Guide to COBRA Health Insurance Benefits
COBRA is widely known to both employees and employers as a way to provide continued health insurance coverage when a period of employment ends. Many people do not realize that COBRA is actually an acronym for the Consolidated Omnibus Budget Reconciliation Act, passed by Congress in 1986, and not an acronym related specifically to the language of employee benefits. The Employee Retirement Income Security Act (ERISA) was amended with the passage of COBRA.
Who Qualifies for COBRA
COBRA benefits are available to certain individuals who are covered by a group health plan on the day before a qualifying event. Beneficiaries generally include former employees; retirees; and spouses, former spouses, or dependent children of qualified individuals. Directors, agents, and independent contractors may also qualify for COBRA benefits if they participated in a qualifying health plan. A dependent may elect to receive COBRA benefits even if the related employee does not.
Private companies with 20 or more employees, state and local governments, and other employee organizations are generally covered by COBRA.
COBRA “Qualifying Events”
COBRA health insurance is only available under certain specified circumstances, including but not limited to:
• Employment termination on a voluntary or involuntary basis (except in the case of gross misconduct)
• Reduced hours of employment
• Medicare benefits take effect
• Death, divorce, or legal separation of the covered employee
Length of COBRA Coverage
The time period during which COBRA is available varies with the type of qualifying event. A plan may extend the benefit period, but cannot shorten the required coverage period. COBRA benefits may be available for 18 to 36 months, depending on the circumstances. Eighteen (18) months is an average benefit period.
The Cost of COBRA Benefits
The beneficiary must pay a monthly premium for COBRA insurance coverage. Many employees face sticker shock when they realize that in addition to the typically small portion of the monthly health payment that was deducted from their paycheck, they now must also pay the portion of the premium previously covered by their employer. In many cases this can be a payment 3-4 times larger than their earlier contribution. Overall, eligible COBRA beneficiaries cannot be required to pay more than 102% of the monthly premium cost, with the 2% representing administrative charges.
A common complaint is that COBRA can be too expensive for the unemployed, since the employer is no longer subsidizing the cost. For this reason, a report by the Commonwealth Fund found that less than 10% of employees took advantage of COBRA benefits in 2006. Nevertheless, COBRA is frequently less expensive than the alternate cost of individual health coverage. Because of the cost, participants selecting COBRA are commonly cases of adverse selection, i.e. those with more serious and immediate health coverage needs. Recent federal government COBRA subsidies will expire soon.
COBRA Coverage Disputes
The COBRA plan administrator is required to provide an election notice when a beneficiary is qualified to receive continue coverage. While infrequent, there are times when an administrator’s determinations are challenged. According to the Employee Benefits Security Administration, determinations involving group health plan coverage eligibility are not governed by ERISA's claims procedure regulation unless they relate to a specific claim for benefits.
COBRA is a useful but costly benefit to employees who find themselves out of work unexpectedly. From an employer’s perspective, compliance requirements may be complex. Multiple federal agencies have responsibility for various aspects of COBRA and ERISA, including the Department of Labor, Treasury Department, the Department of Health and Human Services, and the Internal Revenue Service.
If you are an employer covered by COBRA, work closely with an attorney experienced in COBRA and ERISA matters to insure regulatory compliance and avoid disputes that may lead to litigation.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances. ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.