Does COBRA Apply to Small Business? How to Count
Federal COBRA reaches employers that normally had 20 or more employees last year. How the count really works, and what applies when it does not.
Does COBRA Apply to Small Business?
Federal COBRA turns on a count almost nobody performs correctly: the preceding calendar year, typical business days, part-timers as fractions, and every company under common ownership added together. Here is how the count actually works, what happens the year you cross the line, how state continuation differs, and what you owe your leavers when neither law reaches you
A founder called me the week after letting two people go, wanting to know whether he had just broken a federal law. He had read that COBRA starts at twenty employees, he had seventeen people on payroll that morning, and he had sent nobody anything. He wanted a yes or a no.
The honest answer took twenty minutes, because his question contained three separate mistakes. The threshold is not measured today. It is not measured in whole people. And it is not measured at his company alone, because he owned a second entity with nine employees in it. Once we counted the way the regulation actually requires, he had been subject to federal COBRA for the entire year without knowing it.
This is the piece almost every summary skips. The rule reads like a simple size test and behaves like an arithmetic problem with four moving parts. Below is how the count works, what happens in the year you cross the threshold and the year you fall back under it, how state continuation laws differ, and what you owe departing employees when neither regime reaches you. I build the people and records tooling for businesses without an HR department at FirstHR. This is general information rather than legal or benefits advice.
The Short Answer, and Why It Is Not a Headcount
Federal COBRA applies to your group health plan only if you normally employed 20 or more employees during the preceding calendar year. If you were below that, your plan is a small-employer plan and it is excepted from federal COBRA for the whole of the current year, no matter what your headcount does in the meantime.
The statute itself is one sentence long. Under 29 U.S.C. 1161(b), the continuation coverage requirements do not apply to a group health plan for any calendar year if all employers maintaining the plan normally employed fewer than 20 employees on a typical business day during the preceding calendar year. Everything difficult about this rule lives inside the word normally and inside the word employers.
Notice the shape of it. Your status for this year was decided last year, and it cannot change until January. That is genuinely helpful, because it means you can answer the question once, in writing, and rely on the answer for twelve months. It also means an employer who has never done the count is running blind for a full year at a time.
One more thing worth saying early. Being outside federal COBRA is not the same as owing nothing. It is the beginning of a second question about state law, and for a lot of small employers the state answer is more generous to the employee than the federal one would have been.
How the Twenty Are Actually Counted
You count every full-time and part-time common law employee across the preceding calendar year, with part-timers converted into fractions, and you are outside federal COBRA only if the total was under 20 on at least half of your typical business days. The mechanics sit in 26 CFR 54.4980B-2, and they are more specific than most employers expect.
Start with the basis. You may determine the number of employees on a daily basis or on a pay period basis. Whichever you choose has to be used for all employees and for the entire year being measured. Picking the basis that flatters you and switching later is not an option the regulation offers.
On a daily basis, you take the actual number of full-time employees on each typical business day, plus the actual hours worked by each part-timer that day. On a pay period basis, you use the pay period totals and then apply the resulting figure to each day of that period. Most small employers find the pay period version far easier, because payroll already holds the hours.
Then the fractions. Each full-time employee counts as one. Each part-time employee counts as a fraction whose numerator is the hours that person worked and whose denominator is the hours your business requires for full-time status. The denominator comes from your own employment practices, with a hard ceiling: it can never exceed eight hours for any day or 40 hours for any week.
That ceiling closes the obvious escape route. An employer who defines full-time as 50 hours a week cannot use 50 as the denominator and shrink everybody. For this count, 40 is the most you may ever divide by, which makes part-time hours count for more than employers assume.
Now the exclusions, which cut the other way. Three categories of person are left out of the count even though they may well be covered by your plan: self-employed individuals within the meaning of section 401(c)(1), independent contractors along with their own employees and contractors, and directors of a corporation.
This matters for partnerships and closely held companies where the owners take distributions rather than wages. Those owners can be plan participants and still not appear in the count. It also means a business that leans heavily on contract labor may sit comfortably below the threshold on paper while looking much larger from the outside.
The last step is the day test, and the line sits at exactly half. You normally employed fewer than 20 only if the count was under 20 on at least 50 percent of your typical business days. A summer surge that puts you over for three months leaves you outside federal COBRA. The same surge stretched across seven months does not, which is a real risk for anyone whose part-time staffing swells for most of a year.
Common Ownership Changes the Answer
The employer for COBRA purposes is not only the entity that signs the paychecks. It includes every other member of a controlled group of corporations, a group of trades or businesses under common control, or an affiliated service group, plus any successor to those entities. Employees across the whole group are added together.
