The COBRA 20-Employee Threshold: How Small Employers Count
Federal COBRA does not apply to a plan when all employers maintaining it normally employed fewer than 20 employees in the preceding calendar year.
The line is easy to state and easy to miscount. This guide explains who counts, how part-time workers are weighed and what changes when a group crosses the line.
The Small-Employer Exception
The test looks back at the prior year.
The rule. Under 26 U.S.C. 4980B(d)(1), the exception applies to a qualifying event in a year that follows a calendar year in which all employers maintaining the plan normally employed fewer than 20 employees.
Normally employed. Under 26 CFR 54.4980B-2, a plan is treated as having fewer than 20 employees if it had fewer than 20 on at least half of the typical business days during the preceding year.
Church and government plans. The statute treats church plans and governmental plans separately from this exception.
Who Counts and How
Part-time employees count as fractions.
Who counts. All common-law full-time and part-time employees count. Self-employed individuals, independent contractors and their workers, and corporate directors do not.
Full-time and part-time. Each full-time employee counts as one. Each part-time employee counts as a fraction based on hours worked compared with full-time hours, with full-time capped at 8 hours a day or 40 hours a week.
Related employers. Members of a controlled group count together, including foreign employees.
What Changes When a Group Grows
The change takes effect the following year.
The look-back. Because the test looks at the prior calendar year, a group that grows past 20 is generally subject to COBRA starting the next year.
Multiemployer plans. The exception ends immediately when a non-qualifying employer joins, and the following January 1 when an existing employer grows past the threshold.
Plan ahead. Set up the notices and the administrator before the year you expect to cross, not after the first qualifying event.
A Company With Part-Time Staff
Fractions can keep a group under the line.
The facts. A company has nine full-time employees and twenty part-time employees who each work 20 hours a week, and that was the staffing on at least half of typical business days last year.
The result. Each part-time employee counts as one-half, which is 10 in total. With the nine full-time employees the count is 19, so the company is below 20 and the federal exception applies.
The takeaway. Keep records of headcount and hours, because the count is what proves the exception.
Related Rules and Sources
Where to read the rule in full.
Who Is Covered
What COBRA covers when it applies.
Self-Funded or Insured
How funding changes state law.
Michigan Conversion Coverage
What smaller Michigan employers have instead.
26 U.S.C. 4980B, small-employer exception · 26 CFR 54.4980B-2, counting employees
We run COBRA so nothing is missed.
We set up who administers COBRA, keep the notices on schedule and check the paperwork before it goes out.
Related pages.
State Continuation and Mini-COBRA
State laws for smaller employers.
Who Is Covered
Which people COBRA protects.
How Long It Lasts
18, 29 and 36 months explained.
The Notices
The five COBRA notices.
What It Costs
What an employer may charge.
COBRA Continuation Coverage Law
The federal rules in full.
Questions that come up.
Short answers to the questions we hear most. Each links to the full page.
How do I count employees for the COBRA exception?
Count full-time employees as one and part-time employees as a fraction of full-time hours. Contractors and directors do not count.
Does COBRA apply to a company with 19 employees?
Not under federal law if it normally employed fewer than 20 in the prior year. Check state law.
When does COBRA start applying to a growing company?
Generally the year after the prior-year count reaches 20.
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