Payroll and COBRA: How COBRA Affects Payroll and Benefits

Payroll And COBRA: How COBRA Affects Payroll, Benefits, And Employee Terminations

Payroll and COBRA administration are closely connected because an employee's termination, reduction in hours, or other qualifying event can affect payroll deductions, health benefit coverage, employee eligibility, and the information that must be provided to the COBRA administrator.

The Consolidated Omnibus Budget Reconciliation Act, commonly known as COBRA, generally gives certain employees, former employees, spouses, dependents, and other qualified beneficiaries the right to continue group health plan coverage after certain qualifying events.

Although COBRA administration is often handled by HR, benefits personnel, or a third-party administrator, payroll plays an important role in providing accurate employee status, termination dates, deductions, compensation information, and other data needed to administer benefits properly.

Understanding the interaction between payroll and COBRA is an important part of payroll administration, benefits administration, employee terminations, and compliance.

Important Note: COBRA law contains many rules, requirements and timelines that cannot be accurately listed on a web page. That said, provided below are some basic items of which the payroll department should be aware. Regardless, ANYONE administering COBRA should take training on the subject.

What Is COBRA?

COBRA generally provides eligible employees and other qualified beneficiaries with the opportunity to continue certain group health plan coverage after a qualifying event that would otherwise cause them to lose coverage. Qualifying events can include:

• Termination of employment, other than for gross misconduct
• Reduction in hours that causes loss of coverage
• Death of a covered employee
• Divorce or legal separation
• Loss of dependent child status
• Certain Medicare entitlement events
• Bankruptcy of an employer in certain circumstances

The specific COBRA rights and requirements depend on the plan, the qualifying event, the qualified beneficiary, and applicable federal and state law.

How Does COBRA Affect Payroll?

A COBRA election does not mean that payroll continues making an employee's normal health insurance or other deductions. Instead, payroll may need to provide or receive certain information to the benefits department or COBRA administrator. This payroll process may involve:

• Verify the Coverage Information: Payroll should coordinate with benefits administration to determine which benefits and deductions are affected by the employee's status change
• Identify the Employee Status Change: Payroll must accurately record termination dates, reductions in hours, or other employment changes that may affect benefit eligibility
• Stop Active Employee Deductions: Payroll should stop applicable active employee benefit deductions when coverage terminates, according to the employer's procedures

Because COBRA administration often depends on accurate employee and benefit information, errors in payroll records can create downstream problems for employees and benefits administrators.

COBRA Premiums and Payroll

COBRA premiums are generally handled differently from active employee health insurance deductions.

After an employee loses active coverage and elects COBRA continuation coverage, the qualified beneficiary generally becomes responsible for paying the applicable COBRA premium. The COBRA premium can generally include the applicable cost of coverage plus a permitted administrative charge.

Payroll professionals should understand that COBRA premium payments generally are not made through the employee's regular payroll deduction. Depending on the type of COBRA event and the organization's administration process, COBRA premiums may instead be made through direct payment via the QB or another party.

Payroll should understand the organization's process so that employee deductions do not continue incorrectly after active coverage ends.

COBRA and Employee Terminations

Employee termination is one of the most common situations in which payroll and COBRA administration intersect - and creates problems as COBRA coverage relies on the date of loss of coverage, which often differs from the date of termination or loss of coverage.

COBRA and Final Paychecks

Final payroll processing can create additional COBRA-related issues. Payroll may need to determine which deductions should be taken from the employee's final paycheck and whether any benefit deductions require special handling.

Because some state require a final paycheck on the last day worked while other states have significantly less requirements, payroll should follow the applicable state laws regarding final paycheck and unclaimed wages.

Why Payroll Training Matters For COBRA

As mentioned herein, there are many rules and requirements for COBRA administration...as well as many ways to inadvertently create errors that could harm either the employer, the QB, or both. As such, we strongly recommend that you take training.