What is COBRA?
COBRA is the federal rule that gives people who lose eligibility for their employer health plan the option to keep that same coverage for a limited time – as long as they pay the full cost themselves (plus an administrative fee).
That means they pay:
- The portion they used to pay as an employee or dependent
- The portion the employer used to cover
- Plus up to a 2% administrative fee
Most people don’t realize how much their employer contributes until they see a COBRA bill, which is why premiums can feel so high. COBRA coverage must start the day after the group plan would otherwise end, with no break in coverage, as long as the individual elects and pays for COBRA on time.
COBRA stands for the Consolidated Omnibus Budget Reconciliation Act of 1985, signed into law during the Reagan Administration.
Who Has to Follow COBRA Law?
Federal COBRA applies to employers who:
- Offer a group health plan, and
- Had 20 or more employees on more than half of the typical working days in the preceding calendar year
Once an employer hits the 20-employee threshold in the prior year, it is considered a federal COBRA employer for the entire current calendar year – even if headcount drops later.
ERISA Wrap/Plan Document Reminder: Employers should include their federal COBRA (and state continuation, if applicable) rules in their ERISA plan documents. These documents outline COBRA rights, eligibility, timelines, and administrative procedures.
COBRA Can Only Continue Under an Active Group Health Plan
COBRA continuation is only available while the employer continues to offer a group health plan. If the employer terminates the plan entirely, COBRA cannot be offered because there is no plan to continue. If someone requests COBRA in that situation, the employer must send a COBRA Notice of Unavailability explaining why continuation isn’t available.
How to Count Employees for COBRA
COBRA uses its own counting method, which is different from ACA and other FTE formulas.
- Count all W-2 employees
Full-time employees always count as 1 employee. - Count part-time employees as a fraction
For COBRA, a part-time employee counts as:
“Hours worked”÷”Hours the company considers full-time”
Example: If the company defines full-time as 40 hours/week, and an employee works 20 hours/week, they count as 0.5 employees.
- Important:
This is not the ACA Applicable Large Employer (ALE) calculation method for Full time Equivalents (FTE).
Under ACA, part-time hours are divided by 120 per month to determine the number of FTEs. For COBRA, the divisor is whatever the employer considers full-time – which varies by company (30 hours? 32? 40?). - The count is based on more than 50% of the typical business days in the previous calendar year.
- Once the employer’s COBRA status is set on January 1, it stays that way for the entire year – even if headcount goes up or down mid-year.
Controlled Groups Matter
Some employers operate more than one company under common ownership. When this happens, those companies may be treated as one employer under IRS controlled group rules.
For COBRA, this means:
- All employees across the related companies are combined when determining whether the group hits the 20-employee threshold, and
- If the combined group had 20 or more employees on more than half of the typical business days in the prior year, every company in the group is subject to Federal COBRA – even the smaller subsidiaries.
Controlled group rules can be complex and tax-driven. Employers should work with their CPA or legal counsel if they are unsure about their controlled group status.
For a deeper look at controlled group definitions, see the “Controlled Group Rules” page in the ACA section of the WB Compliance Wiki. Those same IRS rules drive COBRA applicability as well.
Employers Exempt from Federal COBRA
Federal COBRA does not apply to:
- Employers with fewer than 20 employees. (Although many states have their own “mini-COBRA” continuation laws for small groups.)
- Church plans
- Federal government plans
Even when an employer is exempt from federal COBRA, state continuation (such as Cal COBRA in California) may still apply – especially for fully insured medical plans.
Federal COBRA vs. State Continuation (Mini-COBRA)
Most employers fall into one of two buckets:
- If the employer had 20 or more employees in the prior calendar year, Federal COBRA applies.
- If the employer had fewer than 20 employees, Federal COBRA does not apply, but many states have their own continuation laws (often called “mini-COBRA”, or Cal-COBRA in California).
State continuation laws were designed to cover the groups that federal COBRA doesn’t reach. These laws vary by state and can differ in covered benefits, duration, premium rules, and administrative requirements. Some states even extend continuation after federal COBRA ends – for example, Cal-COBRA adds extra time for fully insured medical plans in California.
You can explore these rules in more detail on the State Continuation and Cal-COBRA pages.
What Triggers COBRA Eligibility?
A person becomes eligible for COBRA only when all three of the following are true:
- The employer is subject to federal COBRA,
- The employee or dependent was actually covered under the plan, and
- A qualifying event occurs that causes a loss of eligibility under the plan.
In practical terms, qualifying events are the things that would normally make someone lose their group coverage. Common examples include:
For employees (and their covered dependents):
- Resignation
- Involuntary termination (other than gross misconduct)
- Reduction in hours that causes loss of eligibility (e.g., full-time → part-time)
For dependents only:
- Child reaching the plan’s limiting age
- Divorce or legal separation
- Employee becoming entitled to Medicare (in limited circumstances)
- Death of the covered employee
We’ll walk through each qualifying event in detail in the Qualifying Events section.
Why COBRA Matters
COBRA comes up constantly: terminations, reductions in hours, divorces, dependents aging out, Medicare entitlement, and more. It’s also one of the easiest areas for employers to get wrong, and the consequences can be substantial.
Understanding COBRA helps employers avoid:
- IRS excise taxes
- DOL penalties
- Civil actions and lawsuits
- Costly carrier billing errors
Even small mistakes – like sending the wrong notice, missing a deadline, or miscounting employees – can put an employer out of compliance with federal law.
And most importantly, it ensures employees can transition during major life events without gaps in coverage – which is exactly when they need stability the most.