COBRA 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.