COBRA Administration: Notices, Coverage, and Penalties

COBRA administration is the ongoing compliance work an employer or plan administrator does to deliver continuation health coverage under the Consolidated Omnibus Budget Reconciliation Act: identifying qualifying events, sending the right notices on time, collecting the correct premiums, tracking elections and payments, and documenting everything in case the Department of Labor or the IRS comes asking. Get the sequence right and the plan runs quietly. Miss a notice or misjudge an exception, and the penalties stack across two federal agencies.

Which Plans and Events Bring COBRA Into Play

Federal COBRA reaches group health plans maintained by private-sector employers or employee organizations that had 20 or more employees on a typical business day in the prior calendar year.¹ Governmental and church plans are generally exempt from the IRS excise tax provisions, though parallel requirements may apply under other statutes.²

A qualifying event is any of the following, but only if it actually causes a qualified beneficiary to lose coverage under the same terms that applied before:

Termination of employment (other than for gross misconduct) or a reduction in hours.
Death of the covered employee.
Divorce or legal separation.
The covered employee becoming entitled to Medicare.
A dependent child losing dependent status under the plan.

If coverage would continue unchanged after the event, there is no qualifying event and no COBRA obligation.³

The Notice Sequence

Notices are where most administrative failures happen, and where the daily penalties bite.

General Notice at Enrollment

When coverage under the group health plan first starts, the plan administrator sends a general COBRA notice to the employee and spouse. Under the DOL final regulations, the notice must give the name, address, and phone number of someone who can answer questions about the plan and COBRA. It does not have to name the plan administrator or state when COBRA coverage would begin.⁴

Election Notice After a Qualifying Event

Once the administrator learns of a qualifying event, an election notice goes to each qualified beneficiary. For single-employer plans, the deadline is 14 days from when the administrator was notified. For multiemployer plans, it is the later of 14 days or the end of any longer period the plan’s terms set.⁵

The DOL publishes a Model COBRA Continuation Coverage Election Notice, and using it is treated as good faith compliance with the content rules.⁶ At minimum, the notice must be written for the average participant and cover:

The plan name and the qualifying event.
Each qualified beneficiary, by name or by status (spouse, dependent child).
A statement that each qualified beneficiary has an independent right to elect.
Election procedures, the consequences of not electing, the maximum coverage period, and when it may be extended.
The premium amount, due dates, grace period, payment address, and the consequences of nonpayment.

Information about alternative coverage or policy conversion rights does not need to be in the election notice itself; it belongs in the Summary Plan Description.⁴

Notices the Beneficiary Owes You

Qualified beneficiaries must notify the plan of certain events on their end: a second qualifying event, a Social Security disability determination, or recovery from a disability. The timelines come from the plan or the SPD. If the plan has not set up reasonable notification procedures, a beneficiary is deemed to have given notice when they communicate, in writing or orally, with the administrator or the unit that handles benefit claims.⁵ Written procedures in the SPD protect the plan from being surprised by informal communications later.

Early Termination Notice

If coverage ends before the maximum period, the plan must send an early termination notice stating the date, the reason, and any remaining rights the beneficiary has.¹

How Long Coverage Runs

The maximum period depends on the triggering event. Termination of employment or a reduction in hours generally gives 18 months. That extends to 29 months if a qualified beneficiary receives a Social Security disability determination during the first 60 days of COBRA.³

Death of the covered employee, divorce, legal separation, or Medicare entitlement can give the employee’s spouse and dependents up to 36 months. A second qualifying event during an initial 18-month period, such as the former employee’s death or divorce, can extend the window for affected dependents to 36 months measured from the first event.³

Coverage can end sooner for cause: failure to pay premiums within the grace period, the beneficiary getting other group coverage, the beneficiary becoming entitled to Medicare after electing COBRA, the employer dropping all group health plans, or conduct such as fraud that would get an active employee terminated from coverage.¹

Premiums and Payment Windows

Qualified beneficiaries typically pay the full premium, both the employer and employee portions combined, plus an administrative fee of up to 2 percent. During the disability extension (months 19 through 29), the plan may charge up to 150 percent of the applicable premium.¹

The election window is 60 days from the date the election notice is sent or the date coverage would otherwise end, whichever is later. The initial premium is due within 45 days after election. After that, monthly premiums are due on the first of the month with a 30-day grace period. Administrators should not terminate coverage before the grace period closes, even if a payment is late.

Health FSAs: A Narrow but Mandatory Offer

Health flexible spending accounts are group health plans and so fall under COBRA, with modifications. The plan must offer COBRA for a health FSA only when the account is underspent at the time of the qualifying event, meaning the employee’s annual election exceeds reimbursements paid so far.⁷

Coverage is generally limited to the remainder of the plan year of the qualifying event. If the cafeteria plan permits carryover, the beneficiary keeps access to the carryover balance until the maximum COBRA period ends or the balance is spent, and no premium may be charged for the carryover portion in the following plan year.⁷ The maximum monthly premium is the employee’s total annual election plus the 2 percent fee, divided by 12; carryover amounts are excluded.

