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COBRA: Health Insurance that Works When You're Not
Losing a job doesn’t have to mean losing health insurance benefits.
COBRA is an acronym for Consolidated Omnibus Budget Reconciliation Act. COBRA allows an employee to retain their company health insurance for a period of time after job loss (or other qualifying events). Beneficiaries of COBRA are typically required to pay the full amount of the monthly group premium.
Job loss means more than just a loss of income. It also means a loss of health coverage for you and your family.
That's where COBRA health insurance can help. COBRA is a program that extends coverage under the company's group plan for employees and their families upon the occurrence of qualifying events (voluntary or involuntary job loss, reduction in hours, divorce, death, etc.).
This type of coverage, referred to as “continuation” or “continued” coverage, lasts for a period of time to provide a temporary bridge until the beneficiary is able to obtain health insurance again through another means.
COBRA is a federal law that was first enacted in 1986 and then revised in 1999. The law allows employees and their dependents to remain covered under their company sponsored health insurance during a period of time in which they would otherwise lose their benefits.
In order to receive coverage under COBRA, an employee must experience a “qualifying event.” Examples of qualifying events include:
- Termination of employment for any reason other than gross misconduct
- A reduction in the number of an employee’s scheduled hours that eliminates their status as a full-time employee
For the dependents of the employee, COBRA coverage can be obtained through each of the above reasons as well as:
- The employee becoming eligible for Medicare
- A divorce or legal separation from the employee
- Death of the employee
For all above scenarios, the employee must have been enrolled in the company health insurance plan at the time of the qualifying event and the plan must still be in effect for other active employees.
What Does COBRA Cover?
Continuation coverage under COBRA must be identical to the benefits you were receiving at the time of the qualifying event. In addition, any choices or options made available to active employees under the company plan, such as the right to choose different plan options during open enrollment, must also be made available to you.
How Long Does COBRA Last?
The coverage period for COBRA insurance can last up to 36 months, depending on the type of qualifying event. For employees who are terminated or whose hours are reduced below full-time status, COBRA coverage is good for up to 18 months.
If granted 18 months of COBRA coverage, you may extend the coverage under one of two circumstances:
- When a beneficiary is disabled—if a beneficiary is eligible for Social Security disability benefits, he or she may receive an 11-month extension for 29 total months of COBRA coverage.
- When a second qualifying event occurs—if a second event occurs that would have caused a beneficiary to lose coverage in the absence of the first event, an 18-month extension may be granted.
Continued coverage may be terminated prior to the end date for any of the following reasons:
- The employer terminates the company health plan
- Premiums are not paid in full on a timely basis
- A beneficiary begins coverage under a different plan or becomes entitled to Medicare
- A beneficiary engages in “gross misconduct”
If coverage is terminated early, the plan administrator must provide the beneficiary with notice describing the termination date, reason for termination and any rights the beneficiary may have according to the plan or the law. If you experience an early termination, don’t wait too long to find new coverage. The penalty for not having qualified health insurance is high—and growing.
Which Companies are Required to Provide COBRA?
COBRA requirements pertain to group health insurance plans sponsored by any company that had at least 20 employees on at least 50 percent of its business days during the previous year. Part-time employees are counted as a fraction of an employee equal to the number of hours worked divided by the numbers of hours required to be considered full-time.
Paying for COBRA Benefits
Here comes the catch. Most employees don’t realize how much of their monthly premium is being paid by their employer. Depending on the terms of the health plan, beneficiaries of COBRA usually have to pay the full amount of premiums of the coverage themselves, not to exceed 102 percent of the cost required of active employees. For beneficiaries receiving an 11-month extension, the cost may be increased to 150 percent.
Employers can pay for COBRA either partially or in full for employees and their dependents as part of a severance agreement, although this practice is rare.
Rates for beneficiaries typically must be fixed in advance of each 12-month premium billing cycle, but under certain circumstances, rates for beneficiaries may rise according to any changes in the overall cost of the plan.
