When employment ends, health coverage questions quickly follow. For employers, especially small and midsize organizations, one of the most misunderstood obligations is state continuation coverage, often referred to as “Mini COBRA.”
In a recent episode of the Generous Benefits Podcast, Bret Brummitt breaks down what state continuation coverage really is, how it differs from federal COBRA, and where employers most often get themselves into trouble.
State continuation coverage allows former employees to temporarily continue their employer-sponsored health plan after termination, assuming the termination was not due to gross misconduct.
As Bret explains, this is a continuation of the exact same employer health plan, not a new plan or conversion option. The employee pays the full cost of coverage, similar to federal COBRA.
Key points employers often miss:
State continuation rules vary by state. Find state by state rules here.
Not all states have identical requirements.
The rules depend heavily on employer size and plan type.
In Texas, for example, eligible former employees can continue coverage for up to nine months if they meet the requirements.
This is where confusion often starts.
In Texas, state continuation typically applies to employers that:
Had fewer than 20 employees in the prior calendar year.
Offer a fully insured medical plan.
Had employees enrolled in the plan for at least three months prior to termination.
Employers with 20 or more employees fall under federal COBRA rules instead.
One common mistake Bret highlights is how employers count employees. It is not based on how many people are enrolled in the health plan. It is based on total employee count, including part-time employees, who are counted proportionally.
Another major source of risk is misunderstanding plan structure.
State continuation generally applies only to fully insured medical plans. It does not apply to level-funded or self-funded plans, which are governed by federal ERISA rules rather than state insurance regulations.
Bret cautions that employers sometimes offer continuation coverage on level-funded plans even when they are not required to. That decision can create serious financial exposure, especially if stop-loss carriers deny claims for individuals who should not have been continued on the plan.
As Bret puts it, this is one of those situations where doing more than required can be just as risky as not doing enough.
There are two primary risks:
Failing to offer state continuation when required can lead to fines and employee complaints filed with the state. While penalties are typically less severe than federal COBRA penalties, the administrative burden and legal exposure are still significant.
Offering continuation when it should not be offered can be even more costly. Employers may end up responsible for claims that stop-loss carriers refuse to cover, sometimes in the tens or hundreds of thousands of dollars.
Unlike federal COBRA, most states do not provide a standardized model notice for state continuation. That creates another compliance challenge.
Many employers choose to:
Follow federal COBRA timelines and mailing standards.
Provide written notice during offboarding and follow up by mail.
Outsource administration to a COBRA or continuation vendor.
As Bret notes, outsourcing often costs less than a dollar per employee per month and can significantly reduce compliance risk. Many vendors also absorb penalties if mistakes occur, offering employers additional protection.
From the employee perspective, state continuation feels identical to COBRA. Coverage stays the same, but the full premium shifts to the employee.
For many employees, especially those coming from small employers that subsidize a large portion of premiums, the cost can be a shock.
Bret points out that in many cases, continuation coverage is not the best long-term solution. Employees should evaluate alternatives such as ACA marketplace plans, especially if they qualify for subsidies due to income changes following job loss.
When asked what employers should take away from the conversation, Bret’s advice was clear:
Do it right from the beginning.
That means:
Accurately counting employees.
Understanding whether your plan is fully insured or level-funded.
Knowing whether state continuation or federal COBRA applies.
Not offering coverage when it should not be offered.
Not failing to offer coverage when it is required.
In short, know your parameters, and when in doubt, get help.
State continuation coverage is one of those compliance areas that seems straightforward until it is not. As this episode makes clear, small misunderstandings can turn into expensive problems quickly.
Employers who take the time to understand their obligations, or who partner with knowledgeable advisors and administrators, can protect both their former employees and their organization from unnecessary risk.
For more conversations like this, listen to the Generous Benefits Podcast wherever you get your podcasts.