The regulation makes the point with a blunt example. A corporation employs twelve people, all of them working and residing in the United States, and maintains a group health plan for them. It is a wholly owned subsidiary of a parent, and in the previous calendar year the controlled group including both companies employed more than nineteen people, even though the only United States workers in the group are those twelve. The plan is not a small-employer plan. Foreign corporations are not excluded from the controlled group, so the whole group counts.
For small businesses the common versions of this are less exotic and just as decisive. Two operating companies with the same owners. A holding company with three restaurants under it. A professional practice and a separate management entity. In each case the instinct is to count the entity that maintains the plan, and in each case that instinct produces the wrong answer.
Multiemployer plans run on their own version of the rule. Such a plan is a small-employer plan only where each contributing employer normally employed fewer than 20 in the preceding year, and the status can change mid-year. If a plan stops being excepted because a large employer joins during the year, the exception ends immediately on the addition. If it stops being excepted because an existing contributing employer grew, the change waits until the following January 1.
The Year You Cross the Line, and the Year You Fall Back Under
Crossing 20 during a calendar year does not make your plan subject to federal COBRA that year. Because the test looks backward, growth in the current year attaches COBRA on January 1 of the following year, which gives you the rest of the growth year to prepare.
That lead time is the single most useful feature of the rule, and almost nobody uses it. Between the month you cross and the January it bites, you need an administrator appointed, a general notice ready for every covered employee and spouse, an election notice template, a premium collection process, and a trigger in your offboarding that fires on every departure and every reduction in hours.
| What happened last year | Federal COBRA this year | What you should be doing |
|---|---|---|
| Under 20 on at least half of typical business days | Does not apply to your plan | Confirm your state continuation rule and who administers it |
| 20 or more on more than half of typical business days | Applies for the whole year | Full COBRA administration: notices, elections, premiums, records |
| Crossed 20 partway through the year and stayed there | Does not apply until January 1 next year | Use the remaining months to appoint an administrator and prepare notices |
| Fell back under 20 after a year of being subject | Does not apply to new qualifying events | Keep serving anyone whose event occurred while the plan was subject |
| First calendar year of the business | No preceding year to fail the test | Track the count from day one, because it decides next January |
| Bought a business or restructured | Depends on the successor and controlled group analysis | Count the whole group, then get the conclusion reviewed |
The reverse direction is where employers create liability without meaning to. A plan that has been subject to COBRA and then becomes a small-employer plan remains subject to COBRA for qualifying events that occurred while it was subject. Shrinking below the threshold does not cancel obligations already running.
The regulation walks through it. An employer with 20 employees on more than half its working days in one year is subject to COBRA the next year. An employee resigns at the end of January of that year, elects continuation coverage, and the employer then drops to nineteen for the rest of the year, so the plan is not subject to COBRA in the year after. The plan must nevertheless keep making continuation coverage available to that former employee, potentially all the way to the eighteen month mark, which lands well inside the year when the plan was otherwise excepted.
The same logic runs to 36 months for a divorced spouse who elected while the plan was subject. And the boundary is genuinely a boundary in both directions: a dependent child who ages out during a year when the plan is excepted gets no COBRA rights at all, and does not acquire them later if the plan becomes subject again.
State Continuation Is Not a Smaller COBRA
Most states require insurers to offer continuation of group coverage to people losing it at employers below the federal threshold, and those laws differ from federal COBRA far more sharply than the nickname mini-COBRA suggests. Duration is the widest gap, running from a handful of months in some states to a full 36 in others.
| State | How long continuation runs | Key condition |
|---|---|---|
| California | 36 months from the qualifying event | Applies to groups of 2 to 19 employees; the master policy generally must be issued in California |
| New York | 36 months total, at up to 102 percent of the group premium | Reaches employers with fewer than 20 employees, regardless of the reason coverage ended |
| Massachusetts | 18, 29, or 36 months depending on the event | Small group plans issued to employers with 2 to 19 employees; enforced by the Division of Insurance |
| Illinois | 12 months | Requires three months of continuous prior coverage; the right ends when the group policy itself ends |
| Virginia | 12 months, at the current rate plus an administrative fee capped at 2 percent | Requires continuous coverage under the group policy for the three months before eligibility ended |
| Texas | 9 months, plus 6 more after federal COBRA ends where both apply | Requires coverage for the three months before the job ended |
Read the third column as carefully as the second. Illinois, Texas and Virginia each require three months of continuous coverage before eligibility ends, so a person who enrolled six weeks before leaving may not qualify at all. Illinois also ties the right to the policy, which means an employer that closes and drops the group plan can leave nobody with anything to continue.
