COBRA Continued Health Insurance

Losing a job can be stressful both personally and financially as you try to make ends meet while searching for a new employer.

Although it may not be the first thing that comes to mind, one of the biggest stressors of losing a job for many individuals or households is the resulting loss of enrollment in their employer-based health insurance plans. Health insurance is not only critically important to covering unexpected or expensive medical costs, it is also a legal requirement for American families. Households that do not act promptly to address the situation when a job loss, death or divorce ends their health insurance may face federal penalties at tax time up through 2018.

Recognizing the challenges this creates, the federal government implemented the Consolidated Omnibus Budget Reconciliation Act, or COBRA, in 1986. COBRA allows employees to remain enrolled in their employer-offered health insurance plans for a limited amount of time after the termination of their employment. Not all employers are bound by COBRA, and COBRA is not always the best option for newly unemployed workers. It does, however, provide an invaluable opportunity for smooth and positive transitions to new plans for many households.

Who qualifies for COBRA coverage?

Companies that employ 20 or more full-time workers are required by federal law to participate in COBRA. COBRA laws do not apply to companies of any size that do not offer group health insurance as part of their benefits packages. Some faith-based or church-affiliated companies and organizations may be exempt from COBRA participation. Companies with fewer than 20 full-time workers are also federally exempt. Individuals who would otherwise be eligible for COBRA may not have access to the program and its benefits if their employer shuts down or ceases to offer group health care as part of its benefits package.

Many states have supplemental laws in place that extend COBRA requirements to federally exempt businesses. These “mini COBRA” laws are not consistent, however. Qualifying individuals should check with their state authorities for specific details. Policyholders can become eligible for COBRA coverage if:

  • Their employment is terminated by their employers for any reason other than gross misconduct.
  • Their employment is not terminated, but the number of hours available to them consistently drops below the level needed to qualify for health insurance benefits under their employers’ rules.
  • They quit a job.
  • They become unable to continue working due to disability.
  • They divorce a spouse through whom they qualified for coverage.
  • The spouse through whom they qualified for coverage dies.
  • They turn 26 years of age and cease to qualify for coverage under their parents’ health insurance.

How COBRA Works

When an individual experiences any of the situations that qualify him or her for COBRA coverage, the human resources department, insurance administrator or other responsible party at the employer through which they were receiving health insurance is required to advise him or her of the option to enroll in COBRA. By law, they have 14 days to give this notice. Once notified, the individual has 60 days to enroll in COBRA, if desired. Individuals who initially decline to sign up for COBRA are free to change their minds within the 60-day period and enroll.

Enrollees have 45 days from enrollment to pay their first COBRA premium to keep their coverage. Individuals who elect not to enroll in COBRA have three months to secure new insurance before they become subject to federal penalties at tax time, although the individual mandate penalty of the Affordable Care Act (ACA) is only up through 2018. COBRA coverage can go into effect as early as the first day the employee is unemployed or otherwise disqualified from standard coverage. In some cases, employers will pay for employees’ first COBRA premium.

How long an enrollee may keep COBRA coverage depends on his or her health, income and the reason he or she became eligible. Employees who were terminated or lost their eligibility due to a reduction in hours may keep COBRA coverage up to 18 months. Employees who become disabled may be covered by COBRA for as long as 29 months and may qualify for an additional 11-month extension when their initial eligibility expires. Eligibility due to death or divorce qualifies an enrollee to COBRA benefits for 36 months. Individuals who age out of their parents’ health insurance also qualify for 36 months of benefits.

What COBRA Costs

COBRA allows policyholders to keep their existing insurance plans, but it does not guarantee that they will be able to maintain that coverage at the same prices they were paying previously. It is common for employers to cover between 15 and 30 percent of the cost of employees’ health insurance plan premiums as part of their benefits packages. These benefits do not necessarily carry over to COBRA plans. COBRA enrollees may be required to pay the total cost of their health insurance premiums, as well as an administration fee.

For some policyholders, this expense is worthwhile. Individuals or households with extensive medical expenses, for example, or those who need pricy prescription medications not covered by other plans may do well to hold onto their plans. Policyholders who lose eligibility after they have already paid their deductibles for the year, or who lose eligibility mid-year (when it is most expensive to switch plans) may also find enrolling in COBRA their best option. Individuals who are pregnant or who expect to become pregnant may also particularly benefit from COBRA.

For many households, however, paying as much as 32 percent more than their former costs for health care is unsustainable or unwise. Individuals who are reemployed quickly often gain access to new employer-supported insurance. For other families, becomes easier and more cost effective to select an insurance plan available through the other spouse’s workplace or to purchase different insurance through the federal Health Insurance Marketplace. All of the events that qualify policyholders for COBRA coverage also qualify them for a special enrollment period in the Health Insurance Marketplace.

Depending on the circumstances, individuals who become eligible for COBRA may be able to spend whatever balances they had in Health Savings Accounts or Flexible Spending Accounts on their COBRA premiums. Generally, FSAs cannot be transferred from one employment situation to another so it is especially beneficial to spend down their balances on portable benefits whenever possible.

Individuals and families enrolled in COBRA typically have the opportunity to change their health plans during their employers’ annual enrollment window. This means that policyholders could potentially select a lower-cost plan through their former employers partway through their COBRA coverage period. Some COBRA expenses qualify as itemized costs on policyholders’ tax returns, which can help alleviate the financial stress of paying full cost for COBRA plans.

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