This section discusses:

• COBRA Coverage After Acquisition
• Plans Covered
• Covered Group Health Plans
• Medical Spending Accounts

If you employ two to 19 people, federal COBRA provisions do not apply. However, you may be covered by Cal-COBRA. For more information, see Cal-COBRA.

The determination of COBRA coverage is made based on the number of employees employed in the previous calendar year. Any new employer, no matter how large, is not technically covered by COBRA in its first year of existence unless it had a predecessor or it is part of a controlled group of organizations covered by COBRA.

The law considers a business or corporation an employer of 20 employees during a calendar year if it had 20 employees on at least 50 percent of its typical business days during that year. All related business entities under common control also are considered a single employer for purposes of counting the number of employees to determine if the employer is covered by COBRA, including worldwide employees in the case of multinational employers.1

The 20-employee minimum includes all full-time and part-time employees, regardless of their participation in the group health plan. Part-time employees count as a fraction of an employee, with the fraction equal to the number of hours the part-time employee works for you, divided by the number of hours an employee must work to be considered full-time. A full-time employee, for the purposes of COBRA, can work no more than 40 hours per week or eight hours per day. Employees can be counted on either a typical business day or by pay period. You must use your chosen method consistently.2

If you increase your workforce to 20 or more during the current calendar year, the single employer plan ceases to be a small-employer plan and becomes covered by COBRA on the following January 1.3 If a multi-employer plan ceases to be a small-employer plan because of the addition of an employer who had 20 or more employees in the preceding year, the plan becomes covered by COBRA immediately.4

An employee otherwise entitled to continuation coverage will continue to qualify for coverage even if your workforce drops below 20 employees after COBRA coverage commences.5

• Informing employees of the availability of continued medical coverage under COBRA — even in error (for example, a small employer that’s not covered by COBRA but informs employees of COBRA coverage) — can mandate the employer to provide coverage because the employees relied on the employer’s information.6

COBRA Coverage After Acquisition

An employer is considered to have employed fewer than 20 employees during a particular calendar year if it had fewer than 20 employees on at least 50 percent of its typical business days. Special rules apply when, as a result of an acquisition, the employer’s workforce increased beyond 20 employees. The type of sale determines when COBRA obligations begin.7

A stock sale is a transfer of stock in a corporation that causes the corporation to become a different employer or a member of a different employer. In applying the small-employer plan exception to a group health plan maintained by the combined entity following the stock transfer, employees of both employers during the previous calendar year must be considered. Where the combined employers normally employed at least 20 employees during the previous calendar year, a group health plan maintained by the combined entity becomes covered by COBRA as of the date of the stock transfer.

Example: Company P maintains a group health plan and normally employed fewer than 20 employees during the previous calendar year. During the current calendar year, stock in Corporation O is transferred so that after the transfer P and O are considered a single employer. The combined number of employees normally employed by P and O during the previous calendar year was at least 20. A group health plan maintained by the combined entity ceases to be exempt from COBRA as a small-employer plan as of the date of the stock transfer.

An asset sale is a transfer of substantial assets, such as a plant or division, or all the assets of a trade or business. A buyer of substantial assets is considered a successor employer when they continue the business operations associated with the purchased assets without interruption or substantial change, and the seller ceases to provide any group health plan to any employee in connection with the sale.

Example: Company R maintains a group health plan and normally employed fewer than 20 employees during the previous calendar year. During the current calendar year, R acquires substantially all assets of a business and continues the business operations associated with those assets without interruption or substantial change. The combined number of employees normally employed by R and the acquired business during the previous calendar year was at least 20.

The acquisition of assets by R does not cause R to be considered a single employer with any part of the seller of the assets. The group health plan maintained by R continues to be exempt from COBRA until January 1 following a year in which R normally employed at least 20 employees.

However, if R acquires substantial assets of the seller, continues the business operations associated with the purchased assets without interruption or substantial change and the seller ceases to provide any group health plan to any employee in connection with the sale, R is a successor employer and must make COBRA continuation coverage available to any qualified beneficiaries of the seller even though R is otherwise excepted from COBRA.

Plans Covered

Under COBRA, a covered group health plan must offer each qualified beneficiary (see “Qualified COBRA Beneficiaries” in COBRA - Covered Employees) who would otherwise lose coverage under the plan as a result of a qualifying event (see Qualifying Events and Extension of Coverage) an opportunity to choose to continue the coverage being received immediately before the qualifying event.

A qualified beneficiary who chooses continuation generally can be initially charged an amount no greater than 102 percent of the applicable premium, which is based on the plan’s cost of providing coverage.

COBRA does not require you to provide either group health plans or health benefits to employees. It covers group health plans that you already maintain, when qualifying events occur to covered employees. Though you can maintain multiple plans, each with separate documentation, federal law considers all health benefits you provide to be under a single plan unless:

• It is clear that the plans are separate.
• Separate arrangements exist for their operation.8

Covered Group Health Plans

To qualify as a covered group health plan under COBRA, the plan must provide health care and you must maintain the plan.9

Health care includes the diagnosis, cure, mitigation, treatment or prevention of disease and any other medical effort affecting any structural function of the body. The law considers an employer to be maintaining a group health plan for employees if coverage under the plan would not be available at the same cost to the employee if they were not employed by you, regardless of if you contribute to the group health plan.10 This also includes a scheme whereby you pay for individual policies for your employees.11

In addition to medical coverage, COBRA extends to other benefits, such as dental and vision coverage, and, under certain circumstances, medical and health flexible spending accounts provided under a cafeteria plan and Employee Assistance Programs (EAPs).

Medical Savings Accounts and Cafeteria Plans

Under Internal Revenue Service (IRS) regulations, amounts contributed by an employer to a medical savings account are not considered part of a group health plan subject to COBRA, and employers therefore do not need to provide COBRA continuation coverage for such plans.12

However, COBRA continuation coverage requirements apply to cafeteria plans and other health flexible spending arrangements (health FSAs). The COBRA continuation coverage requirements apply only to the type and level of coverage under the cafeteria plan or other flexible benefit arrangement that a qualified beneficiary is actually receiving on the day before the qualifying event.13

A health FSA will not be obligated to provide COBRA continuation coverage if, as of the date of the qualifying event, the maximum benefit available for the remainder of the plan year is less than the required COBRA premium for the balance of the year. For example, if the employee sets aside $100 per month (or $1,200 per year) and leaves in July after contributing $700 to the MSA and submitting claims for $800, for the rest of the year the qualified beneficiary could submit claims for only $400 ($1,200 minus $800) and COBRA premiums under the MSA would amount to $500 ($1,200 minus $700) plus two percent. Under these circumstances, COBRA would not apply. However, if only $400 was spent before a qualifying event and the beneficiary had a positive balance, COBRA rights would apply. COBRA continuation coverage will not be available for any subsequent plan year.14

After the initial COBRA plan year, COBRA need not be continued if the health FSA isn’t covered by HIPAA’s portability provisions (see Health Insurance Portability and Accountability Act (HIPAA)) and the maximum premiums during the initial COBRA plan year would exceed the available benefits. This generally would apply, because qualified beneficiaries must pay 102 percent of the premium but could recover only 100 percent.

1. IRC secs. 414(b), (c), (m), (o); Kidder v. H & B Marine, Inc., 734 F. Supp. 724 (E.D. La. 1990), affirmed in part and reversed in part, 932 F.2d 347 (5th Cir. 1991); Treas. Reg. sec. 54.4980B-2, Q&A-5(c)