What is COBRA?

When an active employee who participates in your health plan leaves your company, their health benefits don’t necessarily end. Federal or state laws may require you to extend coverage to your employees even after they no longer work for you. That’s because the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) allows some individuals to temporarily continue their employer-sponsored health benefits after they leave their workplace¹.

Failing to comply with COBRA could lead to legal and financial penalties. But understanding the basics of COBRA can help you stay compliant. In this article, you’ll get an overview of COBRA and how it impacts you as an employer.

The information in this article is general. Consult with a trusted advisor if you have specific questions about your organization's COBRA requirements.

In this blog post, you’ll learn:

• How COBRA works, including how state and federal COBRA regulations differ.
• The COBRA eligibility requirements for employees, spouses, and dependents.
• Insights into how employees can elect COBRA coverage, the length of coverage, and the associated costs.

What is COBRA insurance?

COBRA is a federal law that allows specific individuals to maintain their employer-sponsored group coverage after experiencing a qualifying event. This includes situations like job loss or a reduction in work hours.

Here’s who COBRA can cover:

• Employees
• Former employees
• Spouses of current or former employees
• Employees’ former spouses
• Dependents of current or former employees

As an amendment to the Employee Retirement Income Security Act (ERISA) and the Public Health Service Act, COBRA enables the above groups to continue their insurance benefits for a specific time period, even if you no longer employ them, at group rates. This means they don’t need to worry about finding new insurance coverage immediately. This law prevents workers from having a gap in coverage, which may result in costly medical bills.

While COBRA is a federal law, most states have their own COBRA laws that apply to organizations exempt from the federal law.

Who is eligible for COBRA insurance?

Under federal law, employees who work for an organization with 20 or more full-time equivalent employees (FTEs) and participate in their employer-sponsored group plan are eligible for COBRA continuation of coverage. If your health benefits cover your employees’ spouses and dependents, COBRA may also apply to them.

Many states have expanded COBRA requirements to apply to organizations with fewer than 20 FTEs, which this article will dive into later.

Employers or health plan administrators must notify eligible employees of their rights to elect COBRA coverage. Group health insurance plan administrators must provide notice of COBRA alongside the plan’s summary plan description (SPD) within 90 days of an employee's plan eligibility date.

Once employees or their dependents experience a qualifying event, the plan admins have 14 days to notify the qualified beneficiaries how to elect COBRA coverage. The qualified beneficiaries—whether employees, former employees, or dependents—generally have 60 days to decide.

Qualifying events for COBRA

Qualifying events are specific circumstances that allow individuals to enroll in COBRA coverage. These events typically involve a change in employment or personal status that results in a loss of coverage.

Life events that allow employees and their qualified dependents to get continued coverage under COBRA include:

• Voluntary or involuntary job loss. Employees can lose health coverage when they quit, retire, or are terminated by their employer. COBRA helps them bridge the gap in coverage during this transitional period.
• Reduction in hours. When you reduce an employee’s hours to the point where they no longer meet the minimum requirements for benefit eligibility, they may be able to get COBRA continuation coverage.

Life events that allow dependents and spouses of a covered employee to get continued coverage include:

• Death of an employee. In the unfortunate event of the death of an employee, their dependents, such as a dependent child, may qualify for COBRA. Your plan must have covered the dependents before the employee’s death.
• Divorce. If an employee’s spouse received health benefits from your organization before their divorce, they may qualify for COBRA.
• Dependent loses coverage. If your health benefits cover an employee’s dependents and they turn 26, they’re no longer eligible under their parent’s plan. But, the dependents can apply for COBRA coverage while they look for their own policy.
• A covered employee becomes eligible for Medicare. Medicare is a federal health program for Americans aged 65 or older. Younger individuals with disabilities may also enroll in Medicare.

There are some exceptions to these qualifying events. For example, if you terminate employees for gross misconduct, they aren’t eligible for COBRA coverage. Employees and covered dependents also aren’t eligible if you get rid of your group health plan or go out of business (though some states do protect against this).

How does COBRA work?

Now that we’ve explained COBRA and who is eligible for continued coverage, let’s discuss how it works².

Here’s a brief overview:

1. When an employee experiences a qualifying event, they become eligible for continuation coverage under COBRA. This allows them to continue their health benefits temporarily.
2. After a qualifying event occurs, the employee must notify their plan administrator.
3. The plan administrator provides the employee with their COBRA notice and the necessary enrollment forms.
4. The employee or other qualified beneficiaries decide whether to opt in to continue coverage.
5. If they opt out of coverage but change their mind, they can revoke their waiver of coverage if it's within the 60-day election period.

To participate in COBRA, the employee and any qualifying dependents must pay the entire cost of the insurance premium or benefit—including any portion their employer previously covered and any administration fees.

What benefits does COBRA cover?

If your employees or other beneficiaries elect continuation coverage, you must provide them with coverage identical to what’s currently available under your group plan.

How long is COBRA coverage for?

If you terminate an employee or reduce their hours, your health plan must offer continuation coverage for at least 18 months after that qualifying event. But, certain circumstances may allow for an extension past the 18-month requirement.

Suppose an employee becomes eligible for Medicare before you terminate them or reduce their work hours. In that case, their spouse and dependents are eligible for COBRA coverage either 36 months after the employee becomes eligible for Medicare or 18 months after the employee experiences the qualifying event—whichever is longer.

For example, if an employee becomes eligible for Medicare and then experiences a qualifying event two months later, their spouse and dependents would be eligible for COBRA for 34 months after the qualifying event (36 months minus two months).

If a beneficiary becomes disabled, they can elect extended COBRA coverage for an additional 11 months.

