The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a type of health insurance program that allows eligible employees and their dependents to continue enjoying the health care benefits from before they lost or reduced work hours.
We’ll explore what it means, how you can qualify for this service- whether as an employer or employee -and some other features about COBRAs here.
What Is COBRA Health Insurance?
You care about your employees’ health, and large employers are required to pay employee health insurance premiums. This will assist in ensuring that your employees have the coverage they require to remain healthy and productive.
If the employee becomes ineligible for health insurance benefits, they may stop receiving them. This can happen for a variety of reasons, including being laid off or working fewer than the required number of hours per week.
In other words, when a person’s employment ends and he or she no longer meets the eligibility requirements on his or her own healthcare plan, his or her employer will cut ties with regard to payment-of-any-kind – for whatever type provided through work.
COBRA allows an employee and their dependents to keep their insurance coverage for a limited time if they are willing to pay for it themselves.
Former employees, spouses, former spouses, and dependent children must be offered the option of continuing health insurance coverage at group rates, which would otherwise be terminated, under COBRA.
While these individuals will most likely pay more for COBRA health insurance coverage than they did as employees (because the employer will no longer pay a portion of the premium costs), COBRA coverage may be less expensive than an individual insurance plan.
It is also important to remember that COBRA coverage may include prescription drugs, dental treatments, and vision care. Life and disability insurance may be excluded.
Qualifying for COBRA Health Insurance
Each employee and other individuals covered by COBRA insurance have different standards. In addition to meeting these requirements, eligible employees are generally only eligible for COBRA insurance after certain qualifying events, which are described below.
Employers with 20 or more employees are required to provide COBRA coverage to their employees. Part-time employees’ total working hours are aggregated in order to apply equivalent COBRA coverage as a full-time employee. This will determine the employer’s ability to provide COBRA coverage.
The COBRA law applies to employers in the private sector as well as those sponsored by the majority of local governments. Federal employees are also covered under a similar policy, which can be accessed through the website of their respective employer or government agency for more information on how it works if they have questions about coverage periods, etc.
Furthermore, employers in some other states follow local laws similar to COBRA. Mini-COBRAs are so-called because they apply to businesses with fewer than 20 employees.
On the day before the qualifying event, a COBRA-eligible employee must be enrolled in a company-sponsored group health insurance plan. In the previous calendar year, the insurance plan must have been in effect on more than half of the employer’s typical business days.
When an employee is about to leave the company, the employer must provide them with a health plan so that they can be eligible for COBRA once they leave. This is required unless the employer has ceased operations or the number of employees has decreased below 20. In this case, the former employee may not be eligible for COBRA.
The qualifying event must result in the employee losing his or her health insurance. The list of qualified beneficiaries is determined by the type of qualifying event, and conditions differ for each type of beneficiary.
An eligible employee for COBRA must respond these requirements:
- Job loss, either voluntary or involuntary, particularly in times of crisis, such as Covid-19, 2020. This does not apply in cases of willful misconduct.
- A reduction in the number of hours worked, resulting in the loss of employer insurance coverage
In addition to the employee’s two qualifying events (described above), the spouse may be eligible for COBRA insurance if the following conditions are met:
- The covered employee becomes entitled to Medicare
- Divorce or legal separation from the covered employee
- Death of the covered employee
The qualifying events for dependent children are similar to those for the spouse, with one exception: according to the plan rules, loss of dependent child status.
The plan must be notified within 30 days of the qualifying event that applies to the employee. If the qualifying event is divorce, legal separation, or the loss of dependent status of a child, the employee or beneficiaries must notify the plan.
COBRA Benefits and Available Coverage
COBRA rules ensure that qualified candidates receive the same coverage as current employees. Changes to active employees’ plan benefits also apply to eligible beneficiaries. All eligible COBRA recipients must have the same options as non-COBRA recipients.
