What You Need To Know About COBRA Health Insurance

By Amy Fontinelle AAA

If you lose your employee health insurance benefits because you are laid off or have your hours cut and you work for a company with 20 or more employees, your employer should notify you about your Consolidated Omnibus Budget Reconciliation Act (COBRA) health insurance eligibility. But what is COBRA? How does it work? Is it expensive? Should you sign up? Let's uncover the basic facts you need in order to answer these questions.

TUTORIAL: Intro to Insurance: Health Insurance

COBRA Basics
If you become ineligible to receive your employer's health insurance benefits (which is most commonly due to being laid off), your employer will probably stop paying its share of your health insurance premiums. However, a federal law makes it possible for you to keep the same health insurance coverage if you're willing to pay for it. Since 1986, COBRA has enabled former employees, retirees, spouses, former spouses and dependent children to obtain continuing health insurance coverage at group rates. (To learn more, see How An Insurance Company Determines Your Premiums.)

While the term "group rate" makes it sound like you'll be getting a discount that will make the insurance premiums affordable, they're usually much more expensive than people anticipate. When you were employed, you probably paid a small fraction of your actual health insurance premium. You may have paid 10% while your employer paid 90%. Under COBRA, you have to pay 100% of the premium. Sometimes you even have to pay an extra 2% administrative charge. The total premium can be steep and difficult to pay.

Who Qualifies?
The first test of whether you'll be eligible for COBRA is the size of your employer. If you work for a very small company, you're out of luck. To qualify for COBRA, the employer must be a state or local government agency or a private-sector company with 20 or more full-time-equivalent employees. (The hours of part-time employees can be added together to create a full-time-equivalent employee.)

The second test is whether you were enrolled in a company-sponsored group health insurance plan on the day before the qualifying event occurred. The qualifying event must have caused you to lose your health insurance. Qualifying events include leaving your job voluntarily or involuntarily (except in cases of gross misconduct) or having your hours reduced. Employers are also required to offer COBRA to people who were covered under the plan of an employee who passed away or became qualified for Medicare. Spouses, former spouses (sometimes) and dependent children also qualify for COBRA if they were on your plan. (To learn more about Medicare, see What Does Medicare Cover?)

The third test is whether the employer still offers its employees a health plan. If you lose your job because your employer goes out of business or if your employer ceases to offer health insurance to anyone, you won't be eligible for COBRA.

COBRA Coverage
If you do qualify for COBRA, you won't have to learn the ropes of a new health insurance plan for the time being. COBRA provides identical coverage to what the company offers its current employees. Generally, this is the same insurance you had before you lost your health insurance benefits. However, if your employer changes its plan, your COBRA plan will change, too.

Plans that cover prescription drugs, dental and vision care are all considered health coverage. Life insurance and disability insurance are not included. You will have to seek new coverage on your own in these areas. (To learn more, see Top 10 Life Insurance Myths and Choosing The Best Disability Insurance.)

For people who lose health insurance coverage due to termination or a reduction in hours, COBRA coverage generally lasts 18 months. The average length of unemployment in the United States in July 2011, one of the worst months on record, was a little over nine months. There's a good chance you'll find a new job with benefits before your COBRA coverage expires. Some situations allow 36 months of COBRA coverage.

The coverage period may be shorter than 18 or 36 months if the employer ceases to offer any health plan, if you don't pay your premiums, if you become fully eligible for a group plan through another employer or if you become eligible for Medicare.

Cost of Coverage
COBRA is more expensive than what active, covered employees pay because the employer is no longer subsidizing part of the cost of that plan. You pay 100% of the plan's full cost, plus the employer may charge a 2% administrative fee. If you are currently covered by an employer's health plan but anticipate that you might be losing your eligibility for that benefit, there are ways to get an idea of what your COBRA premiums could be. One is to simply talk to your employer's human resources department to find out what the full cost of your coverage is. Another is to look at last year's W-2. It may report how much your employer paid for your insurance. You can add to that amount how much you paid for the year (also reported on your W-2) to get the annual total and divide the result by 12. (To learn more, see The Ultimate Tax-Time Checklist.)

Benefits
If you elect COBRA continuation coverage, you won't have to change doctors because you'll have the same health plan and the same in-network providers. You'll also retain your coverage for preexisting conditions and any prescription medications you use regularly. Also, though COBRA can be expensive, it will seem like a bargain compared to the full-price medical bills you will have to pay if you get sick or injured and you're uninsured.

Drawbacks
The obvious drawback of COBRA is that it can seem very expensive. Also, coverage doesn't last forever. And if your employer isn't required to participate in COBRA, you won't have it as an option.

If your employer changes its health insurance plan, you will get the new plan, but you'll have to accept the changes. Of course, you would have been in the same position if you were still qualified for that employer's health benefits.

Also, the employer's plan may not be the best one for your needs. It may offer more or less coverage than you need (e.g., more or fewer covered services, higher or lower deductibles and co-payments).

Alternatives to COBRA
According to the U.S. Department of Labor, COBRA coverage is ordinarily less expensive than an individual plan. Is this true? Not necessarily. The plan offered by your employer may have many more bells and whistles than the individual plan you would choose for yourself if you knew you were paying full price. It's worth shopping for a new plan, because it might save you money. However, if you are older or have a preexisting condition, or if you are pregnant or intend to become pregnant, individual coverage may be expensive or unattainable, and COBRA may indeed be your best and most affordable option. (To learn more, read Buying Private Health Insurance and Health Insurance: Paying For Pre-Existing Conditions.)

If private health insurance isn't an option, find out whether you and any dependents qualify for a public assistance program such as Medicaid or another state or local programs (e.g., Healthy San Francisco). These programs are usually only available to people with very low incomes and limited assets, however, and the level of care and service may not be what you're accustomed to. Eligibility requirements vary by state.

If you're in good health, you may be able to get by with a health care discount plan. However, it can be more difficult to get health insurance in the future if your insurance coverage is interrupted, and a discount plan does not count as insurance coverage (nor does Medicaid). (Learn more about this option in Get Sale Prices On Health Care With Discount Plans.)

Helpful Tips for Managing a High COBRA Premium
If you know you're about to lose your job and you have a flexible spending account (FSA), you can spend the entire amount that you elected to contribute to your FSA for the year before you become unemployed. If you were going to contribute $1,200 for the year but it's only January and you've only had $100 withheld from your paycheck for your FSA, you can still spend all of the $1,200 that you were planning to contribute. This means you can try to visit all of your doctors and fill all of your prescriptions immediately. But when you lose your job, you generally lose your FSA.

If you do choose COBRA, you can change your plan during the employer's annual open enrollment period. This option might make it possible for you to switch to a less expensive plan (e.g., PPO to HMO).

Tax deductions might also help lessen the burden of higher premiums. When you file your annual tax returns, don't forget to deduct your COBRA premiums and other medical expenses exceeding 7.5% of your income on Schedule A of your federal tax return if you itemize.

Also, if you're paying significantly higher premiums under COBRA, look for ways to reduce your other health care costs, such as switching to generic drugs or buying larger supplies at a discount and visiting low-cost community or retail clinics for basic health care services.

Finally, if you have a health savings account (HSA), you can use those funds to pay your COBRA premiums as well as your other medical expenses, which could significantly reduce the sting of losing your health insurance benefits. (For more on utilizing HSAs, read Fighting The High Costs Of Healthcare.)

The Bottom Line
COBRA is a convenient option for retaining health insurance if you lose your employer-sponsored health benefits, and sometimes it is also the best option. However, the cost is often high and the plan is not always the best one to fit an individual's or family's needs.

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