What is Cobra?

COBRA – the Consolidated Omnibus Budget Reconciliation Act – requires group health plans to offer continuation coverage to covered employees, former employees, spouses, former spouses, and dependent children when group health coverage would otherwise be lost due to certain events. Those events include:

  • A covered employee’s death,
  • A covered employee’s job loss or reduction in hours for reasons other than gross misconduct,
  • A covered employee’s becoming entitled to Medicare,
  • A covered employee’s divorce or legal separation, and
  • A child’s loss of dependent status (and therefore coverage) under the plan.

 

COBRA sets rules for how and when plan sponsors must offer and provide continuation coverage, how employees and their families may elect continuation coverage, and what circumstances justify terminating continuation coverage.
 

Employers may require individuals to pay for COBRA continuation coverage. Premiums cannot exceed the full cost of the coverage, plus a 2 percent administration charge.

What is a Health Plan under Cobra?

What is a group health plan? It is any arrangement that an employer establishes or maintains to provide employees or their families with medical care, whether it is provided through insurance, by a health maintenance organization, out of the employer’s assets, or through any other means. “Medical care” includes for this purpose:

  • Inpatient and outpatient hospital care,
  • Physician care,
  • Surgery and other major medical benefits,
  • Prescription drugs, and
  • Dental and vision care.
     

Life insurance and disability benefits are not considered “medical care.” COBRA does not cover plans that provide only life insurance or disability benefits.
 

COBRA-covered group health plans that are sponsored by private-sector employers are generally considered welfare plans under ERISA and therefore subject to ERISA’s other requirements. Under ERISA, group health plans must be administered by a plan administrator, who is usually named in the plan documents. Many group health plans are administered by the employer that sponsors the plan, but group health plans are also frequently administered, in whole or in part, by a separate individual or organization, such as a professional benefits administration firm. Carrying out the requirements of COBRA is the direct responsibility of the plan administrator

What is a Section 125 plan?

A Section 125 plan, or a cafeteria plan, allows employees to pay for certain benefits on a pre-tax basis. Specifically, employers use these plans to provide their employees with a choice between cash and certain qualified benefits without adverse tax consequences. Paying for benefits on a pre-tax basis reduces the employees’ taxable income and therefore reduces both the employees’ and the employer’s tax liability.

 

In order to receive these tax advantages, a cafeteria plan must comply with the rules of Internal Revenue Code (Code) Section 125 and related Internal Revenue Service (IRS) regulations. Under these rules, a Section 125 plan must have a written plan document and can only offer certain qualified benefits on a tax-favored basis.

 

In addition, once an employee makes a Section 125 plan election, he or she may not change that election until the next plan year, unless the employee experiences a permitted election change event. Also, in order for highly compensated employees to receive the tax advantages associated with a Section 125 plan, the plan must generally pass certain nondiscrimination tests. 

What employers are subject to COBRA?

COBRA generally applies to all private-sector group health plans maintained by employers that had at least 20 employees on more than 50 percent of its typical business days in the previous calendar year. Both full- and part-time employees are counted to determine whether a plan is subject to COBRA. Each part-time employee counts as a fraction of a full-time employee, with the fraction equal to the number of hours worked divided by the hours an employee must work to be considered full time. For example, if full-time employees at Company A work 40 hours per week, a part-time employee who works 20 hours per week counts as half of a full-time employee, and a part-time worker who works 16 hours per week counts as four-tenths of a full-time employee.

COBRA also applies to plans sponsored by state and local governments.1 The law does not apply, however, to plans sponsored by the federal government or by churches and certain church-related organizations.

What is a COBRA Qualifying Event?

“Qualifying events” are events that cause an individual to lose group health coverage. The type of qualifying event determines who the qualified beneficiaries are and the period of time that a plan must offer continuation coverage. COBRA establishes only the minimum requirements for continuation coverage. A plan may always choose to provide longer periods of continuation coverage and/or to contribute toward the cost.

The following are qualifying events for a covered employee if they cause the covered employee to lose coverage:

  • Termination of the covered employee’s employment for any reason other than “gross misconduct,” or
  • Reduction in the covered employee’s hours of employment.

