December 28, 2019

What Is COBRA Insurance and Does Your Business Need It?

That’s where COBRA insurance comes in. It can allow your former employees and their dependants to continue to receive health insurance coverage. So, what is COBRA insurance and does your business need it? Keep reading to find out. 

Taming The COBRA: What Is COBRA Insurance?

The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a part of the 1974 Employee Retirement Income Security Act (ERISA). It strives to provide employees with continued health benefits after they leave their jobs.  If your small business has more than 20 employees and you offer company-sponsored health insurance, you're required to provide COBRA coverage to all terminated employees. Part-time employees must be counted toward the 20-employee threshold.  If a full-time employee works 40 hours per week week, for example, two part-time workers who work 20 hours per week are equal to one of the 20 full-time employees. Due to the high cost of health insurance for employees, your business doesn’t have to comply with COBRA laws if you have less than 20 employees. To be eligible for COBRA insurance, employees must meet a qualifying event. According to the U.S. Department of Labor (DOL)  qualifying events include:
  • Voluntary or involuntary termination of employment for reasons other than gross misconduct.
  • Reduction in the number of hours of employment below plan eligibility requirements.
For covered spouses, qualifying events are as follows:
  • Voluntary or involuntary termination of the covered employee's employment for any reason other than gross misconduct.
  • Reduction in the hours worked by the covered employee below plan eligibility requirements.
  • Covered employee becomes eligible for Medicare.
  • Covered employee undergoes divorce or legal separation.
  • Covered employee passes away. 
Fortunately, you don't have to cover the cost of COBRA coverage if you have more than 20 employees as it is their responsibility. However, you are legally obligated to keep them on your health plan for a certain time period at the same rates as other employees. Depending on the qualifying event, type of plan offered, and state regulations, this time period will be 18 or 36 months. In the event you do offer COBRA insurance, you’ll be responsible for two things as an employer:
  • Informing Your Employees and Their Spouses of Their COBRA Rights: This should be done on the day they start working for you and the day coverage kicks in. These notices must outline how they can accept or deny COBRA coverage.
  • Keeping a Compliance Record: A compliance record involves a written document that outlines how you informed employees and proof that you adhered to the policy. 
It’s important to note that these are federal guidelines only. You may have to follow the COBRA rules in your specific state.

What Is Covered Under COBRA?: 

Once a terminated employee opts for COBRA, they’ll have the same coverage they had when they were employed. This coverage may include medical, dental, and vision plans. Unfortunately, they won’t be able to select new coverage or change their plan to a different one.  For example, if they had a medical and dental plan while they were employed with you, they can keep one or both of them. But, they won’t have the right to add a vision plan if it wasn’t part of their plan prior to COBRA. The only aspect that changes about a terminated employee’s plan is the price. All of their coverage limits, deductibles, and copays will remain the same. 

COBRA Individual Health Insurance Plans

COBRA individual health insurance plans can be very beneficial to employees who stop working for you. It eliminates the need for them to find new insurance coverage right away. They can simply sign up for COBRA and stay on with the same insurance company and plan.  For an individual employee who is in between jobs, COBRA offers a source of stability and continuity. This is particularly true if they have a chronic medical issue and can’t go without health insurance. They can continue to care for their condition and don’t have to go through a different claim filing process. 

Estimated Costs

According to the Kaiser Family Foundation, the average cost of employer-sponsored health insurance premiums was $6,896 for an individual in 2018. If an individual qualifies for COBRA insurance, they’ll be on the hook for this entire amount plus an administration fee of 2 percent.

COBRA For Spouses and Families

Many of your employees likely have spouses and children. If they stop working for you, they may be able to add themselves and their families to their spouse’s employer-sponsored plan. However, this isn’t always the case. They may be the sole breadwinner or their spouse may not get health insurance through their job. In these instances, COBRA can be a real lifesaver. With COBRA, terminated employees can make sure their family’s health needs are taken care of. Their spouse and children can continue to visit the same doctors, receive the same treatments, and pick up the same medications they did when they were employed.

Estimated Costs

The Kaiser Family Foundation found that on average, employer-sponsored health insurance premiums for a family in 2018 were $19,616. That’s a large chunk of change that an employer may have to pay for on their own along with a 2 percent administration fee. 

Pros and Cons of COBRA Insurance

At first glance, COBRA insurance may seem like the ideal option for terminated employees. After all, it can give them the chance to continue their health insurance without working for you. When you dive deep into the ins and outs of COBRA, however, you’ll notice that this isn’t a perfect financial product. Just like all types of insurance, COBRA comes with some drawbacks. Below, we’ll go over some of the most noteworthy pros and cons of COBRA insurance. 

Pros of COBRA

  • Relief From Sudden Change: COBRA can provide health insurance to your employees even when they get fired or quit. This can take a great deal of pressure of them.
  • Same Health Insurance Plan: When an employee selects COBRA coverage, they can stick to the same plan they had before. There's no need to change their plan or filing process.
  • Coverage for Loved Ones: In addition to covering the terminated employee, COBRA insurance can take care of their family’s health needs. It can also protect spouses in the event of divorce. In addition, it can protect employees' loved ones if the employee passes away.
Medical Insurance Under COBRA

Cons of COBRA

  • Expensive: The greatest downfall of COBRA is the cost. While it guarantees continued coverage, you’ll no longer be paying for your employee’s health insurance. They may be subject to up to 102 percent of their insurance premium. To find out the cost of their COBRA premiums, employees will have to take the amount you’ve contributed toward their premiums and add a 2 percent service charge. 
  • Time Limit on Coverage: COBRA coverage doesn’t last forever. In most cases, employees can only use it for 18 months. After that, they’ll have to find another way to obtain health insurance.
  • Not Always Available: COBRA isn’t always available to terminated employees as it is designed for businesses with at least 20 employees. 

Our Verdict

COBRA is a convenient way for your terminated employees to retain health insurance. However, the cost of COBRA insurance is often very expensive and the plan doesn't make sense for the needs of every individual or family.  As a small business owner, it is your job to read up on the Department of Labor’s COBRA resources and ensure you are compliant with the laws. If you find that managing COBRA is too time-consuming or complicated, you can always hire a third-party administrator (TPA) to help. At Fora Financial, we strive to help small business owners succeed. Sign up for our newsletter today for more information on COBRA health insurance and a variety of small business tips.  [cta-newsletter]