Consolidated Omnibus Budget Reconciliation Act (COBRA) – Background, Key Provisions for Workers’ Health Benefits and Recent Changes

• Date: December 16, 2010
• Source: Admin

Background

Workers can face adverse changes and events in their lives – leading to loss of employment or underemployment and uncertainty in income. The Consolidated Omnibus Budget Reconciliation Act (COBRA) was enacted to, among other things, give workers who lose their health benefits the right to choose to continue group health benefits provided by the plan under certain circumstances.
COBRA generally requires that group health plans sponsored by employers with 20 or more employees in the prior year offer employees and their families the opportunity for a temporary extension of health coverage (called continuation coverage) in certain instances where coverage under the plan would otherwise end.

Applicability and Coverage

COBRA generally covers group health plans maintained by employers with 20 or more employees in the prior year. It applies to plans in the private sector and those sponsored by state and local governments. Provisions of COBRA covering state and local government plans are administered by the Department of Health and Human Services.

Several events that can cause workers and their family members to lose group health coverage may result in the right to COBRA coverage. These include:

• Voluntary or involuntary termination of the covered employee’s employment for reasons other than gross misconduct
• Reduced hours of work for the covered employee
• Covered employee becoming entitled to Medicare
• Divorce or legal separation of a covered employee
• Death of a covered employee
• Loss of status as a dependent child under plan rules

COBRA made amendments to existing regulations including the Internal Revenue Code, Employee Retirement Income Security Act of 1974 (ERISA) and Public Health Service Act (PHSA).

Key Workers’ Health Benefits Provisions

Amendments to Internal Revenue Code:

COBRA amended the Internal Revenue Code to deny income tax deductions to employees for contributions to a group health plan unless such plan meets specified continuing coverage requirements.

Amendments to ERISA

COBRA amended the ERISA to require the plan sponsor of each group health plan to provide that each qualified beneficiary who would lose coverage because of a qualifying event is entitled to elect continuation coverage.

A Qualifying Event is defined as:

1.  The death of the covered employee;
2.  The termination or reduction of hours of such employee's employment;
3.  The divorce of the employee;
4.  The covered employee becoming entitled to Medicare benefits; or
5.  A dependent child ceasing to be a dependent child under the generally applicable requirements of the plan.

COBRA set the requirements that continuation coverage must meet and the limits on the applicable premium for such coverage.

Amendments to PHSA:

COBRA amended the PHSA to include new title requiring certain State and local governmental group health plans to provide continuation coverage for certain State and local government employees who would lose coverage because of a qualifying event. COBRA gives the requirements that continuation coverage must meet, the limits on the applicable premium for such coverage, and notice requirements.
 

Eligibility for COBRA:

As per the COBRA Act requirements, under circumstances such as voluntary or involuntary termination when employee loses health insurance coverage, his/her eligibility would be considered. However, termination caused by gross misconduct may ruin the eligibility. Reduction of working hours, or change in full time to part time employment are also considered among the other qualifying events.

As mandated by the statute, a qualified beneficiary is a person who is covered under COBRA group health plan, and spouse or dependent child of a covered employee.

To become COBRA eligible, the employee has to enroll in employer’s health insurance plan during the time of employment.

Premium

For the eligible employees, 60 days are given to elect to receive COBRA benefits. Initially, the premium has to be paid within the first 45 days, failure of which may cause termination of COBRA coverage.

COBRA, unlike any other federal statute, does not require the employers to pay the cost of the coverage, rather under the COBRA coverage, employees and their dependants maintain coverage by paying the full cost of the premium the employer previously paid. Additionally, the COBRA participants pay an extra 2% administrative fee to the COBRA administrating company.

Period of Coverage

Under COBRA, the employee or family member may qualify to keep their group health plan benefits for a set period of time, depending on the reason for losing the health coverage. The following represents some basic information on periods of continuation coverage:

Group Health Plan
As written in the Code § 5500 (b) (1) of COBRA statute, the term "group health plan" is a plan (including a self-insured plan) of, or contributed by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to employees, former employees, the employer, other associated or formerly associated with the employer in a business relationship, or their families.

Two Mandatory Notices
 

The two most important notices required by COBRA are:

• The Initial Notice: Communicates COBRA rights and obligations to plan participants and their dependents. This is sent by the “group health plan” (i.e., the plan administrator).
• The Qualifying Event Notice: Communicates COBRA rights and obligations with reference to a specific qualifying event to plan participants and their dependents. This is sent by the plan administrator when he or she is notified of the occurrence of a qualifying event.

Improper content or delivery of either of these notices can result in litigation and liabilities.
 

Recent Changes

The economic stimulus package, American Recovery and Reinvestment Act (ARRA) enacted by Congress and signed into law by President Obama in February 2009 as a response to the late 2000s recession, included new requirements for continuing health coverage under COBRA. Under ARRA, the following mandatory changes were made to COBRA:

• Eligible employees pay only 35% of their COBRA premiums.  The remaining 65% is paid by the employer, who then receives reimbursement via a government tax credit.
• Eligible employees include any employee who was involuntarily terminated between September 1, 2008 and May 31, 2010 and elects COBRA coverage.
• The COBRA premium reduction under ARRA is not available for individuals who experience involuntary terminations after May 31, 2010.
• Individuals who qualified on or before May 31, 2010 may continue to pay reduced premiums for up to 15 months, as long as they are not eligible for another group health plan or Medicare.
• Employees who declined COBRA or have since dropped enrollment are eligible for a new election opportunity.
• Employers are required to provide notices regarding the premium reduction to individuals who have a qualifying event between eligibility dates of September 1, 2008 and May 31, 2010.
   

Additional Resources:

• Read about the health benefits under Consolidated Omnibus Budget Reconciliation Act (COBRA) in full here.
• Read about the COBRA Continuation Coverage Assistance American Recovery and Reinvestment Act (ARRA) 2009 in full here.
• Is your company in compliance with COBRA requirements? Do you need a refresher course on the act? Then attend any one of the following ComplianceOnline webinars:
  • The Alphabet Soup Just Got Trickier: When the ADA/FMLA/GINA/COBRA/Workers’ Comp All Come Together
  • Document Retention and Destruction: What Human Resource Professionals Must Know