COBRA is one of the most misunderstood and frequently mismanaged employer obligations. It’s a federal law that gives employees and their families the right to continue health insurance coverage after they leave their job. Employers must understand when they must offer it, what they must communicate, and the penalties for getting it wrong.
What Is COBRA?
COBRA stands for the Consolidated Omnibus Budget Reconciliation Act, a 1985 federal law. The relevant part is Title X, which created the right to continuation coverage.
In plain language: when an employee leaves a job or experiences certain other events, they and their dependents have the right to keep the health insurance they had through the employer’s plan—for a limited time and at the employee’s full cost.
The employee pays the full premium (what the employer was paying plus what the employee was paying), plus a 2% administrative fee to the employer for handling the paperwork.
Who Must Offer COBRA?
COBRA applies to employers with 20 or more employees on 50% or more of working days during the prior 12 months. Most mid-size and large employers fall under this threshold.
If an employer has 19 or fewer employees, federal COBRA does not apply. However, some states have their own continuation coverage laws (sometimes called “mini-COBRA” or state continuation laws), which may apply to smaller employers. These vary significantly by state.
Employers should know: even if they don’t think they’re subject to COBRA, they should verify by checking their employee count in the prior calendar year.
When COBRA Is Triggered
An employee loses COBRA eligibility when they leave a job. But there are other qualifying events that trigger COBRA rights for the employee and their dependents:
Employee Termination
When an employee is terminated for any reason (except gross misconduct in some states), they become COBRA-eligible. Gross misconduct is a narrow category—typically things like theft, violence, or deliberate destruction of company property. Being fired for poor performance or missing a deadline does not prevent COBRA eligibility.
Duration: 18 months.
Reduction in Hours
When an employee’s hours drop below the level required to maintain health insurance eligibility (for example, from full-time to part-time), COBRA is triggered.
Duration: 18 months.
Divorce or Legal Separation
The spouse and dependent children lose access to the employee’s health plan through the employer. COBRA lets them continue for a limited time.
Duration: 36 months (longer than employee termination).
Dependent Aging Out
When a child reaches the age limit for dependent coverage (typically 26 under the Affordable Care Act), they can elect COBRA to continue coverage temporarily.
Duration: 36 months from the date of losing dependent status, but in practice often much shorter since they’re losing coverage anyway.
Death of Employee
The employee’s spouse and dependents lose coverage when the employee dies. COBRA allows them to continue.
Duration: 36 months.
Medicare Entitlement
When a covered employee becomes entitled to Medicare, both the employee and their dependents can elect COBRA continuation. This is less common because Medicare is usually an attractive alternative.
Duration: 36 months.
Retiree Coverage Loss
When an employer goes bankrupt and can no longer provide retiree health coverage, retirees become COBRA-eligible.
Duration: Varies.
The 18-Month and 36-Month Rules
Most qualifying events trigger an 18-month COBRA eligibility period. The employee has 60 days from the qualifying event to notify the employer and elect continuation coverage. If they elect within that window, they can maintain coverage for up to 18 months, paying the premium themselves.
Certain events—divorce, dependent aging out, death, and retiree coverage loss—trigger a 36-month period. The logic: these events affect spouses and children, who have less ability to immediately obtain other coverage, so they get a longer window.
Important: the 18-month period can be extended to 29 months if the employee becomes disabled during their employment or within 60 days of losing coverage. The employer must be notified of the disability (through Social Security) and the COBRA participant must timely pay the extra premium for months 19–29.
Employer Obligations
Employers covered by COBRA have several notification and administrative duties:
General Notices
When a health plan is first offered, the employer must give all employees a general notice explaining COBRA rights. This notice must be in plain language and meet specific content requirements. The general notice is typically provided at benefits enrollment or during onboarding.
Qualifying Event Notices
When a qualifying event occurs, the employer must notify the COBRA participant in writing within 14 days of learning about the event. Some events (like termination) the employer knows about immediately. Others (like divorce) the employee must tell the employer about. The notice must explain:
- That COBRA rights have been triggered
- Who can elect (the employee and dependents)
- How long coverage can continue
- How much it will cost
- How to elect continuation
- The deadline to elect (60 days)
- What happens if they don’t elect
- Information about other coverage options (like the ACA marketplace)
Premium Collection
The employer must bill the COBRA participant for premiums and collect payment. The participant has a 30-day grace period on the first premium payment. After that, failure to pay terminates COBRA.
