Which employers are subject to COBRA?
The 20 employee test
Unlike many of COBRA's rules, this one's fairly straightforward. An employer is subject to COBRA if it employed 20 or more employees during 50% or more of the business days in the preceding calendar year.
So, if you're an employer trying to figure out if whether or not to offer COBRA to terminated employees, start by doing an employee count for your company for last year. Employers with seasonal and part time employees may need to do a bit more math as COBRA considers a part time employee a fraction of a full time employee.
EXAMPLE
Let's say 36 hours is considered full time, 3 part-time workers who each work 12 hours per week would be considered the equivalent of 1 full-time employee.
What about companies that grow through acquisistions? Are they required to offer COBRA?
Read the complete IRS Information Letter here
Small employer plan exception to the COBRA continuation coverage requirements in mergers and acquisitions. Guidance is provided on when a group health plan maintained by an employer that grows to have more than 20 employees through a stock or asset acquisition is required to begin complying with the COBRA continuation coverage requirements.
1. If, as a result of a transfer of stock, two previously separate employers are treated as a single employer for purposes of the COBRA continuation coverage requirements, how is the number of employees who were employed by the combined entity during the preceding calendar year determined for purposes of applying to the combined entity the exception from the COBRA continuation coverage requirements for group health plans maintained by employers that normally employed fewer than 20 employees during the preceding calendar year (the small employer plan exception)?
2. If one employer acquires substantial assets (such as a plant or division or substantially all the assets of a trade or business) of another employer, when are the employees associated with the acquired assets taken into account for purposes of applying the small employer plan exception to the acquiring employer?
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.
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.
From the 1999 Final COBRA regulations
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.