Consolidated Omnibus Budget Reconciliation Act (COBRA)

The Consolidated Omnibus Budget Reconciliation Act (also known as COBRA) is a federal law that requires companies employing at least 20 people to provide for a continuation of benefits for former employees and their families under the company's group health insurance plan. COBRA makes it possible for those employees (and other qualified family members) who would otherwise lose their insurance coverage due to the occurrence of a qualifying event to continue their coverage at specified group rates, for a period of eighteen- to thirty-sex months, at their own expense. COBRA specifies the rates, coverage, qualifying events and beneficiaries, notification of eligibility procedures, and time of payment requirements for the continuation of coverage.

A qualifying event is an occurrence that activates an insured individual's protection under COBRA. Qualifying events can include the death of a covered employee, termination of employment or reduction of work hours, Medicare eligibility for the covered employee, divorce or legal separation of the covered employee from his or her spouse, the termination of a child's dependent status under the terms of the group insurance plan, and the bankruptcy of the employer. In other words, a qualifying event occurs when the employee (or the spouse or dependent child) becomes ineligible for coverage under group contract. However, if termination is the result of gross misconduct by the covered employee, it is not a qualifying event.

A qualified beneficiary is defined as any individual covered under the group health plan on the day before a qualifying event occurs. This generally includes the covered employee and his or her spouse and any dependent children. Amendments made in 1996 expand the definition of "qualified beneficiary" to include children born or adopted during the 18-month coverage period.

Employers must provide notification statements to individuals who are eligible for coverage continuation under COBRA. This notification must be made when an insurance plan becomes subject to COBRA, when an employee is covered by a plan that's subject to COBRA (such as a new hire), or when a qualifying event occurs. Additionally, the initial notification made to the spouse of an employee, or to his or her dependents, must be made in writing and sent to the last known address of the spouse or dependent. The eligible individual has 60 days following notification in which to elect the continuation of coverage; if he or she fails to do so in that time period, the option is forfeited.

The rationale behind COBRA is to provide transitional health care coverage until the employee or family member secures coverage or employment elsewhere; thus, an employer is only required to make continuation coverage available temporarily. The maximum period of coverage continuation for termination of employment or a reduction in employment hours is 18 months. For all other qualifying events the maximum period of coverage continuation is 36 months. There are also certain disqualifying events that can end coverage before the specified time periods, such as the first day that a premium payment is missed, if the employer drops the group health plan (however in most states, if an employer discontinues its group plan, employees must have the opportunity to convert to individual insurance without a medical examination or other evidence of insurability), the first day the covered individual obtains replacement coverage, or the date that the covered individual becomes eligible for Medicare.