COBRA Continuation Coverage
Also known as: COBRA, COBRA Coverage, Continuation Coverage
COBRA continuation coverage, named for the Consolidated Omnibus Budget Reconciliation Act, is a federal law requiring group health plans sponsored by employers with 20 or more employees to offer temporary continued coverage to qualified beneficiaries who would otherwise lose it because of a qualifying event. Qualifying events include termination (other than for gross misconduct), a reduction in hours, divorce, an employee's death, or a dependent aging off the plan. The continued coverage must be identical to what similarly situated active employees receive, and it protects the covered employee, spouse, and dependent children.
The reason COBRA matters to a small-business owner is compliance risk and cost allocation. The employer (or its administrator) must send timely election notices — generally within 14 days after the plan is notified — and the beneficiary has 60 days to elect. Coverage typically lasts 18 months (up to 36 months for certain events), and the beneficiary usually pays up to 102% of the plan's full cost: the entire premium plus a 2% administrative charge. Missing a notice deadline can expose the employer to statutory penalties, IRS excise taxes, and lawsuits, so many firms outsource COBRA administration to their carrier or a third party.
The practical nuance is that COBRA obligations do not disappear when a company self-funds its health plan — the sponsor still owes continuation coverage, and it must fund the continuing claims. Employers with fewer than 20 employees are exempt from federal COBRA, but many states impose 'mini-COBRA' laws with similar duties on small groups. Because a COBRA offer preserves minimum essential coverage for the former employee, it interacts with Marketplace subsidy eligibility, and beneficiaries should compare COBRA's cost against a Special Enrollment Period plan. Diligent notice tracking is the single most important thing an employer can do to stay out of trouble.
Real-world scenario
When Cedar & Sage Interiors, a 22-employee design-build firm, laid off project manager Maria after a client contract fell through, her termination was a "qualifying event" that triggered COBRA continuation. While employed, Maria's individual coverage carried a full monthly premium of $780 — the firm paid $580 and deducted $200 from her paycheck. Under COBRA she may keep the identical plan for up to 18 months, but now pays the full $780 plus a 2% administrative fee of $15.60, for a total of $795.60 per month. Had she elected family coverage, the full premium of $2,150 would have grown to roughly $2,193 per month at 102%.
Maria received her election notice and had a 60-day window to enroll, then 45 days to make her first payment. Because she was mid-treatment, continuity mattered: three months in she needed knee surgery billed at $46,000. Her plan applied her $2,500 deductible and, after she hit her $8,000 out-of-pocket maximum, paid about $38,000 of the bill — coverage she would have lost entirely without COBRA. Because the continued plan counts as minimum essential coverage, Maria also avoided any gap that could have complicated a future special-enrollment period.
For Cedar & Sage, COBRA created a hidden exposure too. The firm runs a partially self-funded arrangement with a stop-loss attachment point of $50,000 per claimant against an annual plan spend near $310,000. Maria's $38,000 surgery ran up utilization on a former employee the firm no longer employed, underscoring why COBRA continuants stay in the claims pool.
How it affects your premium
COBRA has no separate "premium" the way a P&C policy does — the cost is driven by the underlying group health plan's rate, plus a small statutory administrative load. What moves that number:
- Full group premium (employer + employee share): The continuant pays 100% of the combined rate, so a plan where the employer previously subsidized 70-80% produces a steep sticker shock.
- 2% administrative surcharge: Federal COBRA lets the plan add up to 2% (up to 150% during an 11-month disability extension) to cover billing and eligibility administration.
- Tier of coverage elected: Individual, employee+spouse, and family tiers carry very different full premiums; a beneficiary can sometimes drop to a cheaper tier.
- Plan richness and network: A low-deductible PPO costs far more to continue than a high-deductible plan; funding design such as self-funded health changes how the "premium equivalent" rate is set.
- Annual renewal increases: The COBRA rate resets each plan year with the group's new rates, so continuants absorb the same trend increases active employees see.
- Administrative outsourcing: Employers using a third-party administrator or administrative-services-only arrangement may pass through the 2% fee, but the base rate still tracks the group.
- Duration of the qualifying event: 18-month (termination/hours reduction) versus 36-month (divorce, death, dependent aging out) periods change total lifetime cost, not the monthly rate.
Common misconceptions
Myth: COBRA is a separate, cheaper insurance policy the government subsidizes.
Reality: COBRA is not a policy at all — it is the right to continue the exact same employer group plan, and the beneficiary pays the full unsubsidized premium plus up to 2%. It is often the most expensive option precisely because the employer subsidy disappears.
Myth: Once an employee leaves, the employer has no more health-plan exposure for that person.
Reality: COBRA continuants remain in the claim pool, so a former employee's large claim still hits the plan and any stop-loss layer. Employers subject to the ACA employer mandate must also track COBRA offers carefully to document compliant coverage.
Myth: You have to sign up for COBRA the day you lose your job or you lose it forever.
Reality: Qualified beneficiaries get a 60-day election window from the later of the qualifying event or notice date, plus 45 days to make the first payment — and coverage is retroactive to the coverage-loss date once paid.
Frequently asked questions
How long does COBRA continuation last?
Does a small business have to offer COBRA?
Is COBRA cheaper than buying a Marketplace plan?
Can an employer just switch everyone to a cheaper plan instead of offering COBRA?
What happens if the COBRA payment is late?
Sources cited
Need cobra continuation coverage?
Compare quotes from 10+ commercial insurance carriers in 5 minutes. Free, no contact info required.
Get My Quotes →