Ongoing Notifications
The employer must notify COBRA participants of changes to the health plan—like changes in coverage, costs, or if the plan is terminated.
Record-Keeping
The employer must keep records of all COBRA elections, premium payments, and terminations for six years.
Penalties for Non-Compliance
The IRS and Department of Labor take COBRA violations seriously. Penalties include:
- Up to $100 per day per affected individual for failure to provide required notices
- Potential excise tax penalties for plan violations
- Department of Labor investigations and enforcement actions
- Employee lawsuits for damages
In practice, penalties range from a few thousand dollars for technical violations to tens of thousands for systemic failures to notify.
Cost: Who Pays What
The employee pays the full cost. Let’s say the health insurance costs $1,500 per month total. The employer was paying $900 and the employee was paying $600. During COBRA, the employee pays the full $1,500, plus 2% ($30) for the administrative fee, for a total of $1,530 per month.
This is expensive, which is why many employees don’t elect COBRA. They instead look at the ACA health insurance marketplace, Medicaid (if eligible), or spousal coverage.
How COBRA Interacts with Section 125 Plans
If the employee was paying for health insurance through a Section 125 (cafeteria) plan with pre-tax dollars, the COBRA election changes this. The employee can still elect COBRA and continue the same coverage. However, COBRA premiums must be paid with after-tax dollars—the pre-tax deduction ends when employment ends.
For the employer, this means: once an employee separates from the company, they no longer participate in the cafeteria plan. They’re on COBRA, paying directly to the plan, using after-tax money. The employer can’t deduct COBRA premiums from their Section 125 elections.
Mini-COBRA: State Continuation Laws
For employers with fewer than 20 employees, federal COBRA doesn’t apply. However, many states have their own continuation coverage laws. These vary widely:
- Some states (like California) require continuation for 12 months
- Some states (like New York) require 4 months
- Some states apply to all employers with specific employee counts
- Some states apply only to specific industries
Employers with fewer than 20 employees in states with continuation laws must offer coverage under those state rules. The notice requirements, premium costs, and duration differ from federal COBRA. Employers should check their state’s requirements.
Common COBRA Mistakes
1. Missing the 14-Day Notification Window
Employers who don’t notify the employee quickly lose the right to collect premiums. The employee can claim they never got notice and demand the plan pay for claims retroactively.
2. Not Explaining the 60-Day Election Period
Employees sometimes don’t realize they have 60 days to decide. Employers who rush them or don’t clearly communicate the deadline create liability.
3. Failing to Continue Coverage While Processing
An employee elects COBRA, but the employer’s insurance broker hasn’t activated it yet, so claims are denied. The employee should have continuous coverage—the 60-day election period shouldn’t create a gap.
4. Not Informing Dependents
When an employee’s job ends, their spouse and adult children may have COBRA rights. Employers sometimes only notify the employee and forget the dependents.
5. Terminating COBRA Early for Non-Payment
If a COBRA participant is 2 weeks late on a payment, they don’t automatically lose coverage. There’s a grace period. Terminating too hastily invites disputes.
6. Not Updating Health Plan Changes
If the employer’s health plan changes (deductible increases, network changes), the employer must notify COBRA participants. Failure to do so can be a violation.
Educational Takeaway
COBRA is a federal continuation coverage law applying to employers with 20 or more employees. It’s triggered by termination (18 months), reduction in hours (18 months), or family events like divorce or death (36 months). Employers must notify affected individuals within 14 days and give them 60 days to elect continuation. The employee pays the full premium plus 2% admin fee using after-tax dollars. Employers must maintain records and handle billing. Non-compliance can result in significant penalties. Smaller employers should check for state continuation laws.
COBRA interacts with pre-tax benefits and requires compliance with minimum essential coverage requirements. Most employers find COBRA complex enough to work with a third-party administrator or benefits consultant to manage notifications, elections, and billing.
