The Consolidated Omnibus Budget Reconciliation Act of 1985, universally known as COBRA, requires that most employers who sponsor group health plans offer employees and their covered family members the opportunity to temporarily continue their group health coverage when they would otherwise lose it due to certain qualifying events. For business owners, COBRA is one of the most administratively demanding aspects of employee benefits compliance, and violations are both common and costly. A failure to send the required notices on time, or to administer the continuation coverage correctly, can expose the employer to excise taxes, DOL penalties, and civil litigation by the affected individuals.

Which Employers Are Subject to COBRA?

COBRA applies to employers with 20 or more employees who sponsor group health plans. The 20-employee threshold is calculated based on the number of employees employed on a typical business day during the preceding calendar year. Both full-time and part-time employees count for this purpose, with part-time employees counted as a fraction of a full-time employee based on their hours. An employer that had 20 or more employees in the preceding year must offer COBRA continuation coverage under its group health plan for the current year, even if its workforce has since fallen below 20.

Employers with fewer than 20 employees are exempt from federal COBRA but may be subject to “mini-COBRA” requirements under state law. Many states have enacted their own continuation coverage laws that apply to smaller employers and that vary significantly in their terms, qualifying events, and notice requirements. Business owners with fewer than 20 employees should review the continuation coverage laws of each state in which they operate to determine their obligations.

The plans covered by COBRA include group health plans that provide medical coverage, dental coverage, vision coverage, employee assistance programs that provide medical services, and certain health flexible spending accounts. COBRA does not apply to life insurance, disability insurance, or most other non-health welfare benefits.

Qualifying Events

COBRA continuation coverage is triggered by qualifying events — specific circumstances that would cause a covered individual to lose group health plan coverage. For employees, qualifying events include voluntary or involuntary termination of employment (for reasons other than gross misconduct) and a reduction in hours of employment such that the employee is no longer eligible for coverage. Death of the employee, divorce or legal separation from the employee, entitlement to Medicare, and a dependent child ceasing to qualify as a dependent under the plan’s terms are qualifying events for covered spouses and dependents.

The determination of whether an event is a qualifying event requires careful analysis. Gross misconduct is a notable exception to the employee termination qualifying event, but its definition is narrower than many employers assume. Mere poor performance, policy violations, or unsatisfactory conduct does not typically constitute gross misconduct sufficient to deny COBRA rights. Courts have generally required intentional wrongdoing of a criminal or quasi-criminal nature before treating a termination as one for gross misconduct. Employers who deny COBRA based on a gross misconduct determination without a solid factual basis are taking a significant litigation risk.

Duration of Continuation Coverage

The duration of COBRA continuation coverage depends on the qualifying event. Most qualifying events entitle the qualified beneficiary to 18 months of continuation coverage. These include the employee’s termination of employment and reduction in hours. A second qualifying event occurring during the initial 18-month coverage period — such as the employee’s death, divorce, or entitlement to Medicare while the former employee is already on COBRA — can extend coverage for the spouse and dependent children to a total of 36 months from the date of the original qualifying event.

Qualifying events that affect covered spouses and dependents directly — such as the employee’s death, divorce or legal separation, Medicare entitlement, or a dependent child ceasing to qualify as a dependent — entitle the affected qualified beneficiary to 36 months of continuation coverage from the date of the qualifying event. A qualified beneficiary who is determined to be disabled (under Social Security standards) at the time of or within the first 60 days of COBRA continuation coverage may be entitled to an extension from 18 months to 29 months.

Notice Requirements: The Foundation of COBRA Compliance

COBRA’s notice requirements are among the most important — and most frequently violated — aspects of the statute. There are several distinct notices that must be provided at different times and by different parties.

The initial notice, sometimes called the general COBRA notice, must be provided to covered employees and their spouses when they first become covered under the group health plan. This notice must describe the COBRA rights and obligations that apply under the plan. For plans subject to ERISA, the initial notice can be included in the summary plan description that is distributed to new plan participants, provided the SPD contains all required COBRA information.

The qualifying event notice is required when a qualifying event occurs. The employer has a defined obligation to notify the plan administrator within 30 days after certain employer-triggered qualifying events, including termination of employment, reduction of hours, death of the employee, Medicare entitlement, and employer bankruptcy. For qualifying events that are within the employee’s or beneficiary’s knowledge — such as divorce, legal separation, or a dependent’s loss of dependent status — the qualified beneficiary has 60 days to notify the plan administrator.

The election notice must be provided to each qualified beneficiary within 14 days after the plan administrator receives notice of a qualifying event. The election notice must describe the qualified beneficiary’s right to elect COBRA continuation coverage, the date coverage will terminate without an election, the premium amount, how to elect COBRA, and the consequences of failing to elect. This notice must be sent by first-class mail (or, if consented to, electronically) to the qualified beneficiary’s last known address. Sending the notice only to the employee’s address when the qualifying event is a divorce, and the former spouse has a different address, is a compliance failure that courts have treated seriously.

