**Question: **When does the COBRA small employer exception apply?

**Short Answer: **The small employer exception from the federal COBRA requirements applies if the employer had fewer than 20 employees on at least 50% of its typical business days in the preceding calendar year.

Small Employer Exception: General Rule

The federal COBRA continuation coverage rules do not apply to small employers.

The small employer test for the federal COBRA exemption is based on whether the employer employed fewer than 20 employees (including fractional part-time employees) on at least 50% of its typical business days in the preceding calendar year.

There are two methods for calculating this threshold—one that is a daily calculation, and one that is a on a per pay period basis.  The details of each approach are copied below.  “Full-time” is determined pursuant to the employer’s practice, but it cannot exceed eight hours per day or 40 hours per week.

Employer Size Increases to Become Subject to Federal COBRA

The COBRA rules determine small employer status based on the previous calendar year.  For these purposes, the number of employees in the present year, the rolling 12-month period, or during the current plan year is not relevant.

The only relevant calculation is whether the employer had fewer than 20 employees on at least 50% of its typical business days in the preceding calendar year.

Example:

• Employer averaged 10 employees in calendar year 2018.

• On October 18, 2019, employer has 85 employees.

Result:

• Employer is not subject to federal COBRA for all of 2019.

• Employer will likely be subject to federal COBRA as of January 1, 2020.

The move to federal COBRA on January 1 upon loss of small employer status is not optional.

One issue with failing to move to federal COBRA is that the insurance carrier could refuse to provide the state mini-COBRA (such as Cal-COBRA) if it ever discovered that the employer was subject to federal COBRA.  In theory, the insurance carrier could remove the mini-COBRA offering on a retroactive basis to the beginning of the calendar year where the employer lost the small employer exception.  Needless to say, this would be extremely problematic.

Another issue is that employees could bring a lawsuit to enforce federal COBRA because a) the rates are generally lower than state mini-COBRA, b) the period of continuation coverage is often longer than state mini-COBRA, and c) federal COBRA applies to both fully insured and self-insured plans (state mini-COBRA laws apply only to fully insured plans).

Lastly, the IRS or DOL could enforce significant penalties against the plan (generally up to $200/day) for failure to comply with the federal COBRA requirements.

Employer Size Decreases to Qualify for Small Employer Exception

Again, the only relevant calculation is whether the employer had fewer than 20 employees on at least 50% of its typical business days in the preceding calendar year.  This means that a decrease to below 20 employees will not have any effect during the current calendar year.

Example:

• Employer averaged 85 employees in calendar year 2018.

• On October 18, 2019, employer has 10 employees.

Result:

• Employer is subject to federal COBRA for all of 2019.

• Employer likely will not be subject to federal COBRA under the small employer exception as of January 1, 2020.

Although it would not be best practice because there are significant liabilities associated with federal COBRA that most employers would prefer to avoid, there likely are not any major problems with continuing to offer federal COBRA rights for some period upon reducing size to qualify for the small employer exception.  Federal COBRA is generally always more generous than any state mini-COBRA alternative.

Again, maintaining federal COBRA practices upon qualifying for the small employer exception is not recommended, but it would not be a problem in the same manner failing to offer federal COBRA after losing the small employer exception status.

Cal-COBRA vs. Federal COBRA

40 States with Mini-COBRA Laws

Failure to Timely Provide Election Notice

Regulations

Treas. Reg. § 54.4980B-2, Q/A-5:

**Q-5. ** What is a small-employer plan?

**A-5. **(a) Except in the case of a multiemployer plan, a small-employer plan is a group health plan maintained by an employer (within the meaning of Q&A-2 of this section) that normally employed fewer than 20 employees (within the meaning of paragraph (c) of this Q&A-5) during the preceding calendar year. In the case of a multiemployer plan, a small-employer plan is a group health plan under which each of the employers contributing to the plan for a calendar year normally employed fewer than 20 employees during the preceding calendar year. See Q&A-6 of this section for rules to determine the number of plans that an employer or employee organization maintains. The rules of this paragraph (a) are illustrated in the following example:

_Example. _(i) Corporation S employs 12 employees, all of whom work and reside in the United States. S maintains a group health plan for its employees and their families. S is a wholly owned subsidiary of P. In the previous calendar year, the controlled group of corporations including P and S employed more than 19 employees, although the only employees in the United States of the controlled group that includes P and S are the 12 employees of S.