New York sits at the other end. Continuation there runs for 36 months and reaches people who lose eligibility for essentially any reason, which is broader than the federal qualifying event list. An employer who assumes state law must be a weaker version of the federal rule will be wrong in that state by a wide margin.
A handful of states impose no general continuation requirement at all. That is not a reason to guess. Your carrier knows which rule applies to your policy, and asking is a single email that takes the question off your desk permanently.
Who Administers It, and What Fully Insured Really Means
State continuation laws regulate insurance carriers rather than employers, so on a fully insured plan the carrier normally administers the coverage and your role shrinks to prompt, accurate notification. That single structural fact explains most of the differences between the two regimes.
Under federal COBRA the plan is responsible, which in practice means you or an administrator you hire. Under state continuation the policy is responsible, which means the insurer. The work you keep is telling the carrier who lost eligibility and when, and telling the employee that the option exists, often on a deadline written into state law. Virginia, for one, requires the group policyholder to give written notice of the availability of continuation within fourteen days of learning that someone lost eligibility.
| Dimension | Federal COBRA | State continuation |
|---|---|---|
| Who is regulated | The group health plan and its sponsor | The insurance carrier issuing the policy |
| Who administers it | You, or an administrator you appoint | Usually the carrier |
| Which plans it reaches | Insured and self-funded alike | Generally fully insured plans only |
| Duration | 18, 29, or 36 months depending on the event | Anything from a few months to 36, set state by state |
| Qualifying events | A single federal list | State defined, sometimes broader than the federal list |
| Premium ceiling | Generally 102 percent of the full cost | Set by state law, commonly around 102 percent |
| Your main duty | Notices, elections, premium tracking, records | Prompt notification on a state deadline |
The third row is the one that catches people. Because these laws work through insurance regulation, they generally cannot reach a self-funded plan. Federal benefits law preempts state laws that relate to employee benefit plans, and it stops states from treating a self-funded plan as though it were an insurer for the purpose of applying insurance rules to it.
Level-funded arrangements deserve a specific mention here, because they are marketed to small employers and they are self-funded underneath the packaging. If you are under 20 employees and your plan is self-funded or level-funded, there is a real chance no continuation law reaches you at all. Confirm the structure of your own plan before you assume a state rule protects your leavers.
What You Owe When Neither Applies
When federal COBRA does not reach you and state continuation does not either, no law requires you to continue anyone’s coverage. What you owe instead is information, delivered early enough to be useful, and the cost of getting that part right is close to zero.
The single most valuable thing you can give a departing employee is the exact date their coverage ends, in writing. Not the termination date, the coverage end date, which is frequently the last day of the month and frequently misunderstood. Every clock that matters to that person starts from it.
Employers sometimes ask whether they can simply keep a departing person on the group plan for a month or two as a goodwill gesture. Ask the carrier before promising it. Eligibility rules in the policy usually define who may be covered, and covering somebody outside those rules can create a claim the plan will not pay.
If continuation gaps are a recurring problem for your leavers, that is a signal about plan design rather than about offboarding. A reimbursement arrangement moves the policy into the employee’s own name, which travels with them.
The Marketplace Special Enrollment Period
Losing job-based coverage opens a 60-day special enrollment period on the Health Insurance Marketplace, and the window also runs during the 60 days before the loss. For an employee at a business outside both continuation regimes, that window is the main route back to coverage, so the dates around it matter more than anything else you can tell them.
The federal guidance is explicit that the window runs in both directions: a person qualifies if they lost qualifying coverage in the past 60 days or expect to lose it in the next 60 (HealthCare.gov). A Marketplace plan then takes effect on the first day of the month after the job-based plan ends, never the same day, so enrolling ahead of the loss is the version that avoids a gap. That is why telling people the end date early is worth more than any explanation you could add to it.
Do not promise anyone the Marketplace will be cheaper. HealthCare.gov states that the additional premium savings introduced during the COVID pandemic ended on December 31, 2025, and that a household qualifying for savings in 2026 will likely pay more for its Marketplace premium than that program produced. Point people at the plan comparison and let them price it.
Two operational details are worth passing on. Documentation of the loss is not a formality: HealthCare.gov warns that someone who does not supply acceptable documents will not qualify for the special enrollment period, so a letter naming the plan and the end date can be the difference between coverage and none. And the enrollment must be completed inside the window, which is a hard boundary rather than a guideline.
There is a second route people forget. Losing eligibility for group coverage triggers a special enrollment right into a spouse’s employer plan, on a shorter deadline than the Marketplace window. Anyone with a working spouse should be told to call that employer within days rather than weeks.