The Election Period and Premium Requirements

Qualified beneficiaries have at least 60 days to elect COBRA continuation coverage. The 60-day election period begins on the later of the date coverage is lost or the date the election notice is provided. If the qualified beneficiary elects COBRA within the election period, coverage is retroactive to the date it would otherwise have lapsed. This retroactivity is important: a former employee who has incurred medical expenses during the election period can elect COBRA and have those expenses covered by the plan, even if they have not yet paid a premium.

Employers can require qualified beneficiaries to pay for COBRA continuation coverage, but the amount they can charge is limited. COBRA premiums cannot exceed 102 percent of the cost to the plan for the coverage. The 102 percent ceiling includes 100 percent of the actual cost (including both the employer’s and employee’s shares) plus a 2 percent administrative fee. For the 11-month disability extension period beyond the initial 18 months, the maximum premium is 150 percent of the plan cost.

COBRA premiums must be paid within 30 days after the due date (a 30-day grace period is mandatory), but the initial premium payment can be required within 45 days of the election. The distinction is important: the 45-day deadline runs from the date of election, not from the date coverage begins. A qualified beneficiary who elects COBRA but does not pay the initial premium within 45 days has not properly elected COBRA and will lose their right to continuation coverage.

Common Employer Pitfalls

Despite its relatively long history, COBRA compliance continues to bedevil employers. Several patterns of noncompliance appear with particular frequency.

Failing to identify all qualified beneficiaries is one of the most common errors. An employer that terminates an employee may send the COBRA election notice to the employee but fail to send a separate notice to the employee’s spouse if the spouse was covered under the plan and is now entitled to elect COBRA independently. COBRA requires that a separate notice be sent to each qualified beneficiary at their last known address, not merely to the employee’s household.

Missing the 14-day deadline for sending the election notice is another frequent violation. When an employer outsources COBRA administration to a third-party COBRA administrator, delays in communicating the qualifying event to the administrator can cause the notice to go out late. While third-party administrators can share responsibility for compliance, the employer remains responsible for ensuring that notices are sent on time. Building efficient processes for communicating qualifying events to the COBRA administrator on the same day they occur is the most reliable way to meet the deadline.

Terminating COBRA coverage prematurely is a particularly harmful violation. COBRA coverage can be terminated before the maximum coverage period only in limited circumstances: the qualified beneficiary fails to pay the required premium, the employer ceases to maintain any group health plan, the qualified beneficiary becomes covered under another group health plan (without exclusions for a pre-existing condition that was present when COBRA began), or the qualified beneficiary becomes entitled to Medicare. Terminating COBRA for any other reason — including because the employer finds it administratively inconvenient or because the employer believes the qualified beneficiary is no longer entitled to coverage — violates the statute.

Penalties for COBRA Violations

The consequences of COBRA violations are significant. The IRS imposes an excise tax under Internal Revenue Code Section 4980B for failures to satisfy COBRA’s continuation coverage requirements. The excise tax is $100 per day per qualified beneficiary for each day the violation continues, up to a maximum of $200 per day per family. An uncorrected violation affecting a family of four that extends over 100 days could result in an excise tax of $20,000 for that single family.

The Department of Labor can assess civil penalties for failure to provide required COBRA notices of up to $110 per day per qualified beneficiary. In addition, under ERISA Section 502(c), courts have discretion to award up to $110 per day in civil penalties against a plan administrator that fails to provide required information upon written request.

Beyond penalties, qualified beneficiaries who are denied their COBRA rights can bring a civil lawsuit to obtain the continuation coverage they were entitled to and to recover any benefits they would have received if properly enrolled. In cases where the employer’s violation caused the qualified beneficiary to incur medical expenses that were not covered, the damages can be substantial. Employers who face these lawsuits often also incur significant attorneys’ fees, even when they ultimately prevail, because ERISA allows courts to award attorneys’ fees to prevailing parties.

Interaction with the ACA

The Affordable Care Act’s individual market protections — including the availability of premium tax credits for coverage through ACA exchanges — have changed the calculus that some qualified beneficiaries use when deciding whether to elect COBRA. In many cases, particularly for individuals whose household income qualifies them for substantial premium tax credits, ACA exchange coverage may be significantly less expensive than COBRA. This has reduced COBRA election rates, but it has not reduced employer compliance obligations.

Employers must still provide proper COBRA notices and administer continuation coverage correctly, even if most qualified beneficiaries ultimately choose not to elect COBRA. The right to elect is what the law protects; whether an individual exercises that right is their personal choice, and it does not affect the employer’s compliance obligation.