The Consolidated Omnibus Budget Reconciliation Act of 1985’s continuation of coverage requirements, now commonly known as COBRA, is the option employees have to continue with their existing insurance coverage for a period of time after termination of employment. Employees may choose to keep their current plan instead of shopping for a plan on the Exchange for a number of reasons, often related to coverage. Once a business begins offering a health plan, it is important that they get up to speed on COBRA coverage and requirements.
COBRA for Terminated Employees
While some employers subsidize COBRA coverage as part of their severance package, this is not required. An employer also is not required to offer COBRA coverage to an employee who was not participating in the company’s healthcare plan at the time of termination. An employer can require the terminated employee to pay up to 102% of the cost of their medical coverage. This includes both the employee and employer’s share of the premium as well as a 2% administration fee.
That said, at least some subsidization COBRA coverage as part of an employee’s severance package is often standard procedure. Companies who choose to do this should be careful to do so within the bounds of federal regulations. The subsidy must be broadly offered to terminated employees. This means, for example, offering the same package to all employees with family plans. Severance documents should clearly disclose to the employees how much they’re paying and what portion of the coverage the employee will be required to pay.
18 Months of Coverage
According to COBRA, employers are required to offer 18 months of coverage under COBRA. After those 18 months are over, this period may be extended to 29 months in the event of a disability, and spouses and dependents have additional COBRA rights to elect up to 36 months of coverage due to certain other qualifying events including divorce or the employee’s death. Additionally, there is nothing in COBRA that restricts employers from offering coverage for a period longer than 18 (or 36) months. However, before offering this extended coverage, ensure that your insurance carrier will cover the extension period. Not doing so may mean your business has to self-insure the employee you agreed to cover.
COBRA and Medicare
Terminated employees over 65 are eligible for Medicare, but must still be offered COBRA coverage. In these situations, COBRA gives the employee time to make the transition to Medicare. If the employee is entitled to Medicare before termination, but has not chosen to enroll, then COBRA coverage must still be offered for 18 months. However, in situations where the employee is eligible for Medicare after termination, then COBRA coverage can end once Medicare entitlement begins. The Medicare Secondary Payer rule prohibits employers from offering incentives to get people to decline Medicare coverage. A business could also run into trouble by discouraging Medicare-entitled individuals from exercising COBRA.
There are many other considerations businesses should be aware of regarding COBRA coverage, such as how premiums can be paid pretax, how to handle COBRA when the company’s plan involves an FSA, and how to handle COBRA when the employees are part of a merger or acquisition.