The Initial Notice is a document detailing COBRA and the responsibilities of both the employer and employee/dependent when a “qualifying event” is experienced. Effective November 26, 2004, providing the Initial COBRA Notice (now know as the “General Notice”) has become more complex.

For our clients, we use the newly designed DOL Initial Notice. The notice requires group contact information for all plans in which the employee has enrolled. COBRA requires the Initial Notice be sent to the employee and spouse covered under the group plan. One Initial Notice addressed to the employee and spouse/family will meet the requirement for notification to both. If the spouse resides at a different location, a separate Initial Notice should be sent to the spouse. In regards to dependent children, the law does not require they receive a Initial Notice, ever.

The 2004 final regulations state that the Initial Notice must be provided within 90 days from the date the employee begins on the plan. If an employee/dependent experiences a qualifying event during the first 90 days on the plan, a Initial Notice must be provided to all covered individuals at the same time as the Qualifying Event notification. For the qualified beneficiaries who receive the qualifying event notice, the Initial Notice must not be sent, because the qualifying event letter will suffice.
The Initial Notice is considered provided on the date of mailing (i.e. post marked). The law states that employers’ are required to furnish a Initiall Notice to each covered employee and covered spouse at the time of commencement of coverage under the plan. ERISA also requires employers to distribute Sample Plan Description (SPD) to each participant covered under the plan. The SPD should be sent within 90 days after the participant becomes enrolled under the plan, or for new plans, the within the 120 days after the plan becomes subject to ERISA.

Church Plans are generally exempt from COBRA if it maintained for its employees (or their beneficiaries) by a church, or by on convention, or association of churches that is exempt from tax under IRS Code 501.

Government Plans established and maintained for its employees by the Government of the United States, by the government of any State of political subdivision thereof, or by any agency or instrumentality of any of the foregoing are ironically exempt from COBRA.

Small Employer Plans are with a few exceptions not subject to COBRA if all employers maintaining such plan normally employed fewer than 20 employees (including part-time) on at least 50% of a typical business day during the preceding calendar year.

There are two methods to count part-time employees. They can be counted as a fraction of an employee equal to the number of hours that the part-time employee works divided by the number of hours than an employee must work in order to be considered a full-time employee. Or, all of the hours worked by part-time employees are added and divided by the sum of the number of hours required to be considered working full-time.

The determination of a small employer exemption becomes complex when considering ownership structures, business reorganizations or the sale of an existing business. For example, a small law firm initially formed as a partnership consisting of eight partners and 15 common-law employees. Its group health plan would be exempted from COBRA. However, if the partnership converted to a limited liability company or a limited liability partnership the partners have now become common-law employees and the firm will have 23 common-law employees and therefore be subject to COBRA.
Although an employer may be qualify as a small employer and therefore be exempt from COBRA, a small employer plan may have continuation coverage obligations under applicable state law (i.e. CA, FL, NY) with as few as 2 employees.

If a qualified beneficiary experiences a qualifying event during a year in which a plan is subject to COBRA, the qualified beneficiary will be entitled to continuation coverage for the remainder of the COBRA maximum coverage period, even if the plan becomes exempt the following year. In addition, if the plan becomes exempt from COBRA, the employer should communicate to all employees and their covered spouses that COBRA no longer applies.

Professional Employer Organizations or PEO’s are designed to provide employees to a company through a leasing arrangement. The PEO typically provides payroll and health care benefits to these workers and their covered spouses and dependents. How do you determine the identity of the employer? Although they are receiving paychecks and benefits from the PEO, many workers engaged in a leasing agreement with a PEO are common-law employees of the recipient organization. This may be due to the fact that the recipient organization directs and controls the manner in which the worker performs services. Ultimately the determination of common-law employees in this situation is based a variety of factors including court decisions and the IRS.

In addition, under IRS Code 414(n) a leased employee that satisfies certain criteria must be treated as an employee of the recipient organization for purposes of COBRA. These criteria are.

1.The individual is not an employee of the recipient
2.The individual’s services are provided pursuant to an agreement between the recipient and the leasing organization
3.The individual has provided services for the recipient on a substantially full-time basis for at least one year and
4.These services are performed under the primary direction or control of the recipient.

If a PEO sponsors a health plan and the PEO workers covered by the plan are considered to be employees of the recipient organization only, and not employees of the PEO, then the PEO would not be subject to COBRA. If a PEO sponsors a health plan and the PEO workers are considered to be its own employees, and not the employees of the recipient organization, then the plan is a plan sponsored by an employer and is subject to COBRA. At times PEO’s state their relationship as co-employers and therefore require advice of legal counsel.


PayPro Administrators
6180 Quail Valley Court Riverside, CA 92507
Tel: 951.656.9273
Fax: 951.656.9276