So in a nutshell, at a time when income drops, insurance premiums go up. A lot of employees have a hard time affording COBRA because premiums often absorb a large portion of their unemployment check.
This was supported by recent data collected by the Kaiser Family Foundation and reported by National Public Radio in 2013. It was determined that the average monthly cost of a company-sponsored health insurance plan is $490 per individual but the average cost to the employee is just $83. Upon enrolling in COBRA however, that employee who had been paying $83 per month is now left with the full $490 price tag.
Meanwhile, Avalere Health found that the average cost of a mid-level plan in the open marketplace was $336, considerably more affordable than COBRA. So, shopping for an individual plan could mean savings in a time when bills are adding up. Since licensed agents can help you check your subsidy eligibility, and help you compare plans, getting some help finding a plan could help you even more.
Health Coverage Tax Credit
Some individuals may be eligible for the Health Coverage Tax Credit (HCTC). This federal tax credit helps qualified recipients pay for certain health coverage plans, including COBRA.
Qualified recipients of the Health Coverage Tax Credit include those who lost their jobs due to negative effects of global trade and are therefore eligible for benefits under the Trade Adjustment Assistance (TAA) program. Those receiving pension payments from the Pension Benefit Guaranty Corporation (PBGC) may also be eligible.
The HCTC is good for 72.5 percent of the cost of premiums with the beneficiary being responsible for the remaining 27.5 percent.
Alternatives to COBRA
Should you experience a qualifying event that makes you eligible for COBRA benefits, keep in mind that this is not your only option for health insurance. You may have other health insurance options available to you on the open marketplace that are more affordable with more individualized coverage.
Before electing for continued coverage through COBRA, it is wise to explore the marketplace to see what other plans you may enroll in. At HealthMarkets, we have thousands of plans to choose from nationwide and our team of licensed agents is standing by ready to help you find coverage for you and your family.
Michael Z. Stahl, an entrepreneurial leader and insurance expert, recently wrote about the importance of not just settling for COBRA.
“Generally, group coverage ends with employment. If the individual chooses, they can continue their plan for a limited time with COBRA. However, the individual would be fully responsible for up to 102% of the cost of the plan. This means that the employer would no longer cover a percentage of the plan, and the plan may cost 2% more.
In contrast, individual insurance plans continue coverage with no regard to change in employment.”
Employees who lose their jobs and become eligible for COBRA are also eligible for a special enrollment period in health insurance through the open marketplace. Special enrollment means you do not have to wait for the annual open enrollment period to purchase a plan.
Another alternative to COBRA is Medicaid. Losing a job typically means a loss of income, and this financial strain can leave one eligible for free or low-cost health insurance under Medicaid.
Lastly, short-term health insurance provides a temporary solution for someone who is “between health insurance plans.” Short-term, or temporary insurance, provides basic coverage but does not meet the requirements of the Affordable Care Act. This means that it will provide you with coverage, but it will not protect you from paying tax penalties.
Applying for and Enrolling in COBRA
If you become eligible for COBRA due to a qualifying event, you must be provided with a 60-day election period to decide whether or not you wish to enroll. Instructions for how to enroll in COBRA must be provided in writing to qualified beneficiaries under the rules of the plan.
There are stiff penalties for companies that fail to adhere, including fines of up to $100 for each day the beneficiary is not notified of their eligibility and even a revocation of the company’s tax deductions for its group health insurance plan.
Beneficiaries and their qualified dependents do not have to enroll together; they are free to acquire COBRA benefits independently of one another.
Losing a job doesn’t have to mean putting you or your loved ones in jeopardy. COBRA continued coverage, Medicaid, or an affordable individual health insurance plan can help provide peace of mind during this turbulent time.
Contact one of our agents today to learn more about how we can help save you time and money on your health insurance.
About the Author: Nina Prince
Nina is a writing ninja (7+ as a consumer advocate)! She is an American foreigner. Avid reader. Unskilled gamer. Falls down a lot. Travel enthusiast. Always honing her craft with a smile.
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