The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a health insurance program that allows eligible employees and their dependents the continued benefits of health insurance coverage when an employee loses their job or experiences a reduction of work hours. Below, we'll explore the basic details of COBRA, how it works, its eligibility criteria, pros and cons, and other features.

Key Takeaways

  • COBRA is an acronym for the Consolidated Omnibus Budget Reconciliation Act, which provides eligible employees and their dependents the option of continued health insurance coverage when an employee loses their job or experiences a reduction of work hours.
  • Employers with 20 or more full-time-equivalent employees are usually mandated to offer COBRA coverage.
  • Health insurance coverage from COBRA extends for a limited period of 18 or 36 months, depending upon applicable scenarios.
  • The cost of COBRA coverage is usually high because the newly unemployed individual pays the entire cost of the insurance (employers usually pay a significant portion of healthcare premiums for employees).
  • If you have lost your health insurance due to job loss during the 2020 coronavirus pandemic, you qualify for a "special enrollment" period on the federal exchange, which gives you 60 days to enroll. This may be a way to find a cheaper health insurance option than COBRA.

What Is COBRA Continuation Coverage?

Large employers in the U.S., those with 50 or more full-time workers, are required to provide health insurance to their qualifying employees by paying a part of insurance premiums. If an employee becomes ineligible to receive an employer's health insurance benefits—which can happen for a variety of reasons (such as getting laid off or falling below a minimum threshold number of hours worked per week)—the employer may stop paying its share of the employee's health insurance premiums. In that case, COBRA allows an employee and their dependents to retain the same health insurance coverage for a limited period of time, provided they are willing to pay for it on their own.

Under COBRA, former employees, spouses, former spouses, and dependent children must be offered the option of continued health insurance coverage at group rates, which otherwise would be terminated. While these individuals are likely to pay more for health insurance coverage through COBRA than they did as employees (because the employer will no longer pay a portion of the premium costs), COBRA coverage might be less expensive than an individual health insurance plan would be.

It's important to note that COBRA is a health insurance coverage program and plans may cover costs toward prescription drugs, dental treatments, and vision care. It does not include life insurance and disability insurance.

Qualifying for COBRA Health Insurance

There are different sets of criteria for different employees and other individuals who may be eligible for COBRA coverage. In addition to meeting these criteria, eligible employees can typically only receive COBRA coverage following particular qualifying events, as discussed below.

Employers with 20 or more full-time-equivalent employees are usually mandated to offer COBRA coverage. The working hours of part-time employees can be clubbed together to create a full-time-equivalent employee, which decides the overall COBRA applicability for the employer. COBRA applies to plans offered by private-sector employers and those sponsored by the majority of local and state governments. Federal employees are covered by a law similar to COBRA.

Additionally, many states have local laws similar to COBRA. These typically apply to health insurers of employers having fewer than 20 employees and are often called mini-COBRA plans.

A COBRA-eligible employee must be enrolled in a company-sponsored group health insurance plan on the day before the qualifying event occurs. The insurance plan must be effective on more than 50% of the employer's typical business days in the previous calendar year. The employer must continue to offer its existing employees a health plan for the departing employee to qualify for COBRA. In case of the employer going out of business or the employer no longer offering health insurance to existing employees (for instance, if the number of employees drops below 20), the departing employee may no longer be eligible for COBRA coverage.

The qualifying event must result in a loss of the employee's health insurance. The type of qualifying event determines the list of qualified beneficiaries, and conditions vary for each type of beneficiary.

Employees

Employees qualify for COBRA coverage in the event of the following:

  • Voluntary or involuntary job loss (except in cases of gross misconduct), such as the 2020 coronavirus pandemic
  • A decrease in the number of hours of employment resulting in loss of employer insurance coverage

Spouses

In addition to the two qualifying events for employees (above), their spouses can qualify for COBRA coverage on their own if the following conditions are met:

  • Covered employee becomes entitled to Medicare
  • Divorce or legal separation from the covered employee
  • Death of the covered employee

The employee or beneficiaries must notify the plan in the event of divorce, legal separation, or a child's loss of dependent status.

Dependent children

Qualifying events for dependent children are generally the same as for the spouse with one addition:

  • Loss of dependent child status as per the plan rules

The employer must notify the plan within 30 days of the qualifying event that is applicable to the employee. The employee or beneficiaries must notify the plan if the qualifying event is divorce, legal separation, or a child's loss of dependent status.

