COBRA Compliance: What to Do When a Business Closes

The closure of a business leads to a number of questions and complications – including the issue of COBRA compliance. When COBRA administrators send out notices before fully understanding the situation, employees can receive mixed messages, making a bad situation worse. In order to avoid problems, it’s important to understand COBRA rules and the details of the closure before beginning any actions.

What are the regulations?

It’s true that being laid off is a qualifying event in terms of COBRA benefits. It’s also true that individuals who experience a qualifying event and their dependents are eligible for COBRA benefits for 18 months. The catch, however, is that COBRA benefits rely on the existence of the business and the payment by the business of health plan costs. If the business ceases to exist and payments to the health plan stop, COBRA benefits also end.

This means that if a business closes, laid-off workers may not receive COBRA benefits. If, however, the business continues to exist as it restructures, COBRA benefits can continue for up to 18 months.

What does all of this mean for COBRA administrators?

When business closure is imminent, administrators may want to rush to send out notifications, thereby giving employees as much warning as possible. However, this isn’t necessarily a good idea. If notices are sent out before key dates have been finalized, the information will likely be incorrect, leading to more confusion in the long run. You don’t want to tell employees they’ll be eligible for COBRA if this won’t be the case, or vice versa. Take some time to get the facts sorted.

What details of the business closure are relevant?

As you create a timeline, these are some things you need to consider.

  • When will employees be laid off, and will all layoffs occur at the same time?
  • When will the business close?
  • Is the business filing for bankruptcy or restructuring?
  • For how long will health plan premiums be paid?

Once you know this, you can put together your COBRA notices. In addition to the standard offer letter, you may need to include an amended offer letter that includes the shortened COBRA eligibility period and a notice of unavailability explaining that employees will not have access to COBRA after a set date. Need COBRA software that automates the process?  Request a COBRAGuard demo.

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