COBRA continuation coverage: what employers must do

COBRA requires an employer group health plan to offer former employees and their covered family members the chance to keep their coverage for a limited time after a qualifying event such as job loss, at a premium of up to 102% of the plan's cost. Federal COBRA applies to employers that had at least 20 employees on more than half of their typical business days in the prior calendar year. Smaller employers are often covered by a state "mini-COBRA" law instead, and the rules vary by state.

Who is covered

The source here is the Department of Labor's Employee Benefits Security Administration (EBSA) publication An Employer's Guide to Group Health Continuation Coverage Under COBRA. Federal COBRA covers group health plans sponsored by private-sector employers (and state and local governments through a parallel public health law) with 20 or more employees. Part-time employees count as fractions in the headcount. Church plans and the federal government are outside it.

Falling below 20 does not end your obligations automatically; the test looks at the prior year. A business with 19 people today might have been over 20 for most of last year and be covered now.

COBRA applies to medical, and also to dental, vision, prescription drug and health flexible spending plans, because those are group health plans (see group dental and vision insurance for employers). It does not apply to life, disability or accident-only coverage. Note that the plan, not the employer's size alone, matters: ERISA basics for small employers: what the law requires of your benefit plans covers how ERISA plans are defined.

State mini-COBRA

Most states have continuation laws for insured plans of small employers that federal COBRA skips, and some also extend the length of federal coverage. Eligibility, duration and notices differ widely, as do the carriers' administrative practices. Mini-COBRA laws typically apply only to fully insured plans, since a self-funded health plan is governed by federal law (fully insured vs self-funded health plans: which fits your business). Check your state with workers' comp and benefits requirements by state and ask your carrier who sends the notices.

Qualifying events and how long coverage lasts

Source for the periods and the 102% and 150% caps: DOL EBSA's employer guide. A person can lose COBRA early if premiums are not paid, the employer ends all group health plans, the person becomes covered under another group plan (if the plan so provides) or becomes entitled to Medicare after the election.

The notice and election timeline

COBRA is mostly a calendar. DOL's guide lists these deadlines.

1. General notice. Within the first 90 days of coverage, the plan must give each covered employee and spouse a notice of COBRA rights. The summary plan description can satisfy it.
2. Employer notice to the plan. After a termination, reduction in hours, death, Medicare entitlement or employer bankruptcy, the employer must notify the plan administrator within 30 days.
3. Employee notice to the plan. For divorce, legal separation or loss of dependent status, the employee or family member notifies the plan. The plan may set a time limit, but it cannot be less than 60 days.
4. Election notice. The plan must send the election notice within 14 days after getting the notice of the event. (DOL rules allow a combined 44 days when the employer is also the plan administrator.)
5. Election period. Qualified beneficiaries get at least 60 days to elect, counted from the later of the date they lose coverage or receive the election notice.
6. First premium. The plan must allow at least 45 days after election to pay the initial premium.
7. Ongoing premiums. Monthly payments carry a grace period of at least 30 days.

Coverage is retroactive: someone who elects within 60 days and pays the first premium is covered back to the date regular coverage ended. That is why a COBRA election is used as insurance, since people can wait to see whether they have a claim. You cannot require payment up front before the election period expires.

What you can charge

The plan can charge up to 102% of the cost of coverage: the full premium, including the portion the employer used to pay, plus 2% for administration. For the disability extension, the cap is 150%. You can charge less, and some employers subsidize COBRA as part of severance. If the plan is self-funded, the cost is based on a reasonable estimate of claims cost, reviewed annually. COBRA participants must be offered the same choices as active employees at open enrollment, and the plan must let them switch to any alternative option the plan offers to similarly situated employees.

A hypothetical example

Say a 25-employee Pennsylvania firm pays $650 a month for single coverage for an employee. If the employer paid 70%, the employee's payroll share was $195. After a layoff, the employee elects COBRA. The maximum monthly COBRA premium is $650 x 102% = $663. The employee goes from paying $195 to $663, which explains why many people decline and look to the ACA marketplace or a spouse's plan. The firm pays nothing but must administer the plan, and the claims of COBRA participants affect the renewal pool.

Penalties and common failures

Missing a COBRA deadline has two penalty tracks. Under ERISA, a court can order a plan administrator to pay a statutory penalty of up to $100 a day (adjusted for inflation by DOL regulation) for failing to send required notices, plus attorney fees and the medical expenses the person would have been covered for. The Internal Revenue Code adds an excise tax of $100 a day per qualified beneficiary for failing to comply, with caps and relief provisions. These amounts accumulate quickly in a long-running case.

Typical failures include:

• Not telling the administrator within 30 days when an employee quits, then getting a late election claim.
• Sending the notice to the wrong address or not keeping proof of mailing.
• Ending the coverage record at termination and never generating the COBRA notice at all.
• Forgetting that an employee on FMLA leave who does not return triggers COBRA when the FMLA coverage obligation ends.
• Using an outdated model election notice. DOL publishes model notices and treats a properly completed model as good-faith compliance.

Practical options

Most small employers outsource COBRA administration to a third-party administrator, the carrier or a payroll provider, and put the vendor's duties in writing. Compare the cost to the risk, since a missed notice can turn a simple termination into a claim for medical bills. If your group is covered by an insurer, ask if its COBRA service is included. Also note that COBRA coverage is not the only route when someone loses job coverage: the Marketplace special enrollment window is 60 days before or after the loss of coverage (HealthCare.gov and DOL), so people may price both before electing.

Employers should also consider that continuing a laid-off worker's coverage may affect The ACA employer mandate: who must offer coverage and the 2026 penalties offers and the way your group health insurance for small businesses: how it works and what it costs plan pools risk. Where COBRA fits in a package is discussed in building an employee benefits package that fits your budget.

Key takeaways

• Federal COBRA applies to plans of employers with at least 20 employees; smaller employers are often covered by state mini-COBRA laws that vary by state.
• The employer has 30 days to notify the plan, the plan has 14 days to send an election notice, and beneficiaries have at least 60 days to elect and 45 days to make the first payment.
• Maximum period is 18, 29 or 36 months depending on the event; the charge is up to 102% (150% in the disability extension).
• Missed notices create penalties under both ERISA and the tax code, so document mailing.
• Use a vendor in writing if you do not have an in-house process.