INSURANCE 101: Consolidated Omnibus Budget Reconciliation Act (COBRA)

Enacted in 1985, the Consolidated Omnibus Budget Reconciliation Act, also referred to as COBRA, extends group health coverage to former employees and their families for up to 18 or 36 months after termination of employment. Under this federal law, an employer group must consist of at least 20 employees.

The premium rate under COBRA remains the same for the terminated individual as it was while the individual was covered under the group policy; however, the terminated employee typically begins paying the entire premium, often paying more than when he or she was covered under the group policy.  Often times this increase in payment is confused for an increase in the premium rate, but in actuality, the increased amount paid by the individual is a result of the employer ceasing contributions to the individual’s premium once he or she is terminated from group coverage. Under COBRA, the terminated employee is responsible for paying the entire premium rate for his or her policy.

Terms and Limitations of COBRA
Qualifying for COBRA occurs when the employee, spouse, or dependent child becomes ineligible for coverage under the group insurance. Examples include family coverage after the death of a covered employee, termination of employment or reduction of hours under full-time status, Medicare eligibility, legal separation spousal coverage, child ineligibility on the group plan, or if the employer declares bankruptcy and employment ends. Employee termination resulting from misconduct does NOT qualify under COBRA.

A qualified beneficiary is considered to be anyone covered under the group policy the day before the qualifying event occurs and normally includes the employee, spouse, and dependent children.

A written eligibility notification, also known as a Notification Statement, must be given to employees, their spouses and any other dependents on the policy by the employer when the employee group becomes eligible for COBRA coverage, or when a qualifying event occurs.  Federal law requires a 60-day period to elect COBRA coverage, after which the employee is no longer eligible.

The purpose of continuation coverage is to provide time for the terminated employee to either apply for new coverage under a new group plan or apply individually (or become eligible for Medicare).

Qualifying Events for 18 Months of COBRA

• Termination of employment (most common)
• Hours of employment are reduced

When an employee’s position within a company is terminated, or when an employee’s hours are reduced below the minimum required to be eligible through the employers’ group policy, he or she is removed from the company’s group health policy.  The additional 18 months provided under COBRA provides this employee with time to find new coverage.

Qualifying Events for 36 Months of COBRA

• Coverage for surviving dependents of a deceased employee
• Former spouse of an employee after legal separation or divorce
• Dependent children that no longer qualify as dependent

COBRA coverage ends when a disqualifying event occurs such as failure to pay premium, Medicare entitlement, or once new insurance is issued.