COBRA Benefits and Available Coverage

For qualifying candidates, COBRA rules provide for the offering of coverage that is identical to that which the employer offers to its current employees. Any change in the plan benefits for active employees will also apply to qualified beneficiaries. All qualifying COBRA beneficiaries must be allowed to make the same choices as non-COBRA beneficiaries. Essentially, the insurance coverage for current employees/beneficiaries remains exactly the same for ex-employees/beneficiaries under COBRA. You must be given at least 60 days in which to choose whether or not to elect continuation coverage. Even if you waive coverage, you can change your mind if it is within the 60-day election period.

From the date of the qualifying event, COBRA coverage extends for a limited period of 18 or 36 months, depending upon the applicable scenarios. One can qualify to extend the 18-month maximum period of continuation coverage if any one of the qualified beneficiaries in the family is disabled and meets certain requirements, or if a second qualifying event occurs—potentially including the death of a covered employee, the legal separation of a covered employee and spouse, a covered employee's becoming entitled to Medicare, or a loss of dependent child status under the plan.

Cost of COBRA Health Insurance

The term "group rate" may be incorrectly perceived as a discount offer, but in reality, it may turn out to be comparatively expensive. During the employment term, the employer often pays a significant portion of the actual health insurance premium (for example, an employer may pay 80% of premium costs), while the employee pays the remainder. After employment, the individual is required to pay the entire premium, and at times it may be topped up with an extra 2% toward administrative charges. Costs may not exceed 102% of the cost for the plan for employees who haven't experienced a qualifying event.

Therefore, despite the group rates being available for the COBRA continued plan in the post-employment period, the cost to the ex-employee may increase significantly when compared to prior insurance costs. In essence, the cost remains the same but has to be borne completely by the individual with no contribution from the employer. COBRA may still be less expensive than other individual health coverage plans. It is important to compare it to coverage the former employee might be eligible for under the Affordable Care Act, especially if they qualify for a subsidy. The employer's human resources department can provide precise details of the cost.

If you have lost your health insurance due to job loss during the 2020 coronavirus pandemic, you qualify for a "special enrollment" period on the federal exchanges, which gives you 60 days to sign up. This may be a way to find a cheaper health insurance option than COBRA.

Early Termination of COBRA Coverage

COBRA coverage can end prematurely in the following cases:

  • Failure to pay premiums on time
  • Employer ceasing to maintain any group health plan
  • A qualified beneficiary gaining coverage under another group health plan (for instance, with a new employer), becoming eligible for Medicare benefits, or engaging in misconduct (such as fraud)

Pros and Cons of COBRA Coverage

An individual who opts for COBRA coverage is able to continue with the same physician, health plan, and medical network providers. COBRA beneficiaries also retain existing coverage for preexisting conditions and any regular prescription drugs. The plan cost may be lower than other standard plans, and it is better than remaining uninsured as it offers protection against high medical bills to be paid for in case of any sickness.

Nonetheless, it's important to keep in mind the downsides of COBRA. Some of the most prominent of these include the high cost of insurance when it is borne entirely by the individual, the limited period of coverage under COBRA, and the continued dependency on the employer. If the employer opts to discontinue the coverage, an ex-employee or related beneficiary will no longer have access to COBRA.

If the employer changes the health insurance plan, a COBRA beneficiary will have to accept the changes even if the changed plan doesn't offer the best fit for the individual’s needs. A new plan may change the coverage period and number of available services, for example, and it may increase or lower deductibles and co-payments.

For these reasons, individuals eligible for COBRA coverage should weigh the pros and cons of COBRA against other available individual plans to select the best possible fit.

A potential COBRA beneficiary also can explore, for example, whether they may qualify for a public assistance program such as Medicaid or other state or local programs. However, such plans may be limited to low-income groups and may not offer the best care and services compared to other plans.

Healthy individuals can explore the option of a low-cost healthcare discount plan. But these plans don't count as insurance coverage, which can make it difficult to get health insurance in the future since signing up for one of these plans means that insurance coverage is considered to have been interrupted.