Essentially, the current employee / beneficiary coverage is identical to the COBRA-based employee / beneficiary coverage. Choosing whether to renew insurance takes at least 60 days. Even if you choose not to enroll in coverage, you have 60 days to change your mind.
COBRA coverage is limited to 18 or 36 months from the date of the qualifying event, depending on the applicable scenarios. If any of the qualified beneficiaries in the family is disabled and meets certain requirements, or if a second qualifying event occurs—which could include the death of a covered employee, the legal separation of a covered employee and spouse, a covered employee becoming eligible for Medicare, or a loss of dependent child status under the plan—the 18-month maximum period of continuation coverage can be extended.
Cost of COBRA Health Insurance
Group rates may appear to be a bargain, but they can actually be more expensive. During their employment, employees frequently pay 80 percent of their health insurance premiums, while on their own plan they pay 20 percent.
The employee pays the entire premium, which is sometimes supplemented with an additional 2% for administrative costs. In most cases, the cost of coverage for employees who have not had a qualifying event cannot exceed 102 percent of what those who have had certain events, such as marriage or birth, pay.
As a result, despite the availability of group rates for the COBRA continued plan during the post-employment period, the cost to the ex-employee may be significantly higher 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 coverage is frequently less expensive than other individual health plans, and it’s critical to compare that cost to what the former employee may be eligible for under the Affordable Care Act. In order to determine whether or not this option makes sense, the employer should provide precise details on their own human resources department about how much a month will be.
Those who lost their health insurance due to a job loss during the 2020 economic crisis were eligible for a “special enrollment” period on the federal exchanges, which gave them 60 days to sign up. That could have been an attempt to find a less expensive insurance option than COBRA.
Early Termination of COBRA Health Insurance
COBRA coverage may be terminated prematurely in the following circumstances:
- Failure to make timely premium payments
- Employer discontinues all group health plans
- A qualified beneficiary who gains coverage under another group health plan (for example, through a new employer), becomes eligible for Medicare benefits, or engages in misconduct (such as fraud)
Pros and Cons
COBRA coverage continuation is critical for those enrolled in COBRA. The individual can continue to see the same physician, health plan, and medical network providers that they had before leaving their job or business relationship, so make sure to inform them of any special requests when scheduling appointments.
A potential COBRA beneficiary can also investigate whether they are eligible for public assistance programs such as Medicaid or other state or local programs. However, such plans may be limited to low-income individuals and may not provide the best care and services in comparison to other plans.
COBRA has significant drawbacks. First, it is costly to maintain, and the individual must pay for their own insurance coverage; second, once you opt out, your employer will no longer offer this option, leaving former employees/related beneficiaries without access if they are not already covered elsewhere; and finally, there isn’t much wiggle room when applying due periods after leaving an organization.
If the employer changes the health insurance plan, a COBRA beneficiary must accept the changes, even if the new plan does not meet the individual’s needs. A new plan may alter the coverage period and number of available services, as well as increase or decrease deductibles and copayments.
For these reasons, individuals eligible for COBRA coverage should weigh the benefits and drawbacks of COBRA against other available individual plans in order to find the best fit.
Healthy people should consider a low-cost healthcare discount plan. However, these plans do not count as insurance coverage, which can make it difficult to obtain health insurance in the future because enrolling in one of these plans means that insurance coverage has been interrupted.
Managing a High COBRA Premium
If you’re considering COBRA coverage but are concerned about the cost differences between insurance coverage through this program and insurance coverage with the support of an employer, there are a few things to keep in mind.
When you lose your job, you usually lose your flex spending account as well (FSA). If you are about to lose your job, you can spend your entire year’s contribution to the FSA before you lose your job. If you planned 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 the entire $1,200—say, by seeing all of your doctors and filling all of your prescriptions right away.
If you choose COBRA, you can switch to a less expensive plan, such as a preferred provider organization (PPO) or health maintenance organization, during the employer’s annual open enrollment period (HMO).