You must provide beneficiaries with at least 36 months of continued coverage for all other qualifying events.

The table below summarizes the length of COBRA coverage:

Health plans may terminate COBRA coverage early if any of the following occur:

• Employees or other beneficiaries don’t pay monthly premiums in full
• The employer cancels their health benefits
• A beneficiary gets coverage under another plan or Medicare
• The employee or beneficiary engages in misconduct that justifies plan termination, such as fraud

How much does COBRA cost?

Under COBRA, employers can charge beneficiaries who choose continuation of coverage the entire premium or cost of the benefit. This includes any portion of the benefit previously paid for by the employer. They can also charge up to an additional 2% administrative fee.

For example, suppose an employer-sponsored plan costs $600 per month. The employer covers 70% of the premium, or $420. The employee pays the remaining $180 each month. With COBRA, the employee is responsible for the full $600 payment. If the employer charges a 2% fee, this is an additional $12 fee, bringing the total to $612 per month.

For those receiving the 11-month “disability extension,” plan administrators can increase COBRA premiums to 150% of the plan’s total coverage cost.

How does COBRA differ by state?

While COBRA is a federal law, many states have their own versions that apply to smaller organizations.

The table below includes a summary of each state’s mini-COBRA laws.

What health plans are subject to COBRA provisions?

Not all health plans are subject to COBRA provisions. Let’s look at the types of health plans the law covers.

COBRA applies to employers offering group plans with 20 or more FTEs. This includes private and public sector employers (except the federal government) and nonprofit organizations other than churches. Federal COBRA benefits also apply to self-funded insurance plans. However, only some state COBRA laws apply to self-funded plans.

Group health plans under COBRA include any arrangements or benefits that provide any of the following³:

• Inpatient and outpatient hospital care
• Physician care or doctors’ visits
• Surgery benefits
• Prescription drug coverage
• Dental or vision coverage

COBRA doesn’t apply to plans that only provide life insurance or disability events. The federal government also doesn’t consider health savings accounts (HSAs) a type of group health, so they’re also exempt.

Traditional group health insurance plans and COBRA

Traditional group health plans, group dental plans, and vision plans are subject to COBRA. Employers offer these plans to their employees to provide comprehensive coverage at a low cost.

Health reimbursement arrangements (HRAs) and COBRA

Health reimbursement arrangements (HRAs) are employer-funded health benefits that allow employers to reimburse their employees tax-free for qualifying medical expenses. Depending on the type of HRA an employer offers, this can include individual health insurance premiums.

Some types of HRAs are subject to COBRA, while others aren’t.

Let’s take a brief look at how COBRA interacts with HRAs:

1. The individual coverage HRA (ICHRA) is subject to COBRA continuation coverage requirements. But, an employee who has lost their individual health plan isn’t a qualifying event⁴. Qualifying events that trigger the continuation of an ICHRA include termination of employment, reduced hours, or moving an employee to a class that you don’t offer group coverage or an ICHRA.
   1. Electing COBRA may not be a good financial decision for participants. Since the ICHRA is a reimbursement benefit, eligible employees would need to pay the entire cost of their insurance premium and pay to access the ICHRA based on usage (see section c below). This could end up costing employees and dependents more than going without the benefit. 
   2. Plan sponsors may allow former employees to continue participation in the ICHRA. But they must maintain individual health insurance coverage. Individuals can use their ICHRA allowances for up to 18 months after the qualifying event.
   3. COBRA-eligible employees and former employees must pay a premium to access their continued ICHRA allowance. Employers can use either the actuarial method or the past cost method to determine COBRA premiums.
2. An integrated HRA, also known as a group coverage HRA (GCHRA), is also subject to COBRA⁵. Employers must integrate this type of HRA with a group health plan. For employees or qualified beneficiaries to elect COBRA coverage for a GCHRA, they must also elect COBRA coverage from the group health plan.
   1. Employers can calculate their COBRA premium using the past-cost method (benefit utilization minus administrative fees). Or, they can use the actuarial method (reasonable estimate of HRA utilization and administrative fees). You can charge 102% of the premium.
3. A qualified small employer HRA (QSEHRA) isn’t a group plan under ERISA. So, it isn’t subject to COBRA. But, former employees can still request reimbursement for any medical expenses they incurred before losing their eligibility. They have 90 days to request reimbursement after termination.

Alternatives to COBRA for individuals

Individuals who experience a qualifying event don’t have to elect COBRA coverage. COBRA payments can be expensive without employers paying their portion of the premium costs. Luckily for individuals, losing employer-sponsored health coverage creates a qualifying life event. This makes individuals eligible for a special enrollment period (SEP).

This allows employees and families to apply for individual health insurance on a public exchange. This type of coverage offers more flexibility, as consumers can choose a plan that best fits their needs and budget. It’s also cheaper than COBRA in many cases.

The table below explains an individual’s options after losing coverage.

Table source: Department of Health and Human Services

Conclusion

COBRA coverage is an essential protection from coverage gaps for workers who lose their employer-sponsored group health, dental, or vision insurance. If your organization has 20 or more FTEs and offers a group plan (or has enough FTEs to be subject to your state’s mini-COBRA law), your health plan administrator must provide continuation coverage to employees and their dependents who have qualifying events.

Luckily, there are alternatives to COBRA for individuals, including individual health insurance plans and short-term insurance.

This article was originally published on September 27, 2023. It was last updated on February 17, 2025.

1. DOL - FAQs on COBRA

2. U.S. COBRA health insurance

3. An employee's guide to health benefits under COBRA

4. HRAs and COBRA

5. IRS Notice 2002-45