The following are qualifying events for a spouse and dependent child of a covered employee if they cause the spouse or dependent child to lose coverage:

  • Termination of the covered employee’s employment for any reason other than “gross misconduct,”
  • Reduction in hours worked by the covered employee,
  • Covered employee becomes entitled to Medicare,
  • Divorce or legal separation from the covered employee, or
  • Death of the covered employee.

In addition to the above, the following is a qualifying event for a dependent child of a covered employee if it causes the child to lose coverage:

  • Loss of “dependent child” status under the plan rules. Under the Affordable Care Act, plans that offer coverage to children on their parents’ plan must make coverage available until the child reaches the age of 26.

What is a Premium Only Plan?

A premium only plan (POP) is the most basic and most popular type of Section 125 plan, which are often referred to as “cafeteria plans.” While there are different types of Section 125 plans, each provides employers and employees with the chance to save money by reducing their tax liabilities.

A POP plan allows employees to pay their portion of insurance premiums with pre-tax dollars. Benefits that are typically offered within a POP plan include health, dental, vision, accidental death and dismemberment, short- and long-term disability, and group life insurance up to $50,000. 


POP Benefits 

With a POP plan, employees have the option of choosing an amount of pre-tax salary that will be withheld from their wages for insurance premiums. Depending on the amount they elect, employees can save up to up to 40% on their payroll deductions due to savings on Medicare, Social Security and unemployment taxes (depending on the state). As a result, employees have more money to take home each pay period. 

For employers, POP plans can decrease company payroll expenses and federal and state tax liabilities. For every dollar an employee contributes into a POP, employers save 7.65% on FICA taxes—a substantial financial savings. In addition, employee morale may improve since their take-home paychecks are larger. 


POP Disadvantages

While POPs can save costs, it is important to be aware of the potential disadvantages of these plans for both employees and employers.

  • Since a POP plan decreases an employee’s taxable income, it may also reduce other benefits, like Social Security, that are calculated using an employee’s income.
  • Employers are responsible for the implementation and maintenance costs associated with a POP plan.
    • Often, the tax savings gained covers most or all of the cost of the plan administration. Still, administering a POP plan is another responsibility for already busy HR professionals.
  • While POPs can offer tax savings to employees, they do not offer the same advantages of flexible spending accounts (FSAs), which allow employees to use FSA funds for qualified medical expenses in order to help offset their out-of-pocket costs. Employees may find POP plans to be less comprehensive than FSAs or other health care account options potentially offered at other companies.

POP Administration

Employees are only eligible to enroll in POPs during your annual open enrollment period, within a specified date for new hires or after a qualifying event (marriage, birth of a child, etc.). Employers are required to provide participants with a summary plan description (SPD) that explains the plan’s benefits, claims review procedure and participants’ rights.

In addition, employers offering a POP should perform nondiscrimination testing annually to make sure the benefit plan does not discriminate in favor of certain highly compensated or key employees. A POP test is deemed to satisfy the Section 125 plan nondiscrimination requirements if it passes an eligibility test. All tests should be kept on file in case of an audit.

 

What is a Full Cafeteria Plan?

Under a Full Cafeteria Plan, the employer makes a non-elective contribution for each eligible employee. Each employee may spend the employer contribution to purchase any of the benefits offered within the Cafeteria Plan. In addition, the employee may contribute pretax dollars to purchase additional benefits beyond what he or she can purchase with the employer's contributions.

What is a Simple Cafeteria Plan?

The Affordable Care Act (ACA) amended Section 125 of the Internal Revenue Code (Code) to allow certain small employers to establish “simple cafeteria plans” for plan years beginning after Dec. 31, 2010. Eligible small employers that maintain a simple cafeteria plan receive a safe harbor from the nondiscrimination rules for cafeteria plans and certain component benefits offered under the plan. 

These plans are treated as meeting the nondiscrimination requirements applicable to: 

Cafeteria plans, as long as certain eligibility, participation and minimum contribution requirements are met; and 

Certain component benefits offered under the cafeteria plan.

