Are small employers required to offer COBRA coverage?

COBRA does not apply to a group health plan for any calendar year if the employer maintaining the plan employed fewer than 20 employees on at least 50% of its working days during the preceding calendar year.

If more than one employer is maintaining a group health plan (except for multiple employer welfare arrangements--MEWAs), all of the employers maintaining the group health plan must meet this test. That is, each one must have fewer than 20 employees on at least 50% of the days in the preceding calendar year.

Continuation coverage arising from qualifying events in previous years when an employer was subject to COBRA is not cut off if the employer becomes eligible for the small employer exemption. The employer must continue to make such COBRA coverage available for the appropriate periods.

The IRS has issued a revenue ruling that clarifies the small employer exception rule from COBRA coverage of group health plans in two specific situations.

Situation 1. Company P maintains a group health plan. P normally employed fewer than 20 employees during the previous calendar year. Under section 414(t) of the Internal Revenue Code, no other entity is treated as a single employer with P. During the current calendar year, stock in Corporation O is transferred so that after the transfer P and O are considered to be part of a single employer. The combined number of employees normally employed by P and O during the previous calendar year was at least 20. As a result of the stock transfer, P and O are treated as a single-employer. In this case, the IRS concluded that a group health plan maintained by the combined entity ceases to be excepted from COBRA as a small-employer plan as of the date of the stock transfer.

Situation 2. Company R maintains a group health plan. R normally employed fewer than 20 employees during the previous calendar year. No other entity is considered to be part of a single employer with R. During the current calendar year, R acquires substantially all the assets of a business and continues the business operations associated with those assets without interruption or substantial change. The combined number of employees normally employed by R and the acquired business during the previous calendar year was at least 20. However, the acquisition of assets by R does not cause R to be considered a single employer with any part of the seller of the assets. In this case, the IRS concluded that a group health plan maintained by the acquiring company continues to be excepted from COBRA as a small-employer plan for at least the remainder of the year of the asset acquisition.(IRS Rev. Rul. 2003-70, IRB 2003-27, July 1, 2003.)