COBRA Benefits in 3 Minutes or Less
Yes, we timed it.
If you’re an employer looking to offer COBRA benefits for the first time, a broker fielding COBRA questions from clients, or an employee considering opting into your employer’s COBRA coverage, you’ve probably found yourself scratching your head from time to time. COBRA rules and regulations are often hard to navigate, and understanding COBRA can be a difficult task if you’re offering COBRA for the first time.
In this post, we’ll give you a high-level overview of eligible and ineligible COBRA benefits, plus insight on COBRA and health savings accounts (HSAs).
COBRA: What is it?
The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), is a federal law that requires most employers with 20 or more employees who offer health care benefits to also offer the option of continuing such coverage to qualified beneficiaries – at their own expense – who would otherwise lose their benefits. Loss of coverage may be a result of employment termination, reduction in hours, or certain other events.
From the employee’s perspective, COBRA legislation allows employees and their dependents who were covered under an employer’s group health plan to continue their health coverage in situations when it would ordinarily be lost, such as a layoff or reduction in the number of hours worked.
What benefits are and are not covered by COBRA?
Medical Benefits (Physician Care, Inpatient & Outpatient Hospital Care, Surgery and other Major Medical Benefits)
Employee Assistance Program*
Flexible Spending Account (FSA)**
Dependent Care FSA (DCFSA) / Dependent Care Assistance Program (DCAP)
Disability Income Insurance
Health Savings Account (HSA)
* Employee Assistance Programs are COBRA eligible only if they offer health counseling benefits.
** FSAs would only be available through the end of the current plan year for which COBRA was elected, and if there is an unused account balance as of the qualifying event date. Dependent Care FSAs are excluded, as noted in the next section.
Direct Bill Services
Although certain coverages do not need to be offered through COBRA, many employers do elect to offer them to select populations through a third-party administrator (TPA). These coverages are called direct bill services.
Examples of direct billing populations include:
- Select vested employees, such as executives
- Retirees who are capable of being on benefits until reaching the age of 65 years old
- Family members of ex-employees who have passed away
- Employees who are on FMLA. (By ensuring billing for their eligible benefits, employers prevent monetary loss for this population.)
Why aren’t HSAs considered a COBRA-eligible health benefit?
Although HSAs may be used in large part to pay for health care expenses, these are viewed as financial investment accounts, not health benefits.
HSA funds are the property of the employee. So, the funds accrued in the HSA account at the time of the qualifying event can continue to be used for health care expenses.
However, an employee can’t make new financial contributions to the HSA if their employment or eligibility is terminated…unless the employee is contributing funds on a post-tax basis and then filing it on their taxes going forward.