This ACA Overview describes the requirements for establishing a simple cafeteria plan, as well as the benefits to employers that maintain this type of plan.
 

Eligible Employers

Employers with an average of 100 or fewer employees during either of the two preceding years may establish a simple cafeteria plan.

Once an employer becomes eligible and establishes a simple cafeteria plan, it will continue to be treated as eligible for subsequent years, until the year after the first year its average number of employees reaches 200 or more.

What is a Flexible Spending Account?

A flexible spending account (FSA) is an account in an employee’s name that reimburses the employee for qualified health care or dependent care expenses. It allows an employee to fund qualified expenses with pre-tax dollars deducted from the employee’s paychecks. The employee can receive cash reimbursement up to the total value of the account for covered expenses incurred during the benefit plan year and any applicable grace period. 


“Use-it-or-lose-it” Rule

As required by the Internal Revenue Service (IRS), an FSA has a “use-it-or-lose-it” provision stating that any unused funds at the end of the plan year (plus any applicable grace period) will be forfeited. When electing an FSA during open enrollment, the employee must specify how much he or she would like to contribute to the FSA for the year. The goal is to choose an amount that will cover medical or dependent care expenses, but that is not so high that the money will be forfeited at the end of the year.

The IRS allows employers to offer an extended deadline, or grace period, of 2 ½ months* after the end of a plan year to use FSA funds. Thus, for a plan year ending Dec. 31, employees would have until March 15 to spend the funds in their FSAs. This provision is strictly optional; the employer must choose to implement it.

 In addition, employers may allow participants to carry over up to $550* in unused funds into the next year. Similar to the grace period rule, this carry-over rule is strictly optional, and employers must choose to implement it. The carry-over provision is only available if the plan does not also incorporate the grace period rule.

What is a Health Flexible Spending Account?

A health care FSA reimburses employees for eligible medical expenses, up to the amount contributed for the plan year. A health care FSA offered through a cafeteria plan must limit the amount of salary reduction contributions that employees can make.

A health care FSA only reimburses employees for money spent on medical care, as defined under Section 213(d) of the Tax Code. Section 213(d) of the Tax Code defines “medical care” to include amounts paid “for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body.”

Examples of qualified medical expenses include deductibles and copayments for an individual’s health plan. Eye exams, eyeglasses, contact lenses, hearing exams, hearing aids, physical exams and smoking cessation programs are also covered. For a complete list of qualified medical expenses, visit the IRS website.

What is a Dependent Care Flexible Spending Account?

The second type of FSA is a dependent care account. This account can be used to pay for care of dependent children under the age of 13* by a babysitter, day care center, or before- or after-school program. Care for a disabled spouse, parent or child over the age of 12 is also eligible for reimbursement.

Many of the same general rules that apply to health care FSAs also apply to dependent care accounts, such as the “use it or lose it” rule. However, there are some other important differences between the two types of accounts. For dependent care accounts:

There is an annual limit as to how much an employee can contribute. This amount is $5,000, or, if lower, the maximum amount that can be excluded from the employee’s income under Section 129 of the Tax Code when the employee’s election is made;

The American Rescue Plan Act temporarily raises pre-tax contribution limits for a DCAP for calendar year 2021. For this calendar year, a married employee who files a joint tax return or an unmarried employee may place up to $10,500 in a DCAP. A married employee who files a separate tax return may place up to $5,250 in a DCAP.

The money in a dependent care account is not available until it has been deposited by the employee; and

Dependent care expenses cannot be reimbursed until they are actually incurred. This can be an issue when child care centers “pre-bill” for services, and employees are required to pay in advance

What is Adoption Assistance?

Adoption assistance benefits help you with various parts of the adoption process. Benefits might include advice and help with paperwork, time off while bringing the child home, reimbursement for adoption-related costs or other types of assistance. Employers that offer adoption assistance benefits understand the importance of supporting their employees who choose to adopt. Employers typically design their adoption assistance benefits similarly to the benefits they provide for new biological parents, particularly regarding parental leave policies. 

What Do Adoption Assistance Benefits Provide?

