COBRA Compliance Made Easy: Employer Steps That Matter

The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law that requires certain employers to offer continued healthcare coverage to employees and their dependents after a qualifying event such as termination, reduced work hours, or other changes in employment status.

For employers, COBRA compliance is essential to avoid legal penalties and ensure departing employees have access to continued health coverage. This guide explains COBRA requirements, eligibility rules, employer responsibilities, and best practices for compliance.

COBRA is a federal law that requires group health plans to offer temporary continuation of health coverage to employees and their dependents after a loss of job-based insurance due to specific qualifying events.

COBRA allows former employees and their covered dependents to remain on their employer-sponsored health plan for a limited period by paying the full premium cost, plus an administrative fee.

Key Takeaway for Employers: COBRA does not require employers to pay for coverage—but it does require them to offer the option to eligible individuals.

COBRA applies to private-sector employers and state or local governments that have:

• 20 or more employees on at least 50% of business days in the previous calendar year
• A group health plan (includes medical, dental, vision, and some wellness plans)

Small Business Exception: Employers with fewer than 20 employees are exempt from federal COBRA rules, but they may be subject to state continuation laws (sometimes called “mini-COBRA”).

• Both full-time and part-time employees count toward the 20-employee threshold.
• Part-time employees are counted as fractions based on their hours worked.

Example:

• A full-time employee = 1 employee
• A part-time employee working 20 hours/week = 0.5 employees

If your company meets the 20-employee threshold, COBRA applies to all employees enrolled in a group health plan, regardless of their individual work hours.

To qualify for COBRA, an individual must meet two conditions:

• They were covered under the employer’s group health plan on the day before the qualifying event.
• They experienced a qualifying event that caused them to lose health coverage.

A qualifying event is any change in employment or life status that results in the loss of employer-sponsored health coverage.

Qualifying Event	Who is Eligible?	Maximum Coverage Duration
Voluntary or involuntary termination (excluding gross misconduct)	Employee, spouse, dependents	18 months
Reduction in work hours (e.g., switching from full-time to part-time)	Employee, spouse, dependents	18 months
Divorce or legal separation from covered employee	Spouse, dependents	36 months
Death of the covered employee	Spouse, dependents	36 months
Dependent child loses eligibility (e.g., aging out at 26)	Dependent child	36 months
Employee becomes eligible for Medicare (spouse & dependents lose coverage)	Spouse, dependents	36 months

Key Takeaway for Employers: Termination for gross misconduct is the only scenario where COBRA benefits do not have to be offered. However, this can be difficult to prove legally, so employers should consult an employment attorney before denying coverage.

Employers play a critical role in ensuring COBRA compliance. Failure to follow the rules can result in significant fines.

Employers must provide written COBRA notices at specific times.

✔ General COBRA Notice (Initial Rights Notice)

• Given to new employees and their covered dependents within 90 days of enrolling in the health plan.
• Explains COBRA rights and obligations in case of a future qualifying event.

✔ COBRA Election Notice

• Must be sent within 14 days after a qualifying event occurs.
• Explains eligibility, costs, deadlines, and coverage options.
• Employees then have 60 days from the notice date to elect COBRA coverage.

Best Practice: Employers should work with third-party COBRA administrators or HR/payroll providers to ensure timely, accurate notifications.

COBRA enrollees remain on the same employer-sponsored plan they had before their qualifying event. Employers must:

• Ensure continued access to coverage under the same terms as active employees.
• Process COBRA premium payments (usually handled by a third-party administrator).

Employers do not have to pay for COBRA coverage, but they can charge participants the full premium plus an additional 2% administrative fee.

• Employee pays 100% of the plan premium (both employer and employee share).
• Employer may charge an additional 2% administrative fee.
• Employees have a 30-day grace period each month to pay their premiums.

If the total monthly health plan premium (employer + employee share) is $500:

• Active employees might pay $150 per month.
• COBRA participants must pay $500 + 2% fee = $510 per month.

Under certain circumstances, COBRA coverage can be extended beyond 18 months:

• Disability Extension: If an employee or dependent becomes disabled, coverage can be extended to 29 months.
• Second Qualifying Event: If a second qualifying event occurs (e.g., divorce, death of the covered employee), dependents can extend COBRA to 36 months.

Employers must send a Termination of COBRA Coverage Notice when COBRA coverage ends due to:

• End of the maximum coverage period (18, 29, or 36 months)
• Failure to pay premiums on time
• Employer terminates the group health plan

Failure to comply with COBRA requirements can result in substantial penalties:

Best Practice: To avoid penalties, employers should outsource COBRA administration to a third-party benefits provider for compliance tracking.

For employers, COBRA compliance is mandatory, but outsourcing administration can reduce risk and administrative burden.

• COBRA applies to employers with 20+ employees who offer a group health plan.
• Employers must provide COBRA notices within required timeframes.
• Employees can continue coverage for 18-36 months, but they must pay full premiums.
• Non-compliance can result in significant IRS & DOL penalties.
• Employers should consider a third-party administrator to manage COBRA notices and premium collection.

By proactively managing COBRA obligations, employers can protect their business from costly penalties while ensuring former employees receive the coverage they’re entitled to.

Frequently Asked Questions About COBRA for Employers