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COBRA’s Basic
Requirements

Basic Coverage

The plan sponsor of each group health plan must generally permit a “qualified beneficiary” who would otherwise lose coverage as the result of a “qualifying event” to elect to continue the same coverage he/she had under the plan, within a specific election period. The coverage, often referred to as “continuation coverage,” may not be conditioned on the basis of insurability.

Group Health Plans Subject to COBRA

COBRA generally applies to all private -sector group health plans maintained by employers that have at least 20 employees (whether full or part time). While this may appear at first to be a simple determination, remember that this is COBRA. The 20 employee threshold is determined by looking at whether the employer has more than 20 employees on more than 50 percent of its typical business days in the previous calendar year. Each part-time employee counts as a fraction of a full-time employee, with the fraction equal to the number of hours that the part-time employee worked divided by the hours an employee must work to be considered full time.

COBRA also applies to plans sponsored by state and local governments. It does not, however, apply to plans sponsored by the federal government or by churches and certain church-related organizations.

When determining whether a plan itself is subject to COBRA’s requirements, the plan must first be considered a “group health plan.” That means any arrangement that an employer establishes or maintains to provide employees or their families with medical care, whether it is provided through insurance, by a health maintenance organization, out of the employer’s assets, or through any other means. Medical care includes, for this purpose, inpatient and out patient hospital care, physician care, surgery and other major medical benefits, prescription drugs, and dental and vision care. In addition, a group health plan is one that is maintained by an employer or employee organization even if the employer or employee organization does not contribute to it if coverage under the plan would not be available at the same cost to an individual but for the individual’s employment-related connection to the employer or employee organization. COBRA does not cover life insurance plans, disability plans or long term care plans.

Further discussion regarding what constitutes a health plan includes the following concepts. If an employer or employee organization maintains a program that furthers general good health, but the program does not relate to the relief or alleviation of health or medical problems and is generally accessible to and used by employees without regard to their physical condition or state of health, that program is not considered a program that provides health care and so is not a group health plan. For example, if an employer maintains a spa, swimming pool, gymnasium, or other exercise/fitness program or facility that is normally accessible to and used by employees for reasons other than relief of health or medical problems, such a facility does not constitute a program that provides health care and thus is not a group health plan. In contrast, if an employer maintains a drug or alcohol treatment program or a health clinic, or any other facility or program that is intended to relieve or alleviate a physical condition or health problem, the facility or program is considered to be the provision of health care and so is considered a group health plan.

Small Employer Plans

Since many states have enacted mini-COBRA laws that mirror the federal COBRA law, the issue of continuation coverage can sometimes be blurred. The federal COBRA law has very specific guidance regarding what constitutes a small employer plan. Small employer plans are not covered by the federal COBRA law but are increasingly covered by state law. The 20 person threshold described above is the most basic of requirements. As described above, a small-employer plan is a group health plan maintained by an employer that normally employed fewer than 20 employees during the preceding calendar year. In the case of a multiemployer plan, a small-employer plan is a group health plan under which each of the employers contributing to the plan for a calendar year normally employed fewer than 20 employees during the preceding calendar year.

With respect to a controlled group of corporations, foreign corporations are not excluded from membership in a controlled group of corporations. Thus, a company in the United States with a subsidiary company a broad would include those subsidiary employees in determining whether the federal COBRA law applies.

With respect to determining which employees to include in the calculation, in addition to that described above, the following individuals are not counted as employees for purposes of COBRA: self-employed individuals, independent contractors (and their employees and independent contractors), and directors (in the case of a corporation).

Just when the reader thought the calculation of the 20 employee threshold was already confusing, COBRA adds yet more complexity. An employer may determine the number of its employees on a daily basis or a pay period basis. The basis used by the employer must be used with respect to all employees of the employer and must be used for the entire year for which the number of employees is being determined. If an employer determines the number of its employees on a daily basis, it must determine the actual number of full-time employees on each typical business day and the actual number of part-time employees and the hours worked by each of those part-time employees on each typical business day. Each full-time employee counts as one employee on each typical business day and each part-time employee counts as a fraction, with the numerator of the fraction equal to the number of hours worked by that employee and the denominator equal to the number of hours that must be worked on a typical business day in order to be considered a full-time employee. If an employer determines the number of its employees on a pay period basis, it must determine the actual number of full-time employees employed during that pay period and the actual number of part-time employees employed and the hours worked by each of those part-time employees during the pay period. For each day of that pay period, each full-time employee counts as one employee and each part-time employee counts as a fraction, with the numerator of the fraction equal to the number of hours worked by that employee during that pay period and the denominator equal to the number of hours that must be worked during that pay period in order to be considered a full-time employee. The determination of the number of hours required to be considered a full-time employee is based upon the employer’s employment practices, except that in no event may the hours re quire d to be considered a full-time employee exceed eight hours for any day or 40 hours for any week.

For multiemployer plans, the determination of whether the plan is a small-employer plan on any particular date depends on which employers are contributing to the plan on that date and on the workforce of those employers during the preceding calendar year. If a plan that is otherwise subject to COBRA ceases to be a small-employer plan because of the addition during a calendar year of an employer that did not normally employ fewer than 20 employees on a typical business day during the preceding calendar year, the plan ceases to be excepted from COBRA immediately upon the addition of the new employer. In contrast, if the plan ceases to be a small-employer plan by reason of an increase during a calendar year in the workforce of an employer contributing to the plan, the plan ceases to be excepted from COBRA on the January 1 immediately following the calendar year in which the employer’s workforce increased.

So, now what happens if a plan becomes a small employer plan? The following rule applies: if a plan that has been subject to COBRA (that is, was not a small-employer plan) becomes a small-employer plan, the plan remains subject to COBRA for qualifying events that occurred during the period when the plan was subject to COBRA. This is an important consideration for an employer in the current economic climate when trying to ascertain which law applies – federal or, in certain instances, state law. The IRS regulations provide the following example to illustrate this point:

The previous example becomes more confusing when questions concerning eligible...