Adoption assistance benefits come in many forms, but the benefits can be generally categorized into information resources, financial assistance and parental leave. If your employer offers adoption assistance, it may be in one or more of these categories.

Information Resources. The adoption process can be fraught with complicated rules, processes and paperwork. Information resources from your employer can help you navigate the adoption process. This assistance may include access to an adoption specialist who can answer questions or provide special support for more difficult adoption situations. Other resources may include recommendations for licensed adoption agencies, support groups and organizations.

  • Financial Assistance. Another benefit is financial assistance for many adoption-related expenses. Fees and expenses associated with adoption may include public or private agency fees, court costs, legal fees, foreign adoption fees, home study charges, medical costs, temporary foster care charges, transportation and traveling costs, pregnancy costs for a birth mother and counseling fees associated with child placement and transition. Employers that offer this financial benefit can set up the program in various ways.

 

Financial assistance for adoption could be provided in the form of a single payment to assist with the adoption—usually an amount between $1,000 and $15,000. Assistance might also be provided through reimbursement for adoption-related fees and expenses. For example, an adoption assistance reimbursement program might cover 80% or 100% of specified expenses (such as court fees, travel expenses or child medical care) up to a predetermined maximum amount.

 

In addition, an employer may provide benefits per adoption or per child adopted. Expenses may be paid up front as they are incurred or reimbursed after child placement or when adoption is finalized. Some employers provide extra financial assistance for the adoption of children with special needs.

 

  • Parental Leave. Like the birth of a child, bringing home an adopted child requires time and care. Parental leave allows you the time you need to assimilate the child into your home and make sure he or she is properly cared for. According to the Family and Medical Leave Act (FMLA), companies with 50 or more employees are required to provide both mothers and fathers up to 12 weeks of unpaid leave for the birth or adoption of a child. Companies that offer adoption assistance benefits may offer additional parental leave, or they might provide paid parental leave or a combination of paid and unpaid time off.

 

 

What is the Family and Medical Leave Act (FMLA)?

The Family and Medical Leave Act (FMLA) is a federal law that provides eligible employees of covered employers with unpaid, job-protected leave for specified family and medical reasons. Under the FMLA, eligible employees may take leave for their own serious health conditions, for the serious health conditions of family members, to bond with newborns or newly adopted children or for certain military family reasons.

In addition to providing eligible employees with an entitlement to leave, the FMLA requires that employers maintain employees’ health benefits during leave and restore employees to their same or equivalent job positions after leave ends. The FMLA also sets requirements for notices, by both the employee and the employer, and provides employers with the right to require certification of the need for FMLA leave in certain circumstances

The FMLA is enforced by the Department of Labor (DOL).


Links and Resources


COVERED EMPLOYERS: The FMLA applies to:

  • Public agencies, including state and federal employers;
  • Public and private elementary and secondary schools; and
  • Private-sector employers with 50 or more employees during 20 or more calendar workweeks in the current or previous calendar year.

ELIGIBLE EMPLOYEES: The FMLA applies to:

  • Currently work for a covered employer;
  • Have worked for this employer for a total of 12 months (need not be consecutive, and can look back up to several years);
  • Have worked at least 1,250 hours over the previous 12 months (however, special hours of service rules apply to airline flight crew members);
  • Work in the United States or any territory or possession of the United States; and
  • Work at a location where the employer has 50 or more employees within a 75-mile radius at the time the employee requests leave.

If the employee does not meet the eligibility requirements, an employer may not designate the leave as FMLA even if the leave would otherwise qualify for FMLA protection. If the employee is not eligible for FMLA leave, the employer may grant the employee leave under the employer’s policy. Once the employee becomes eligible and the leave is FMLA-qualifying, any of the remaining leave period taken for an FMLA-qualifying reason becomes FMLA-protected leave

What qualifies as a serious health condition under the FMLA?

