The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a health insurance program that allows an eligible employee and his or her dependents the continued benefits of health insurance coverage in case that employee loses his or her 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.
What Is COBRA Continuation Coverage?
Employers in the U.S. are required to provide health insurance to their qualifying employees by paying a part of insurance premiums. In case the employee becomes ineligible to receive an employer's health insurance benefits due to a variety of reasons (like getting laid off or falling below a minimum threshold number of hours worked per week), the employer may stop paying its share of employee’s health insurance premiums. A 1986 federal law called the Consolidated Omnibus Budget Reconciliation Act allows the employee and their dependents to retain the same health insurance coverage if they are willing to pay for it on their own. COBRA allows former employees, retirees, spouses, former spouses and dependent children to obtain continued health insurance coverage at group rates that otherwise might be terminated. While these individuals will likely pay more for health insurance coverage through COBRA than they would have as an employee (as a result of the fact that the employer no longer pays a portion of the premium costs), COBRA coverage is typically 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 percent of 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 loss of 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:
- Voluntary or involuntary job loss (except in cases of gross misconduct)
- Decrease in the number of hours of employment resulting in loss of employer insurance coverage
Spouses: In addition to the above two qualifying events for employees, their spouses can qualify for COBRA coverage if the following conditions are met:
- Covered employee becoming entitled to Medicare
- Divorce or legal separation from the covered employee
- Death of the covered employee
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 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 Coverage Available
For qualifying candidates, COBRA rules provide for the offering of identical coverage to what the employer offers to its current employees. Any change in the plan benefits for the active employees will also apply to qualified beneficiaries. All qualifying COBRA beneficiaries must be allowed to make the same choices as the non-COBRA beneficiaries. Essentially, the insurance coverage for current employees/beneficiaries remains exactly the same for ex-employees/beneficiaries under COBRA.
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. 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 as compared with 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 still remains less expensive compared to most individual health coverage plans. The Human Resources department of the employer can provide precise details of the cost.
Early Termination of COBRA Coverage
COBRA coverage can end prematurely in the following cases:
- Failure to pay premiums in 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 can enjoy the opportunity 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 is still 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, COBRA still has some downsides to keep in mind as well. Some of the most prominent cons to COBRA 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 qualifies 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 may not offer the best fit for the individual’s needs. For example, a new plan may change the coverage period and number of available services, and it may increase or lower deductibles and co-payments.
For the reasons above, individuals eligible for COBRA coverage are typically still best off weighing the pros and cons of COBRA against other available individual plans to select the best possible fit.
A potential COBRA beneficiary can also explore whether he or she 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 as compared with other plans. Healthy individuals can explore the low-cost healthcare discount plan, but since they do not count as insurance coverage it can result in difficultly to get health insurance in the future as the insurance coverage is considered to have been interrupted.
Managing a High COBRA Premium
For individuals considering COBRA coverage but 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 many important considerations to keep in mind.
The loss of a job is generally accompanied by the loss of a flexible spending account (FSA). If there is a threat of job loss, one can opt to spend the entire amount elected to contribute to the FSA for the year before one becomes 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.
Upon choosing COBRA, one can change their 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 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.
Tax deductions might also help reduce the burden of higher premiums. While filing the annual tax returns, one is allowed to deduct COBRA premiums and other medical expenses exceeding 7.5% of the income on Schedule A of the federal tax return.
Other savings can be achieved by reducing other healthcare expenses, such as switching to generic drugs or buying larger supplies at a discount and visiting low-cost community or retail clinics for basic healthcare services.
Finally, one can utilize the funds of their health savings account (HSA) to pay COBRA premiums as well as medical expenses, which could significantly reduce the sting of losing health insurance benefits. This is one of many ways individuals can push back against the high costs of health care.
It's important to note that making timely payments on COBRA premiums is essential to maintaining coverage for the duration of eligibility. The initial premium payment is due within 45 days of the date of COBRA election by the beneficiary. Payment is typically designed to cover a period which is retroactive, going back to the date of the loss of coverage and the qualifying event which established eligibility. For individuals benefiting from COBRA who do not make payments in a timely fashion, there is the possibility that coverage will be canceled until payment is received, at which point coverage will be reinstated.
How COBRA Is Related to the Government
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. For instance, the Labor Department's regulatory responsibility includes the disclosure and notification of COBRA requirements as stipulated by law. On the other hand, 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 9 months of coverage. The remaining 65% of the payment is covered by the former employer through a payroll tax credit.
How to Apply for COBRA Coverage
In order to begin COBRA coverage, an individual must firm confirm that he or she is eligible for assistance per the requirements listed above. Typically, an eligible individual will receive a letter from either an employer or a health insurer outlining COBRA benefits. However, some individuals find this notification difficult to understand because it includes a large amount of required legal information and language. Individuals having a difficult time determining whether they are eligible for COBRA or how to begin coverage through this program should contact either the health insurer or the employer's HR department.
For individuals either not eligible for COBRA or those searching for alternatives, there are other options as well. In some cases, a spouse's health insurance plan may be a possibility. The federal health insurance marketplace or a state health insurance marketplace are also avenues to explore. As indicated previously, Medicaid programs and other short-term policies designed for those experiencing a gap in health coverage may also be possibilities. Health insurance professionals typically discourage individuals from electing to go uninsured entirely, as the possibility of severe downsides is high. 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.