The Case For COBRA Subsidies

On February 28, 2010, many Americans faced the expiration of unemployment subsidies provided by the American Recovery and Reinvestment Act of 2009 (ARRA). Two days after the deadline, Congress passed the Temporary Extension Act of 2010 (TEA) which extended premium reductions provided by COBRA for health benefits until March 31, 2010. A new bill is set to extend the subsidy until the end of 2010. Without the extension, what is at risk?

What COBRA provides
According to the Department of Labor, the Consolidated Omnibus Budget Reconciliation Act (COBRA) was passed in 1986, in order to provide continued group health coverage to individuals whose benefits otherwise might be terminated. (Find out about what to do when the axe falls in The Layoff Payoff: A Severance Package.)

The basic idea behind COBRA was to provide temporary continuance of coverage for individuals who experienced serious life events. Generally speaking, there are three requirements for COBRA eligibility: your group plan must be covered by COBRA, a qualifying event must occur, and you must be a qualified beneficiary for that event.

Employers are required to offer continued coverage to the former employee, his or her spouse and dependent children and even former spouses in the event that coverage would be terminated due to specific events including death, divorce from a covered employee or termination of employment (for circumstances excluding gross misconduct). In the original legislation, continued coverage was offered for 18 months if the qualifying event was termination of employment or reduction of hours. In the midst of the recent financial crisis, lawmakers had to go back to the drawing board.

The Coverage
ARRA allowed involuntarily terminated workers to be eligible for COBRA subsidies, provided their termination occurred between September 1, 2008, and March 31, 2010. The subsidy provided a 65% discount on coverage premiums for eligible individuals. Under the provisions, individuals must pay 35% of their COBRA premiums with the remainder being reimbursed by way of a tax credit to the coverage provider. The reduced premiums last for up to 15 months and are applicable to stints of health coverage initiated on or after February 17, 2009. (For related reading, check out Fighting The High Costs Of Healthcare.)

TEA Time
TEA provides a new guideline for what defines a qualifying event for purposes of ARRA. An involuntary termination is now a qualifying event if it occurs between March 2, 2010 and March 31, 2010, and follows a qualifying event that was a reduction of hours occurring between September 1, 2008, and March 31, 2010.

A World Without COBRA Subsidies
COBRA coverage can be quite expensive. Employers may require individuals to pay the entire cost of coverage, plus an administrative fee of 2 percent. Without the extension, individuals who were involuntarily terminated after the applicable cutoff date could still be eligible for COBRA benefits, but not the subsidy. In theory, an eligible employee terminated on March 1, 2010 with a $1,000 monthly COBRA premium would be responsible for the entire premium, while another eligible employee terminated just one day prior would pay just $350 for the same coverage.

According to the Department of Health and Human Services, in a 2009 report, the nation's average monthly cost of family coverage under COBRA ranged from $885 to $1,191, in Hawaii and New Hampshire respectively. For individual coverage, the nation's average monthly COBRA premiums ranged from $334 in Hawaii to $444 in Delaware. The report issued by Families USA estimated on average, even with COBRA, family coverage premiums amount to approximately 84 percent of the family's average unemployment benefits. (Prepare yourself, read Planning For Unemployment.)

Bottom Line
On March 10, 2010, the Senate passed The American Workers, State and Business Relief Act (H.R. 4213). It extends COBRA benefits through the end of the year. The bill has a price tag of approximately $190 billion. It is now up for consideration in the House of Representatives, for differences to be resolved before the bill is signed by the President.

Inevitably, the extensions will come to an end. However, the latest extension will provide more affordable coverage for Americans who may have otherwise been without insurance. For those with benefits set to expire at the end of 2010, at least there is more time to explore future options for employment and insurance coverage. (Find out more in Losing Your Job: From A To Z.)

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