What is COBRA compliance

COBRA compliance is the legal requirement for US employers to offer continued health coverage to qualified employees and their dependents after certain events, such as job loss.

As an employer, maintaining COBRA compliance protects your business from legal issues and penalties.

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What is COBRA?

COBRA is the acronym for the Consolidated Omnibus Budget Reconciliation Act, passed in 1986. The act, which amended the Employee Retirement Income Security Act, allows workers to continue their health coverage for some time after an unforeseeable event.

The US Department of Labor runs the COBRA program at the federal level. However, many states have similar but smaller programs that cover smaller businesses.

Employers in such states must comply with both the state and federal act. A Deel PEO expert can help you determine how the acts overlap and how to comply with both without affecting your bottom line.

Are you required to provide COBRA coverage?

COBRA applies to employers with 20 or more employees on at least 50% of their regular business days in the previous year. You must also have offered a group health plan during the year.

Determining whether you meet this threshold is more complex than counting your employees. For instance, COBRA requirements count full-time employees individually and part-time workers as fractions.

You calculate the value of this fraction by dividing the number of hours an employee worked by the number of hours a full-time worker works (typically 2,080).

Who pays for COBRA coverage?

Employees covered under COBRA generally pay the total cost of insurance premiums. In some instances, you may be legally allowed to charge employees 102% of their premiums and use the extra 2% to cover the administrative costs of providing the coverage.

If an employee receives extended COBRA coverage due to disability, you may be able to charge 150% between months 18 and 29. A PEO expert can help you calculate these amounts.

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What are your employer obligations under COBRA?

If you meet COBRA thresholds, you must provide covered employees with plans typically covered by group health insurance. These include:

• Healthcare plans
• Dental plans
• Hearing plans
• Vision plans
• Alcohol and substance abuse plans
• Medical spending accounts, and
• Mental health plans

Vacation, retirement, disability, and life insurance plans are not covered under COBRA coverage.

Who is eligible for COBRA coverage?

Employees who qualify for COBRA coverage are called qualified beneficiaries. A qualified beneficiary is any worker covered under your group health plan the day before a COBRA-covered event.

People typically considered qualified beneficiaries include:

• Full and part-time employees
• Their spouses
• Their dependents
• Partners in a partnership
• Retirees (except those entitled to Medicare)

You are not required to offer COBRA coverage to employees who enrolled for Medicare the previous year, opted out, or did not qualify for your group health plan.

What are qualifying events?

A qualified beneficiary or covered employee becomes entitled to COBRA coverage following an event that would disrupt their regular coverage. This is called a qualifying event.

Common qualifying events include:

• A reduction in employment houses
• An involuntary or voluntary termination
• The divorce or separation of a covered spouse from an employee
• Death
• Enrollment in Medicare
• Active military duty
• A change in status for an employee’s covered dependent

You may also be required to provide COBRA coverage to your employees if your business files for bankruptcy and leaves your workforce uncovered.

What constitutes gross misconduct?

Although COBRA requires you to discontinue coverage for an employee terminated for gross misconduct, it does not define what this means. Nonetheless, some qualifying criteria may include:

• The misconduct is willful
• The employee is able to understand the gravity of the offense
• The offense is connected to their job

Employees can challenge your decision to exclude them from COBRA coverage for misconduct. If this happens, you may face federal litigation. Have a Deel PEO or compliance expert weigh the legal costs against the estimated cost of offering the employee coverage.

How long is COBRA coverage valid?

How long you cover a qualified beneficiary under COBRA depends on the nature of the qualifying event. Coverage for eligible employees begins on the date the qualifying event takes place.

It then continues for:

• 18 months for all cases of reduced working hours or termination (excluding gross misconduct)
• 29 months for beneficiaries classified as disabled under the Social Security Act
• 36 months for other qualifying events, including:
  • Death of an employee
  • Legal separation or divorce
  • Medicare entitlement

In the event of a second qualifying event, such as reduced working hours followed by disability, you may be required to extend the coverage period.

You may also offer additional coverage at will.

Can COBRA coverage terminate early?

Yes. You may discontinue continuation COBRA coverage for an employee if:

• They fail to pay for COBRA premiums on time
• You discontinue your group health plan
• The employee is no longer considered disabled
• You suspect fraud or misconduct
• The employee transfers to another group health plan or qualifies for Medicare

You must send an employee a notice of termination if you terminate their coverage.

How should you communicate COBRA coverage to employees?

In addition to providing coverage to qualified beneficiaries, the DOL prescribes certain communication obligations to employers. You must notify employees of their right to continue coverage benefits following a qualifying event. You must also inform:

• Covered employees and spouses of their initial rights when they join your COBRA continuation coverage plan
• Qualified beneficiaries of their right to elect to continue coverage after a qualifying event occurs
• The plan administrator when a qualifying event occurs

You have 30 days to notify the administrator (insurance company) of a qualifying event. After receiving your notice, the administrator has 14 days to notify the covered beneficiary.

When should an employee respond to your notice?

After you communicate a qualifying event to the plan administrator within 30 days and they contact the beneficiary, the beneficiary has 60 days to respond to your COBRA election notice.

If they do not respond, they are no longer eligible for COBRA and cannot sign up for coverage.

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Can you be penalized for not complying with COBRA?

Yes. COBRA is a federal act enforceable by law. For every case of noncompliance, the DOL may assess fines of up to $110 per day per qualified beneficiary.

The typical COBRA coverage period is 18 months. Therefore, if you fail to offer an employee COBRA coverage during a year, assuming they have a spouse and 2 dependents, you may be charged up to $40,000 in fines for this one employee.

Qualified beneficiaries who should have received coverage but did not may also sue you in federal court for noncompliance. This could result in damages for the employee and legal fees.

The IRS may also assess you for excise tax.

How can you maintain COBRA compliance?

You can maintain COBRA compliance by tracking and covering qualified beneficiaries every year. While seemingly simple, this task includes:

• Assessing your workforce and recorded work hours to determine eligibility
• Shopping for a plan administrator
• Identifying qualified beneficiaries
• Collecting payments from payroll to cover COBRA premiums
• Assessing whether qualified events trigger coverage
• Notifying beneficiaries and administrators of triggered coverages
• Balancing payroll and taxes after coverage disbursement

An HR administration tool or software can help you automate these tasks and flag potential compliance issues. This automation can take the guesswork out of COBRA compliance and give you more power over your compliance strategy. It can also reduce administrative tasks.

Why should you outsource COBRA compliance to Deel?

Complying with COBRA requirements can be a hassle. Between determining eligibility and assessing qualifying events, it can overload your HR team and disrupt other administrative functions.

Deel’s all-in-one HR tool is optimized for compliance. We can help you implement COBRA policies and reflect coverages in your payroll through accurate consolidated omnibus budget reconciliations.

See how we helped Family Care incorporate a compliant payroll system in just three months.

“There’s no question about the integrity and accuracy of the data or reporting. We have no doubt that we’re compliant with our requirements for superannuation, reporting, PAYG and so on.” – Heather Hall, Director of Business Services, Family Care.

We can also help you monitor and track COBRA regulatory changes to remain compliant as your team grows and your coverage plans change.

Contact the Deel team today to learn more or book a demo to try our services firsthand.