Managing a High COBRA Premium

If you're considering COBRA coverage but you're concerned about the differences between the cost of insurance coverage through this program and the cost of insurance with the support of an employer, there are a number of important considerations to keep in mind.

When you lose your job, you generally lose your flexible spending account (FSA). If a job loss is threatened, you are allowed to spend your entire year's contribution to the FSA before you become unemployed. If you were going to contribute $1,200 for the year but it's only January, for example, 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—say, by seeing all of your doctors and filling all of your prescriptions immediately.

Upon choosing COBRA, you can change your plan during the employer's annual open enrollment period and opt for a less expensive plan like a preferred provider organization (PPO) or health maintenance organization (HMO).

If available, a refundable tax credit called the Health Coverage Tax Credit (HCTC) can be utilized by qualifying individuals to pay up to 72.5% of qualified health insurance premiums, including COBRA continuation coverage. However, the HCTC program is set to expire Dec. 31, 2020. Additionally, because of COVID-19, the HCTC processing center in Austin, Texas is closed until further notice; follow updates here.

Tax deductions might also help reduce the burden of higher premiums. While filing the annual tax returns, you are allowed to deduct COBRA premiums and other medical expenses exceeding 7.5% of your adjusted gross income (AGI) on your 2019 federal tax return (but you must itemize your deductions on Schedule A). Note that the threshold amount is due to increase to 10% of AGI for 2020 taxes.

You can achieve additional savings by reducing other healthcare expenses, such as switching to generic drugs or buying larger supplies at a discount and visiting a low-cost community or retail clinic for basic healthcare services.

Finally, you can utilize the funds of your health savings account (HSA) to pay COBRA premiums as well as medical expenses, which could significantly reduce the sting of losing your health insurance benefits.

It's important to note that making timely payments on COBRA premiums is essential to maintaining coverage for the duration of your eligibility. The initial premium payment is due within 45 days of the date of your COBRA election, and failure to make that payment could lead to the loss of your COBRA rights. Payment is typically designed to cover a period that is retroactive, going back to the date of the loss of coverage and the qualifying event that established eligibility.

If you do not make your COBRA payments on time but you do within the grace period for that period of coverage, there is the possibility that your coverage will be canceled until payment is received, at which point coverage will be reinstated.

You can utilize the funds of your health savings account (HSA) to pay COBRA premiums as well as medical expenses, which could significantly reduce the sting of losing health insurance benefits.

Government Jurisdiction over COBRA

Several agencies of the federal government are responsible for administering COBRA coverage. Currently, the Departments of Labor and Treasury maintain jurisdiction over private-sector group health plans, while the Department of Health and Human Services is responsible for public-sector health plans. However, these agencies are not necessarily heavily involved in the process of applying for COBRA coverage or related aspects of the continued coverage program.

The Labor Department's regulatory responsibility includes the disclosure and notification of COBRA requirements as stipulated by law. And the Center for Medicare and Medicaid Services provides information about COBRA provisions for public-sector employees.

The American Recovery and Reinvestment Act of 2009 expanded COBRA eligibility and also reduced the rates of eligible individuals by 65% for up to nine months of coverage. The remaining 65% of the payment is covered by the former employer through a payroll tax credit.

Applying for COBRA Coverage

In order to begin COBRA coverage, an individual must confirm that they are eligible for assistance according to the requirements listed above. Typically, an eligible individual will receive a letter from either an employer or a health insurer outlining COBRA benefits. Some individuals find this notification difficult to understand because it includes a large amount of required legal information and language. If you have any difficulty determining whether you are eligible for COBRA or how to begin coverage through this program, contact either the health insurer or your former employer's HR department.

For individuals either not eligible for COBRA or those searching for alternatives, there are other options; in some cases, a spouse's health insurance plan may be a possibility.

For individuals either not eligible for COBRA or those searching for alternatives, there are other options. In some cases, a spouse's health insurance plan may be a possibility. Or you might explore your options on the federal health insurance marketplace or a state health insurance marketplace.

As indicated above, Medicaid programs and other short-term policies designed for those experiencing a gap in health coverage may also be available to you. Health insurance professionals typically discourage individuals from electing to go uninsured entirely, as the possibility of severe downsides is high—especially during an uncertain time. Fortunately, individuals eligible for COBRA coverage have at least 60 days to elect to participate in the program.

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 a family's needs.