What happens to an employee’s benefits if their hours get cut? What happens if an employee gets laid off? Do they immediately lose health coverage? What about their family?

The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a continuation of coverage that allows an employee and the employee’s dependents to continue benefits in the event of job loss or reduced hours. But how does COBRA work, who is eligible, what does it cost, and the pros and cons? Let’s discuss.

Employers with 50 or more full-time equivalent employees (FTE; part-time and full-time employee calculation) in the United States must provide health insurance to their employees by paying part of their premiums. Additionally, an employer below the 50 FTE requirement can still offer benefits. Suppose the employee becomes ineligible to receive the employer’s benefits due to getting laid off or falling below the threshold of hours to qualify. In that case, the employer can stop paying part of the premiums. COBRA, established in 1986, allows employees and dependents to retain the same health coverage if they are willing to pay for it themselves. In addition to former employees and former dependents and spouses of those employees, COBRA also allows retirees continued health coverage at group rates that otherwise may have been terminated. Yes, they will likely pay more through COBRA than they did as an employee, but COBRA is typically cheaper than an individual health care plan.

COBRA is a continuation of coverage that can include medical, prescription drugs, dental, vision, and flexible spending account (FSA) benefits. It does not, however, include disability or life insurance.

There are different sets of criteria to be eligible for COBRA. In addition to meeting these, eligible employees can only receive COBRA coverage after a “qualifying event .”First, usually, employers with 20+ full-time employees are mandated to offer COBRA coverage. Multiple part-time employees’ hours can be combined to create a full-time equivalent employee. Private sector employees and state and local governments have COBRA corresponding plans. Second, an employee must be enrolled in a company-sponsored group healthcare plan on the day before the “qualifying event” occurs, and the plan must’ve been effective for at least half of the previous calendar year. If an employer is going out of business and is no longer offering healthcare coverage to other employees, the departing employee will no longer be eligible for COBRA benefits.

COBRA coverage extends for 18-36 months, depending on circumstance. A former employee may extend past 18 months if a qualified beneficiary is disabled or if a second qualifying event occurs, such as the death of a covered employee, legal separation or divorce, the employee becoming entitled to Medicare or loss of dependent child status.

The cost of COBRA healthcare can often be a surprise to the ex-employee. The term “group rate” can be misleading as it’s sometimes perceived as a discount. That’s not the case. Often, employers pay a significant portion of the premium – anywhere from 50-100% of the costs. After employment is terminated, the individual is required to pay the entire amount with the addition of administrative fees.

Drawbacks of COBRA for employees are the cost, the limited coverage period, and the continued dependency on the employer. If the employer changes health insurance plans, the COBRA beneficiary must accept those changes even if unhappy. COBRA benefits will be terminated if the employer goes out of business and no longer offers insurance.

However, COBRA is usually less expensive than most individual healthcare plans and definitely less expensive than being uninsured. In addition to the cost being less than an individual plan, another pro of COBRA is that the former employee can continue with the same physician within the same medical network. The beneficiaries can also retain coverage for preexisting conditions and regular prescription drugs.

Need help understanding COBRA rules and regulations? Let us guide you to compliance by calling (704) 333-3255 or sending us a message through our contact page.