Few beneficiaries actually elect FSA COBRA because the premium is after-tax and the remaining benefit is often small. The offer itself is still mandatory, and skipping it carries the same penalties as any other notice failure.

Denying COBRA for Gross Misconduct

The only statutory ground for denying COBRA outright after a termination is that the employee was fired for gross misconduct. Neither the statute nor the regulations define the term, so the standard has been built case by case, and courts have not converged.⁸

The bar has generally been treated as high. A federal court in Illinois held that taking and deleting files was not necessarily gross misconduct as a matter of law, even though criminal theft had met the standard in earlier rulings.⁸ A Maryland court found that a medical assistant’s isolated negligence, leaving a patient alone after an injection, did not qualify, especially because no harm resulted.⁹ Invoke the exception wrongly and the employer may be ordered to provide retroactive coverage and face penalties of up to $110 per day for failing to send the election notice.

Penalties for Noncompliance

Two separate penalty regimes apply, and they stack.

ERISA Civil Penalties

Under ERISA Section 502(c)(1), a plan administrator who fails to provide required COBRA notices can be personally liable for up to $110 per day per beneficiary. The DOL’s Employee Benefits Security Administration can also assess civil penalties of up to $1,100 per day for failures tied to annual reporting requirements.¹⁰

IRS Excise Tax Under § 4980B

A plan that fails to meet COBRA’s continuation coverage requirements owes an excise tax of $100 per day per affected qualified beneficiary. If a single qualifying event affects multiple beneficiaries, the daily cap is $200. The noncompliance period runs from the date of the failure until it is corrected or six months after the maximum coverage period ends, whichever comes first.²

If the IRS turns up failures during an income tax examination, a minimum tax applies: the lesser of $2,500 or the amount otherwise calculated. For failures that are more than de minimis, that floor jumps to $15,000.²

Several safety valves soften the tax. No tax applies if the responsible party did not know, and could not have known with reasonable diligence, about the failure. Failures corrected within 30 days of discovery, where the failure was due to reasonable cause and not willful neglect, are excused. For unintentional failures, the annual total is capped at the lesser of 10 percent of the employer’s prior-year group health plan spending or $500,000; third-party administrators have a $2,000,000 ceiling. The IRS Secretary can also waive the tax where it would be excessive relative to the failure.²

Multiemployer Plans

COBRA applies to a multiemployer plan if at least one contributing employer had 20 or more employees in the preceding calendar year.⁵ The joint board of trustees typically acts as the plan administrator responsible for notices and tracking qualifying events. Union members whose employer goes bankrupt or ceases operations can keep continuation rights as long as the multiemployer plan itself continues.¹ The election notice deadline runs on the later-of rule: 14 days or the end of any longer period the plan’s own terms allow.

What Federal COBRA Does Not Cover

Employers with fewer than 20 employees are outside federal COBRA. Many states have passed mini-COBRA statutes extending similar rights to small-firm employees, but not all; as of the most recent comprehensive survey, Alabama, Alaska, Arizona, Idaho, Indiana, Michigan, and Montana had no state-level expansion for small-firm employees, and in Washington, insurers must offer employers the option to include a continuation provision rather than mandating it in group policies.¹¹ Small employers should check their state law before assuming nothing applies.

Pandemic-era tolling is also over. The emergency notices from the DOL, Treasury, and HHS that suspended COBRA election and payment deadlines ran through the Outbreak Period, which ended on July 10, 2023, 60 days after the COVID-19 National Emergency expired on May 11, 2023. Qualifying events on or after July 12, 2023 run on standard statutory timeframes with no emergency extensions.¹² Plans may still voluntarily extend deadlines, and the DOL has encouraged them to do so.

1
U.S. Department of Labor. COBRA Continuation Health Coverage – Workers
2
Cornell Law Institute. 26 U.S. Code § 4980B
3
Internal Revenue Service. Revenue Ruling 2004-22
4
Crowell & Moring LLP. DOL Issues Final Rules on COBRA Notice Requirements
5
Katten. COBRA Compliance and Enforcement
6
U.S. Department of Labor. Model COBRA Continuation Coverage Election Notice
7
Bricker Graydon LLP. What Happens to Health FSA Balances When COBRA Coverage Is Elected
8
Thomson Reuters. Data Theft Was Not Necessarily Gross Misconduct That Would Preclude COBRA Coverage
9
Bricker Graydon LLP. What Rises to the Level of Gross Misconduct Under COBRA
10
U.S. Department of Labor. ERISA – Employee Retirement Income Security Act
11
KFF. Expanded COBRA Continuation Coverage for Small-Firm Employees
12
U.S. Department of Labor. FAQs About FFCRA, CARES Act, and HIPAA Implementation Part 58