If available, qualifying individuals can use a refundable tax credit known as the Health Coverage Tax Credit (HCTC) to pay up to 72.5 percent of qualified health insurance premiums, including COBRA continuation coverage. The HCTC program was set to expire on December 31, 2020, but the Internal Revenue Service (IRS) has extended it until December 31, 2021.
Tax breaks may also help to alleviate the financial burden of higher premiums. You can deduct COBRA premiums and other medical expenses that exceed 7.5 percent of your adjusted gross income (AGI) on your federal tax return when filing your annual tax returns (but you must itemize your deductions on Schedule A).
You can save even more money by switching to generic drugs or purchasing larger quantities at a discount, as well as visiting a low-cost community or retail clinic for basic healthcare services.
Finally, you can use the funds in your health savings account (HSA) to pay COBRA premiums as well as medical expenses, potentially alleviating the pain of losing your health insurance benefits.
It is critical to note that timely payment of COBRA premiums is required to maintain coverage for the duration of your eligibility. Failure to make the initial premium payment within 45 days of the date of your COBRA election may result in the loss of your COBRA rights. Payment is typically intended to cover a retroactive period, beginning with the date of loss of coverage and ending with the qualifying event that established eligibility.
If you fail to make your COBRA payments on time but do so within the grace period for that period of coverage, your coverage may be canceled until payment is received, at which point it will be reinstated.
Government Jurisdiction Over COBRA
COBRA coverage is administered by a number of federal government agencies. The Departments of Labor and Treasury currently have authority over private-sector group health plans, while the Department of Health and Human Services is in charge of public-sector health plans. These agencies, however, are not always heavily involved in the process of applying for COBRA coverage or other aspects of the continued coverage program.
The regulatory responsibility of the Department of Labor includes the disclosure and notification of COBRA requirements as required by law. In addition, the Centers for Medicare and Medicaid Services provides information on COBRA provisions for government employees.
The American Recovery and Reinvestment Act of 2009, which President Biden signed into law on March 11, 2021, included a provision that provided a 100 percent subsidy of COBRA premiums beginning April 1, 2021, and ending September 30, 2021. Employers recoup their Medicare premiums through tax credits.
President Biden signed the American Rescue Plan Act of 2021 into law on March 11, 2021, and it includes a provision that provides a 100 percent subsidy of COBRA premiums beginning April 1, 2021, and ending September 30, 2021. Employers recoup their Medicare premiums through tax credits.
If you lost coverage due to a reduction in hours or an involuntary termination of employment, you are eligible for the COBRA premium subsidy. Your employer must consider “assistance-eligible individuals” who have COBRA coverage during the six-month subsidy period to have paid all of their premiums. If you are eligible for another group health plan or Medicare, you will lose your eligibility for the COBRA subsidy. If you do not self-report your eligibility for other coverage to the COBRA plan, you will face a tax penalty.
Applying for COBRA Health Insurance
To begin COBRA coverage, an individual must confirm that they are eligible for assistance based on the criteria outlined above.
Typically, an eligible individual will receive a letter outlining COBRA benefits from either an employer or a health insurer. Some people find this notification difficult to understand because it contains a lot of legal information and language.
If you are unsure whether you are eligible for COBRA or how to begin coverage under this program, contact the insurer or the HR department of your former employer.
There are other options for people who are not eligible for COBRA or who are looking for alternatives. A spouse’s health insurance plan may be an option in some cases. Alternatively, you could look into your options on the federal health insurance marketplace or a state insurance marketplace. The loss of a job triggers a special enrollment period.
Medicaid programs and other short-term policies designed for those experiencing a gap in health coverage, as mentioned above, may also be available to you.
Individuals who choose to go uninsured are typically discouraged by health insurance professionals because the possibility of severe consequences is high—especially during an uncertain time. Individuals who are eligible for COBRA coverage have at least 60 days to choose whether or not to participate in the program.
The Bottom Line
COBRA is a convenient option for retaining health insurance if you lose your employer-sponsored 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.