COBRA Insurance: What It Is and If It's Right for You
For the time between health benefit coverage at your last job and your next job, COBRA may ensure the coverage you need.
One of the biggest benefits that many companies offer to their employees is access to a group health insurance policy. Group health insurance is generally cheaper than an individual health policy, so this can be a major incentive for many workers to stay with their current employer.
But when employees get laid off or have their hours reduced to part-time status, they will generally lose their group coverage and be forced to purchase individual health insurance instead. But for some people, there is an option to bridge the gap.
What is COBRA?
The Consolidated Omnibus Budget Reconciliation Act (COBRA) was passed in order to allow former employees to retain their group health insurance coverage for up to 18 to 36 months after they leave their employers.
COBRA prevents former employees from having to immediately find replacement coverage, although the cost of the premiums for the coverage they had with their former employer will usually be much higher than they paid as an employee. This is because the employer usually pays a large percentage (such as 80%) of the total cost of health insurance for its employees.
Read: What You Need to Know About Health Insurance Before Quitting Your Job
Once COBRA coverage kicks in, the ex-employee must bear the cost of this coverage all by him or herself. And there can even be an additional 2% charged to the employee to cover administrative costs.
However, even this higher-priced insurance coverage may still be cheaper than paying for a standalone health insurance policy. Any change in the employer's group health coverage will also apply to COBRA coverage.
Employees usually are given 60 days from the date of the qualifying event (the qualifying event being the employee's resignation, termination or layoff) to decide whether or not to enroll in COBRA coverage. They can still enroll even if they initially decide that they don't want this coverage but then change their mind before the 60 days are up.
Who is Eligible for COBRA?
All businesses that employ at least 50 full time workers are required to offer health insurance as a group benefit. COBRA coverage encompasses health and medical insurance as well as dental and vision care. However, it does not include life, disability,long-term care (LTC) or longevity insurance coverage, which may have been part of the employee plan.
There is more than one set of criteria that can apply to a former employee and other individuals when it comes to qualifying for COBRA coverage. All employers in the private sector that have at least 20 full-time employees are generally required to offer this form of coverage to their employees.
Federal, state and local government employees are also eligible for COBRA coverage in most cases. Many states also have local laws that require employers that employ fewer than 20 full time employees to offer a version of COBRA coverage that is often referred to as "Mini-COBRA" coverage.
An employee must be enrolled in the employer's group health insurance plan on the day before a qualifying event happens, and the employer has to have had a group health insurance plan in force for at least half of the company's typical business days during the previous calendar year.
The employer must also continue to offer group health insurance to its remaining employees after the qualifying event for the employee in question has occurred. If the employer goes out of business or its full time workforce drops below the 20-employee threshold, then departing employees may not be eligible for COBRA coverage.
In addition to an employee leaving his or her employer (for any reason other than gross misconduct) or being reduced to part-time status, an employee's spouse can qualify for COBRA coverage if the employee becomes eligible for Medicare, the employee dies or the spouse divorces the employee.
In the event of a divorce, it is critical that the employee or beneficiaries notify the employer of the pending legal action. Qualifying events for dependent children generally mirror those of a spouse and also apply when a child loses dependent status.
Employees who have lost their health insurance coverage due to a job loss that occurred as a result of the Coronavirus pandemic qualify for a special enrollment period of 60 days during which they can apply for coverage on one of the healthcare exchanges that were created by the Affordable Care Act. This form of health coverage may cost less than COBRA coverage in some cases.
Read: 10 Things You Need to Know About Health Insurance in the United States
How Long Does Coverage Last?
COBRA coverage can be terminated before the 18 month period has elapsed if premium payments are not made in a timely fashion (the initial premium is due within 45 days of electing COBRA coverage), the former employer ceases to offer group health coverage or the former employee engages in any form of misconduct such as fraud.
Former employees who obtain access to new group coverage with another employer will also lose their COBRA coverage once the new group coverage kicks in. COBRA coverage can also be extended for another 18 months in special circumstances, including the death of the employee or a divorce.
COBRA coverage can allow a former employee to maintain the same group health coverage that he or she enjoyed while working for their former employer, albeit at a much higher cost. But any changes that the employer makes to their group health coverage will automatically apply to COBRA coverage as well, and this could adversely affect the coverage limits for the former employee and his or her family.
Alternatives to COBRA
Those who balk at the high premiums that are required for COBRA coverage may want to take a look at Medicaid coverage or other state or local plans that offer lower-cost alternatives to traditional health insurance. But many of these programs are designed exclusively for low-income taxpayers, so it may be difficult to qualify for them.
Read: 10 Tips for Choosing the Right Health Insurance Policy
There are also other types of health plans that aren't classified as health insurance per se, but enrolling in one of these plans may result in a gap in your health insurance coverage, which means that it may be harder for you to qualify for other group coverage later on. If your spouse has access to group health insurance through his or her job, then this may be your best alternative if you lose your own coverage from your previous job.
Consult your financial advisor or human resources department for more information on COBRA and whether it is right for you
Written by Mark Cussen | CFP, CMFC
Mark has over 25 years of experience in the financial industry, and has worked with investments, insurance and mortgages as well as income tax preparation and comprehensive financial planning.
His writing work includes insurance and securities training manuals and educational articles for several financial websites, such as Investopedia.com and MasonFinance.com.