COBRA & the Small Employer - Determining Eligibility

Entrepreneur Thurston Widget had a vision. He felt the world was finally ready for the Thneed-an invention so novel, it defies description. And at $3.98 each, how could anyone not need a Thneed? Having found the perfect location down on Utopia Lane, he builds his first factory and hires his first employee. Business takes off, more Thneeds are made and more employees are hired. Before Mr. Widget realizes it, he's employing a hardworking staff of 26.

Suddenly, a chilling thought crosses Mr. Widget's mind - "Am I COBRA-eligible?"

Defining Small Employer Employee Eligibility

COBRA provides for a "small employer exemption." Any employer who employed fewer than 20 common law employees on a typical business day in the prior year is exempt from offering COBRA continuation coverage to its employees. For purposes of this calculation, related employers such as controlled groups or affiliated service groups must be counted together.

There are two important issues to remember about this exemption. First, to determine the COBRA exemption status for the current year, employees must be counted for the prior calendar year. For example, if ABC Company employed 18 full-time employees and no part-timers for all of 2003 and then hired an additional 6 full-time employees early in 2004, ABC Company wouldn't be required to comply with COBRA until January 2005.

Second, the 1999 COBRA regulations stipulate that the number of employees counted for COBRA purposes should include part-time employees on a fractional basis. To make this calculation, take the number of hours worked by a part-time employee in a pay period and divide that number by the number of hours the employer deems "full time." For many employers, that's 40 hours per week; for some, it's 30 or 35 hours.

Crunching the Numbers

Here's an example:

The Thneed Company considers 40 hours per week full-time status. In 2003, Thneed staffed these positions:

16 employees @ 40 hours per week 16 X 40 / 40	=	16
4 employees @ 25 hours per week 4 X 25 / 40	=	2.5
6 employees @ 15 hours per week 6 X 15 / 40	=	2.25
Total	=	20.75 employees

 

Total full-time employees		16
Total part-time labor hours for 2-week pay period		380
Total hours for full-time status per week		40
Number of weeks in pay period		2
16 + 380 / (40 X 2)	=	20.75

 

This count should be performed for each pay period. If there are more pay periods in the previous calendar year with 20 or more employees than with fewer than 20, then the employer is subject to COBRA. Notice we don't mention how many of these employees are actually enrolled in the health plan. For COBRA purposes, the number of people on the plan is irrelevant. What is important here is the number of total employees.

Be Mindful of Your Company's Count Some employers are tempted to offer COBRA because they're "close" to meeting the 20-employee threshold. But be forewarned: If an employer offers COBRA to a former employee and that former employee elects and experiences a significant claim, the insurance carrier will generally request payroll records from the employer to be certain COBRA must be offered.

If the audit shows the employer is exempt under the "small employer exemption," the insurance carrier will deny the claim. However, because the employer already has promised the coverage and accepted the COBRA premium, the employer may be open to a lawsuit-and also end up self-insuring the claim.

On the other side of the coin, if an employer is subject to COBRA but doesn't offer it, the employer may be liable for penalties and excise taxes from the IRS and the Department of Labor, as well as the aforementioned lawsuits and self-insuring claims.

The moral of the story is this: Do a careful count of your employee base and seek professional assistance if you are unsure. The penalties for non-compliance with COBRA are painful for any employer, but for the small employer they can be a bet-your-business proposition.