No business hangs out the “Yes, We’re Open for Business” sign thinking that one day it would eventually be closing the doors for good. But in a slow-to-recover economy, small businesses are faced with difficult challenges, and the decision to close the doors is sometimes one of them.

If this happens, smart business owners understand the importance of wrapping up business matters that include obligations assisting eligible employees in securing continuing health care coverage through COBRA, if available. In this type of situation, many important questions will be raised, so it’s always best to be prepared.

If your business is facing a bankruptcy and planning a large layoff, restructure, or closing the doors for good, be proactive — have the right information on hand to answer questions and facilitate the process for former employees during this time of uncertainty. Below are some common questions business owners ask about COBRA when facing a bankruptcy:

Q: My company is looking at filing for Chapter 11 bankruptcy but only laying off a few employees. Will those losing their jobs be eligible for federal COBRA benefits?

A: The answer is both yes and no.

It’s important for employees to understand that financial bankruptcies aren’t the same and can affect their benefits differently. Under Chapter 11, a company is financially looking to reorganize itself through various cost-cutting measures such as salary cuts, benefit reductions, and layoffs. Under Chapter 7, a company shuts down operations completely — including benefits. So, in getting back to the yes/no answer …

• Yes, COBRA is available to laid-off employees.  But, the COBRA option exists only if the health plan exists.  Thus, the COBRA benefit extension period may be less than 18 months if the entire plan terminates.  
• No, if you close your doors and are unable to continue the health plan, employees cannot continue COBRA because the plan no longer exists. Many people assume that a dislocated employee will have automatic COBRA coverage. Unpaid carrier premiums equate to a policy cancellation —period.

Q: As an employer, what are my obligations for notifying employees about continuing health care coverage?

A: It depends. If you must drop health insurance benefits altogether as a result of Chapter 7 or 11, you are required to give employees 60 days notification before the coverage ends. During that time, employees will receive a “certificate of creditable coverage,” which will be needed when applying for a new policy.

As an employer, it’s critical to notify your COBRA administrator immediately as to your decision, so they can contact laid-off workers regarding their health care benefits available under federal COBRA, and the fact that coverage will no longer be continued.

Q: I’m filing Chapter 11 but plan on maintaining the health plan. What’s the first thing I should do and how will my displaced employees be notified?

A: If you’re filing Chapter 11 but plan to continue benefits, contact the carrier to determine the plan’s paid through date. Then, notify your COBRA administrator regarding the bankruptcy, along with estimated timeframes regarding the business reorganization and timing of layoffs. 

At that time, the COBRA administrator will notify dislocated employees as to their eligibility, including how long the plan will continue before sending an offer letter outlining exactly what their continuation rights are.

Q: What about retiree benefits? 

A: If the employer files Chapter 11 and terminates or reduces retiree medical as part of the reorganization, those retirees and their beneficiaries who lose coverage due to the bankruptcy are entitled to COBRA.  In other words, the bankruptcy itself is a qualifying event for retirees.

Facing a company bankruptcy brings many challenges, but when it comes to continuing health care coverage, employers need to understand the impact it will have on their employees — including critical timeframes for notifying the COBRA administrator. During this challenging time, it’s advisable to take a proactive approach so dislocated employees can better navigate their way through their health care options.

For more information about bankruptcy, you should contact your company’s legal counsel.  You may also be able to obtain COBRA-specific guidance relating to bankruptcy by visiting the Department of Labor’s website at www.dol.gov/ebsa.