more individual policies under an arrangement maintained by an employer to provide health care to two or more employees.

Health care includes diagnosis, cure, mitigation, treatment or prevention of disease, and any other services or care for the purpose of affecting any structure or function of the body. Plans covering the following are generally considered health plans under COBRA:

• Medical or surgical care
• Prescription drugs
• Dental care
• Vision care
• Hearing care
• Drug and mental health treatment

Health flexible spending arrangements (FSAs) and health reimbursement arrangements (HRAs) are also health plans. Some health savings accounts may be considered health plans, but the IRS has indicated that COBRA does not apply to these accounts.

Qualified Beneficiaries – Who is a qualified beneficiary?

A qualified beneficiary is any individual who, on the day before the qualifying event, is covered under a health plan by virtue of being on that day either:

  • An employee;
  • A spouse of a covered employee;
  • A dependent child of the covered employee*; or
  • Any child who is born to or placed for adoption with a covered employee during a period of COBRA continuation coverage.