The Notices That Survive Regardless
Being outside federal COBRA removes the COBRA notices and nothing else. Every other disclosure attached to sponsoring a health plan continues to apply, and several of them carry deadlines that small employers miss precisely because they associate benefits paperwork with COBRA.
| Notice | When it is due | Who it reaches |
|---|---|---|
| Summary plan description | Generally within 90 days of a participant becoming covered | Every participant in an ERISA-covered plan |
| Summary of benefits and coverage | At application, enrollment, and on renewal | Every participant and beneficiary in a major medical plan |
| Medicare Part D creditable coverage notice | Annually, before October 15, plus other triggering points | Medicare eligible participants, dependents, and continuation enrollees |
| Creditable coverage disclosure to the federal government | Within 60 days of the start of each plan year, through the online form | Filed with the Centers for Medicare and Medicaid Services |
| Marketplace coverage options notice | At the time of hiring | New employees at businesses covered by the Fair Labor Standards Act |
| State continuation notice | State deadline, sometimes within 14 days of the loss of eligibility | The employee or the carrier, depending on the state |
The creditable coverage notice is the one I see missed most. It applies to any employer offering prescription drug coverage to Medicare-eligible individuals, it runs on a fixed annual date, and it has nothing to do with company size. The disclosure to the federal government sits alongside it and is a short online form rather than a project.
The Marketplace notice at hiring comes from the Affordable Care Act amendment to the Fair Labor Standards Act, and federal guidance states there is no fine or penalty for failing to provide it. That is a poor reason to skip it. It is a model document, it takes a minute to add to your onboarding pack, and it answers a question new hires ask anyway.
If you are unsure whether your plan is ERISA-covered and what documentation that pulls with it, the summary plan description is the right place to start. The federal government also publishes an employer-facing summary of the continuation rules (Department of Labor) that is worth reading once even if you conclude the rules do not apply to you.
Building the Count Into Your Year
Do the count once a year, in the same month, on the same basis, and keep the working. It takes under an hour with payroll data in front of you and it answers a question that would otherwise sit unresolved for twelve months.
January is the natural slot, because the year you are measuring has just closed and the answer applies immediately. Put it next to whatever else you already do in January and it stops being a task anybody has to remember separately.
Record four things: the basis you used, the hours standard you applied for full-time status, the list of entities you included, and the number of typical business days on each side of 20. That file is not bureaucracy. It is the document that answers a former employee who claims a COBRA offer was owed, and it is far easier to write now than to reconstruct two years later.
Watch the trajectory as well as the number. If last year came in at seventeen and this year is tracking above 20, you have several months of warning that federal COBRA attaches in January, and that warning is only useful if somebody is looking at it. Fold the check into the same rhythm as the rest of your compliance calendar rather than treating it as a benefits question.
Where Small Employers Get This Wrong
Six patterns account for nearly every wrong answer I have seen, and the first two are simple arithmetic.
Counting today instead of last year is first. The question is always about the preceding calendar year, so a headcount taken in the moment of panic answers a question nobody asked.
Counting people rather than fractions is second, and it is the most expensive one. A business with fourteen full-timers and a dozen part-timers can be over 20 without a single day when twenty people are in the building. If your part-time hours are meaningful, you cannot skip the conversion.
Counting one entity is third. Common ownership pulls the whole group into the count, and owners of multiple small entities are the group most likely to be wrong about their own status.
Assuming state law must be weaker is fourth. Several states run continuation for 36 months and define eligibility more broadly than the federal list, so a small employer can owe more through the carrier than a larger one owes directly.
Assuming a state rule protects a self-funded plan is fifth. Insurance regulation reaches insurers, and a self-funded or level-funded plan under the federal threshold may sit outside both regimes with nothing between the employee and an open market.
And silence is sixth. When neither law applies, saying nothing is the worst available option, because it costs the same as saying something and creates the impression that an offer was missed.
One footnote on the stakes. Where federal COBRA does apply and notices are missed, the excise tax under 26 U.S.C. 4980B runs at 100 dollars for each day of the noncompliance period for each qualified beneficiary, with a limit of 200 dollars a day where more than one qualified beneficiary in the same family is affected by the same qualifying event. That arithmetic is why the count is worth doing properly rather than assuming.
Frequently Asked Questions
Does COBRA apply to small businesses?
