Health insurance must be available to departing help

When an employee leaves a company voluntarily or involuntarily, health insurance becomes a big concern.

The employee and his or her family depend on it.

Employers are required to offer continued coverage - but it can be costly for the employee.

The Consolidated Omnibus Budget Reconciliation Act (COBRA) is designed to help former employees and their families maintain health insurance when they need it most - when they have lost access to employer-sponsored coverage as a result of certain "qualifying events" such as:

•  Leaving a company, whether voluntarily or involuntary, is such an event for an employee as well as for the former employee's spouse and dependent children.
• Separation, divorce or the employee's death are qualifying events for a spouse and for dependents.

When those events or others occur, employers are required to make an offer of continued coverage, for which the beneficiary usually must pay the full premium and an administrative fee.

The basic COBRA requirements for employers are to send notices to employees, former employees, and their spouses and children, to reinstate eligible individuals to one or more health plans, and to collect premiums.

There is a lot of tracking involved, such as who is eligible and who is not, who has received which notices, when the notices were sent and whether premiums are paid accurately and on time. (See the "It's in the Details" box for more information.)

Does it apply to your company? If your company has 20 or more employees, COBRA applies to your group health plans.

To determine whether you hit the 20 employee threshold for COBRA, you must count the number of employees your company had on a typical business day in the preceding year rather than the number of employees who participated in or who were eligible to participate in your group health plan. In addition, you must count the employees with common ownership.

Fractions count

As in math class, fractions matter. In this case - to part-time employees.

The COBRA rules apply a special rule for counting part-time employees for purposes of counting the number of employees your company had on a typical business day. Part-time employees count as a fraction of an employee. The fraction is equal to the number of hours that the part-time employee works divided by the number of hours that must be worked to be considered full-time eligible to participate in the plan.

Mistakes are costly

There's a price for breaking the rules. Simple mistakes can cost employers a lot of money.

The most common COBRA violations include failing to send notices on time or at all, neglecting to list flexible spending accounts on notices, keeping inadequate records, and not offering participants the right to add or change health plans at open enrollment.

The rules for COBRA administration are enforced by two federal agencies. The U.S. Department of Labor (DOL) oversees the law's notification and disclosure provisions, while the Internal Revenue Service (IRS) deals with matters such as duration of coverage and who qualifies as a beneficiary. Both agencies can levy penalties for noncompliance.

The IRS can collect $100 per day and the DOL $110 per day. While the government rarely prosecutes violations, the larger risk for employers is that they will be sued by individual workers over mistakes in COBRA administration, which can lead to monetary judgments, attorney's fees and court costs.

While COBRA costs more than the company's regular insurance plan, the people who utilize it typically are those with more medical expenses and they are the ones who are most motivated to seek legal remedies if they feel COBRA has been denied unfairly.

COBRA fees

Employers who elect COBRA coverage usually are charged 102 percent of the full premium, reflecting a 2 percent administrative fee. Employer subsidies are permissible, but rare.

Alternative coverage may be offered in lieu of COBRA. Employers have the option of offering individuals who are eligible for COBRA the option of electing alternative coverage in lieu of COBRA.

One example of alternative coverage is the employer continuing to pay, for six months, the employer contribution toward the costs of coverage that the employer pays for active employees and the individual only pays the equivalent of the employee contribution for coverage.

For illustration, if an individual who is eligible for COBRA elected alternative coverage in lieu of COBRA and the employer pays $850 a month toward the $1,200 a month cost for family coverage under the plan, the employer would pay $850 a month of the $1,200 a month for family coverage for the COBRA-eligible individual for six months. At the end of six months, there would be no additional rights to continue coverage under the plan.

Four notices required

COBRA requires four main notices, which typically are letters sent by first class mail:

1. The initial general notice, sent within 90 days to new employees and others who enroll in a health plan, notifying them of their COBRA coverage rights.

2. A qualifying event / election notice, sent to employees and beneficiaries within 14 days after the plan administrator has been notified of a qualifying event. The notice informs recipients of their COBRA election rights. Individuals have 60 days to elect or deny coverage, then 45 more days to pay the first premium. The 60-day election period, along with the 45 days the qualified beneficiary has to pay the first premium, thus gives a qualified beneficiary up to 105 days to decide whether to purchase COBRA coverage.

In the case of a divorce, legal separation or a child's loss of dependent status, a qualified beneficiary has up to 60 days to notify the plan administrator. The plan administrator must then give the proper notice within 14 days before the 60-day election clock even begins.

The practical effect is that the qualified beneficiary has 179 days (60+14+60+45) to decide whether to purchase and pay for COBRA coverage.

3. A notice of unavailability, indicating ineligibility for COBRA coverage, provided within 14 days of a qualifying event.

4. A notice of termination, sent to participants when coverage is about to expire because of nonpayment of premiums or for other reasons, including the end of the coverage time frame.

If elected, COBRA coverage is retroactive to the date that regular benefits ended. That can be important for employees with pre-existing conditions who must prove they have had continuous health coverage to be covered by another employer's plan.

The type of qualifying event determines the period of COBRA coverage. The required minimums are 18 months for termination and reduction in hours - plus an extra 11 months if a beneficiary becomes disabled - and 36 months for an employee death, Medicare entitlement, divorce, legal separation or a dependent child's eligibility loss.

COBRA administration of medical, dental, vision and other health care plans is usually wrapped together, so that one notice covers all types of plans. Employees can elect or deny COBRA coverage for separate plans if active employees can enroll in each type of plan separately.

Mila Stahl is vice president and principal of the Human Resources Group, a Madison human resources consulting and recruiting firm.