A Guide to COBRA Insurance for Small Businesses

A Guide to COBRA Insurance for Small Businesses
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The Scope of the Act

The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1986 gives workers and their dependents, covered under group health plans offered by employers the right to choose to continue such benefits for a limited periods of time, when they become ineligible.

COBRA insurance covers any medical, dental, vision, death, accidental death and dismemberment coverage already offered to employees. People opting for such coverage usually enjoy the same type of coverage that existed before the event that triggered COBRA, except the weekly income benefit provided to members by the fund. Any changes to the health coverage provided to active members and their dependents apply to COBRA-members also.

The act applies to plans in the private sector and those sponsored by state and local governments, with 20 or more employees. Small businesses employing between 2 and 20 employees fall under mini-COBRA, which is the same as normal COBRA but with reduced duration.

Who Becomes Eligible

The following events make an employee and their dependents eligible for COBRA mandated continued coverage: The time periods for which they may enjoy such extended coverage are given alongside:

  • Voluntary or involuntary termination of the covered employee’s employment, for reasons other than “gross misconduct”: 18 months, for employee, spouse, and dependent children.
  • Reduced hours of work for the covered employee: 18 months for employee, spouse, and dependent children.
  • Covered employee becoming entitled to Medicare: 36 months for spouse and dependent children.
  • Divorce or legal separation of a covered employee: 36 months for spouse and dependent children.
  • Death of a covered employee: 36 months for spouse and dependent children.
  • Loss of status as a dependent child: 36 months for dependent children.

Each independent beneficiary has the right to opt for coverage. For instance, on the death of a covered employee, a dependent child may opt for the coverage whereas the spouse may opt not to.

The mini-COBRA in force in some states, applicable to small businesses has reduced coverage of 9 months instead of the standard 18 months and a higher payout liability for the employees.

Employer Obligations

COBRA Insurance for Small Business

COBRA mandates employers sponsoring group health plans to provide an opportunity to employees and their families covered by such group health insurance, to extend health coverage in the instances mentioned above, on a temporary basis. The act, while not imposing the financial obligation to pay for continued coverage nevertheless requires companies employing more than 20 employees to carry the cost of the federal subsidy (65 percent of the premium) until they claim a write-off on federal taxes. Small businesses employing less than 20 employees, however, do not have this financial burden, for the law stipulates administration of mini-COBRA by insurance companies, who would carry the cost of the subsidy until they claim a tax write-off.

The act also mandates employers to provide the following notices:

  • An initial notice to covered employees and their dependents, when coverage starts, informing them of their rights under COBRA, a summary of the law, and the designated plan administrator.
  • Notifying the plan administrator of a covered employee’s death, termination of employment, reduction in hours, or Medicare entitlement.
  • Notifying each qualified beneficiary the right to choose continued coverage, when a qualifying event comes to pass.

Employers may discontinue COBRA continuation coverage under certain circumstances, such as:

  • The scheme no longer applies for any members, including existing regular employees.
  • The qualified beneficiary becomes enrolled in Medicare or another group health plan that does not contain any exclusion or limitation with respect to a preexisting condition.

Employee Obligations

COBRA places the responsibility of making payments for the benefits availed on the employee. Individuals wanting extended coverage may be required to pay the entire premium for coverage plus two percent of the cost to the plan, making the total payment 102 percent of the premium normal members pays. For COBRA insurance for small business, or mini-COBRA, the two percent additional coverage becomes five percent,making the total payment 105 percent of the premium normal members pay. The recent federal subsidy, as part of American Recovery and Reinvestment Act of 2009 subsidizes 65 percent of premium cost for both COBRA and mini-COBRA.

Employees also have the obligation to notify the plan administrator of their intention to opt for continued coverage within 60 days of receiving notification from the employer.

Other responsibilities include the covered employees or their dependents informing the plan administrator of:

  • Divorce, legal separation, disability or a child losing dependent status under the plan.
  • Change of marital status.
  • Change of address.

Employees or their dependents opting for the coverage have to inform the designated plan administrator within the stipulated time period and start paying the applicable premium, and all costs related to deductibles. Failure to make timely payments may result in loss of coverage. The premiums are usually set in advance, in 12-month cycles. The plan administrator is not obliged to send invoices or reminders about payments, and employees have to contact the designated plan administrator to make timely payment of premiums.

COBRA allows adding new dependents when the plan is in force, for any reason including change of status or loss of such dependents coverage elsewhere. For instance, an employee under COBRA may incorporate a newly wed spouse or newborn for the balance of the period of the COBRA election by submitting a revised dependent list to the plan administrator within 30 days of the event, such as marriage or birth having taken place. COBRA premiums on a composite basis means the premium amount remains unchanged regardless of the number of dependents incorporated.