Illness, injury, impairment, or physical or mental condition involving incapacity or treatment connected with inpatient care in hospital, hospice, or residential medical-care facility, or continuing treatment by a health care provider involving a period of incapacity due to:

  • A health condition lasting more than three consecutive full calendar days and involving a certain level of treatment;
  • A chronic serious health condition or a permanent or long-term condition for which treatment may be ineffective;
  • Absences to receive multiple treatments (including recovery periods) for a restorative surgery or Serious Health Condition:
  • Illness, injury, impairment, or physical or mental condition involving incapacity or treatment connected with inpatient care in hospital, hospice, or residential medical-care facility, or continuing treatment by a health care provider involving a period of incapacity due to:
  • A health condition lasting more than three consecutive full calendar days and involving a certain level of treatment;
  • A chronic serious health condition or a permanent or long-term condition for which treatment may be ineffective;
  • Absences to receive multiple treatments (including recovery periods) for a restorative surgery or for a condition that if left untreated likely would result in incapacity of more than three days; or
  • Any incapacity related to pregnancy or for prenatal care.

In the case of a member of the Armed Forces, including a member of the National Guard or Reserves, an injury or illness incurred by the member in line of duty on active duty in the Armed Forces (or which existed before the beginning of active duty and was aggravated by service in the line of duty on active duty) that may render the member medically unfit to perform the duties of the member’s office, grade, rank or rating.

For a veteran of the Armed Forces, including a veteran of the National Guard or Reserves, an injury or illness incurred by the member in the line of duty on active duty in the Armed Forces (or which existed before the beginning of active duty and was aggravated by service in the line of duty on active duty) and that manifested itself either before or after the member became a veteran..

Who is a health care provider under the FMLA?

Doctors of medicine or osteopathy authorized to practice medicine or surgery; podiatrists, dentists, clinical psychologists, clinical social workers, physician assistants, optometrists, chiropractors (limited to manual manipulation of spine to correct subluxation shown to exist by x-ray), nurse practitioners, and nurse- midwives, if authorized to practice under state law and consistent with the scope of their authorization; Christian Science practitioners listed with the First Church of Christ, Scientist in Boston, MA; any provider so recognized by the employer or its group health plan's benefits manager; and any health provider listed above who practices and is authorized to practice in a country other than the United States.

Who does the FMLA affect laws or agreements?

The FMLA does not affect any other federal or state law which prohibits discrimination, nor supersede any state or local law which provides greater family or medical leave protection, nor does it affect an employer’s obligation to provide greater leave rights under a collective bargaining agreement or employee benefit plan. The FMLA also encourages employers to provide more generous leave rights.

Salaried executive, administrative, professional or computer employees of covered employers who meet the Fair Labor Standards Act (FLSA) criteria for exemption from minimum wage and overtime under federal regulations, 29 CFR Part 541, do not lose their FLSA-exempt status by using any unpaid FMLA leave.

What is a covered service member?

FMLA Rights for Military Families

The Family and Medical Leave Act (FMLA) allows eligible employees to take unpaid, job-protected leave for certain family and medical reasons. Eligible employees are entitled to two types of FMLA leave related to a qualifying family member’s military service. This type of FMLA leave is called military family leave.

  • The military family leave provisions of the FMLA entitle eligible employees of covered employers to take FMLA leave for the following two reasons: Qualifying Exigency Leave—For a “qualifying exigency” arising from the foreign deployment of the employee’s spouse, son, daughter or parent with the Armed Forces; or 
  • Military Caregiver Leave—To care for a covered service member with a serious injury or illness if the employee is the service member’s spouse, child, parent or next of kin.

Links And Resources

An Employer's Guide to Group Health Continuation Coverage Under COBRA 

Avoiding Common COBRA Mistakes 

Model General Notices 

COBRA Common Questions Notification


Summary of Qualifying Events, Beneficiaries & Max Period of Continuation Coverage

Termination/Reduction in Hrs of Employment

   Employee/Spouse/Dependent Child - 18 Months

Employee Enrollment in Medicare

   Spouse/Dependent Child - 36 Months

Divorce/Legal Separation

   Spouse/Dependent Child - 36 Months

Employee Death

   Spouse/Dependent Child - 36 Months

"Dependent Child" loss status under the plan

   Dependent Child - 36 Months