The employee generally pays the full cost of the insurance premiums. In fact, the law allows the employer to charge 102 percent of the premium, and to keep the 2 percent to cover your administrative costs. When an employee gets extended COBRA coverage due to disability, you can charge 150 percent of the premium for months 18 through 29.

An exception to this rule is required under the American Recovery and Reinvestment Act of 2009. This temporary change in the law allows an individual who is involuntarily separated from employment on or after September 1, 2008, and before January 1, 2010, to elect to pay 35 percent of his or her COBRA coverage and have it treated as paying the full amount, limited to up to nine months. The former employer will be required to pay the remaining 65 percent but, in effect, will be reimbursed by crediting those amounts against income tax withholding and payroll taxes it is otherwise required to remit to the federal government. Income and other limitations on COBRA coverage apply. A detailed explanation for employers on this temporary 2008-2009 change to COBRA law is available on the IRS website.

Federal law states that COBRA coverage can be terminated if premium payments are late. According to the law, payment of any premium is considered to be timely if it is made within 30 days after the due date or within a longer period set out under the plan. The due date must not begin before the first day of the coverage period. And, when someone chooses to take COBRA coverage, they still have 45 days to make the first payment.

The fact that most insurers want you to pay in advance for coverage complicates this process because you have to pay in advance for the coverage under the policy, but the law states that you have to give COBRA insureds a 30-day grace period from the time the payment is due. This is yet another reason to consider outsourcing your administration.

Elena leaves her job and her group health plan coverage on August 1. She elects COBRA coverage on September 1 and chooses to pay her COBRA premiums on a monthly basis. Elena's first premium payment is due on October 16. On that date she must make payments for August and September. Payment for October must be made by October 31. Thereafter, Elena must make a payment no later than 30 days after the first day of each month.