(ii) Under §1.414(b)-1 of this chapter, foreign corporations are not excluded from membership in a controlled group of corporations. Consequently, the group health plan maintained by S is not a small-employer plan during the current calendar year because the controlled group including S normally employed at least 20 employees in the preceding calendar year.

(b) An employer is considered to have normally employed fewer than 20 employees during a particular calendar year if, and only if, it had fewer than 20 employees on at least 50 percent of its typical business days during that year.

(c) All full-time and part-time common law employees of an employer are taken into account in determining whether an employer had fewer than 20 employees; however, an individual who is not a common law employee of the employer is not taken into account. Thus, the following individuals are not counted as employees for purposes of this Q&A-5 even though they are referred to as employees for all other purposes of §§54.4980B-1 through 54.4980B-10—

(1) Self-employed individuals (within the meaning of section 401(c)(1));

(2) Independent contractors (and their employees and independent contractors); and

(3) Directors (in the case of a corporation).

(d) In determining the number of the employees of an employer, each full-time employee is counted as one employee and each part-time employee is counted as a fraction of an employee, determined in accordance with paragraph (e) of this Q&A-5.

(e) An employer may determine the number of its employees on a daily basis or a pay period basis. The basis used by the employer must be used with respect to all employees of the employer and must be used for the entire year for which the number of employees is being determined. If an employer determines the number of its employees on a daily basis, it must determine the actual number of full-time employees on each typical business day and the actual number of part-time employees and the hours worked by each of those part-time employees on each typical business day. Each full-time employee counts as one employee on each typical business day and each part-time employee counts as a fraction, with the numerator of the fraction equal to the number of hours worked by that employee and the denominator equal to the number of hours that must be worked on a typical business day in order to be considered a full-time employee. If an employer determines the number of its employees on a pay period basis, it must determine the actual number of full-time employees employed during that pay period and the actual number of part-time employees employed and the hours worked by each of those part-time employees during the pay period. For each day of that pay period, each full-time employee counts as one employee and each part-time employee counts as a fraction, with the numerator of the fraction equal to the number of hours worked by that employee during that pay period and the denominator equal to the number of hours that must be worked during that pay period in order to be considered a full-time employee. The determination of the number of hours required to be considered a full-time employee is based upon the employer’s employment practices, except that in no event may the hours required to be considered a full-time employee exceed eight hours for any day or 40 hours for any week.

IRC § 4980B(c)(3):

(3) $100 limit on amount of tax for failures on any day with respect to a qualified beneficiary.

(A)  In general. Except as provided in subparagraph (B), the maximum amount of tax imposed by subsection (a) on failures on any day during the noncompliance period with respect to a qualified beneficiary shall be $100.

(B)  Special rule where more than 1 qualified beneficiary. If there is more than 1 qualified beneficiary with respect to the same qualifying event, the maximum amount of tax imposed by subsection (a) on all failures on any day during the noncompliance period with respect to such qualified beneficiaries shall be $200.

California Health & Safety Code § 1366.21(e):

(e) “Employer” means any employer that meets the definition of “small employer” as set forth in Section 1357 and (1) employed 2 to 19 eligible employees on at least 50 percent of its working days during the preceding calendar year, or, if the employer was not in business during any part of the preceding calendar year, employed 2 to 19 eligible employees on at least 50 percent of its working days during the preceding calendar quarter, (2) has contracted for health care coverage through a group benefit plan offered by a health care service plan, and (3) is not subject to Section 4980B of the United States Internal Revenue Code or Chapter 18 of the Employee Retirement Income Security Act, 29 U.S.C. Section 1161 et seq.

California Health & Safety Code § 1366.23(a):

(a) Every health care service plan, including a specialized health care service plan contract, that provides coverage under a group benefit plan to an employer, as defined in Section 1366.21, shall offer continuation coverage, pursuant to this section, to a qualified beneficiary under the contract upon a qualifying event without evidence of insurability. The qualified beneficiary shall, upon election, be able to continue his or her coverage under the group benefit plan, subject to the contract’s terms and conditions, and subject to the requirements of this article. Except as otherwise provided in this article, continuation coverage shall be provided under the same terms and conditions that apply to similarly situated individuals under the group benefit plan.