Federal COBRA applies only to a group health plan maintained by an employer that normally employed 20 or more employees during the preceding calendar year. An employer normally employed fewer than 20 if, and only if, it had fewer than 20 on at least 50 percent of its typical business days that year. Below that line the plan is a small-employer plan and is excepted from federal COBRA entirely. That is not the end of the analysis. Most states impose their own continuation requirement on insurers covering smaller groups, with durations ranging from a few months to three years, and those rules reach employers federal COBRA never touches. The practical question for a small employer is therefore not whether COBRA applies, but which of the two regimes applies and who administers it.
How do you count employees for the COBRA 20-employee threshold?
You count all full-time and part-time common law employees across the preceding calendar year, on either a daily basis or a pay period basis, and the basis you choose must be used for every employee for the whole year. Each full-time employee counts as one. Each part-time employee counts as a fraction, with hours worked as the numerator and the hours your business requires for full-time status as the denominator. That denominator can never exceed eight hours for a day or 40 hours for a week. Self-employed individuals, independent contractors and the people who work for them, and corporate directors are excluded. You then compare the count against 20 on each typical business day. Fewer than 20 on at least half of those days puts you outside federal COBRA.
Does the COBRA count include part-time employees?
Yes, but as fractions rather than whole people, and this is where most small employers get the answer wrong. A part-timer working 20 hours where full-time is 40 counts as half an employee. Ten such part-timers add five to your count. A business that thinks of itself as having fourteen employees can easily be at 20 or more once the part-time hours are converted, which pulls it inside federal COBRA without anyone noticing. The hours standard comes from your own employment practices, with one limit: the number of hours required to be considered full-time can never exceed eight for any day or 40 for any week. You cannot define full-time as 50 hours a week to shrink the fractions.
Do employees at a parent company or sister company count?
Yes. For COBRA purposes the employer is not just your legal entity. It includes any other person that is a member of a controlled group of corporations, a group of trades or businesses under common control, an affiliated service group, or a group described under the related aggregation rules, and it includes any successor to those entities. The regulation illustrates this with a subsidiary employing twelve people in the United States whose parent group employs more than nineteen worldwide. The subsidiary’s plan is not a small-employer plan, because the controlled group is the employer. Businesses with a holding company, common owners across several operating entities, or a recent asset purchase should run the count across the whole group rather than entity by entity.
What happens the year we grow past 20 employees?
Nothing immediately, and that is the useful part. The test looks at the preceding calendar year, so crossing the threshold in, say, September does not make your plan subject to federal COBRA in September. If you normally employed 20 or more this year, federal COBRA attaches to your plan on January 1 of next year and applies to qualifying events from that date. You get the remainder of the growth year to appoint an administrator, prepare the general notice for every covered employee, and build the election and premium process. The mirror image also holds. If you fall back under the threshold, the plan stops being subject to COBRA for new events, but you must keep making continuation coverage available to anyone whose qualifying event occurred while the plan was subject.
What is state continuation coverage, and how is it different?
State continuation, often nicknamed mini-COBRA, is a state law requiring insurers to let people who lose group coverage keep it for a defined period. It differs from federal COBRA far more than the nickname suggests. Duration is the biggest gap: some states require a few months, others require a full 36. Eligibility conditions differ too, with several states requiring three months of continuous coverage before the loss, and several ending the right the moment the employer drops the group policy. Most importantly, these laws regulate insurers rather than employers, so they generally reach fully insured plans only, and the carrier usually administers the coverage. Your obligation is often limited to notifying the carrier or the employee promptly, on a deadline set by state law.
What if we are under 20 and our state has no continuation law?
Then no law requires you to continue anyone’s coverage, and the same is true if your plan is self-funded, because state insurance laws generally cannot reach a self-funded plan. What you owe in that situation is information rather than coverage. Tell the departing person the exact date their coverage ends, in writing, because that date starts every clock that matters to them. Losing job-based coverage opens a 60-day special enrollment period on the Health Insurance Marketplace, and it also runs during the 60 days before the loss. A spouse’s employer plan carries its own special enrollment right on a shorter deadline. None of that requires you to spend money. It does require you to be accurate about dates.
What notices do we still have to send if COBRA does not apply?
Being outside federal COBRA removes the COBRA notices and nothing else. If your plan is covered by ERISA you still owe a summary plan description, and any plan offering major medical coverage still owes a summary of benefits and coverage. If your plan includes prescription drug coverage you must tell Medicare-eligible participants each year, before October 15, whether that coverage is creditable, and disclose the same to the federal government. The employee notice of Marketplace coverage options at hiring still applies to businesses covered by the Fair Labor Standards Act. Several states impose their own continuation notice deadlines on the policyholder, sometimes as short as fourteen days after you learn of the loss of eligibility. Ask your carrier which of those falls on you.