Unfortunately, lay offs and workforce reductions are often necessary in business. Prior to 1986, in addition to losing a pay check, laid off workers also faced an immediate loss of benefits. To address this Congress passed the COBRA Act. What is COBRA?
In 1986, Congress passed the Consolidated Omnibus Budget Reconciliation Act (or, COBRA). The Act applies to the health insurance plans provided by private-sector employers with 20 or more employees, employee organizations, or state or local governments.
Under the Act, former employees, retirees, spouses, former spouses, and dependent children have the right to temporary continuation of health coverage at group rates after losing a job do to a "qualifying event." Qualifying events include:
- Voluntary or involuntary termination of employment for reasons other than gross misconduct
- Reduction in the number of hours of employment
- Spouse and child coverage if the covered employee becomes entitled to Medicare
- Spouse and child coverage upon divorce or legal separation of the covered employee
- Spouse and child coverage on death of the covered employee
- Child coverage if child loses of dependent child status under the plan rules
Employers have notice requirements under the law. The employer is entitled to notify the employee about benefits availability. The business owner can find a business insurance health plan that offers this administrative function or can have it performed in house or with a third-party administrator. No matter how it is administered, the employer must notify the plan administrator with 30 days of a qualifying event.
The plan administrator must notify the employee within 14 days of that notice. The former employee has 60 days to elect a continuation of coverage and 45 days to pay the premium.
The coverage is generally for 18 months. But, plans can provide longer periods. Also, disability or another qualifying event happening in the initial period can extend benefits out to 36 months.
Employers have no obligation to pay for the coverage. The employer can offer plan coverage at a rate no more than 102% above the employee plan rate for an employed person in the plan. The reason the premiums appear so high is because the average employee never sees the employer contribution to their health coverage. That contribution is no the laid off worker's responsibility. So, for example, health coverage costing the employee $400 per month can suddenly be $808 per month and it comes at a time when the employee has no pay check.
In my experience, employers in the 20 to 50 employee range frequently have trouble complying with the Act. Employers often fail to notify the administrator of a qualifying event. Some employers have internal administrators who believe they know what they are doing - when they do not. The Department of Labor has a wealth of information on its website including compliance assistance. If you are a business offering an employee health plan as a part of your business insurance plan and you have over 20 employees, it is a good idea to frequently review your internal handling of employee lay offs, retirements, divorces and other qualifying events.
