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What is COBRA Insurance

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After you quit or lose a job, you can temporarily continue your employer-sponsored health insurance coverage through a federal law known as COBRA.

But here's the catch: You have to pick up the entire tab, plus up to 2% for administrative costs. Prepare for sticker shock if you're accustomed to the employer paying the premium.

Congress passed the Consolidated Omnibus Reconciliation Act two decades ago to give families an insurance safety net. Before then, people who lost health insurance had to try to find affordable individual insurance, which wasn't easy. Oftentimes, that was impossible -- especially if you had any pre-existing conditions. People often got turned down or faced exorbitant premiums.

There are now more options under the Affordable Care Act (ACA). The ACA created health insurance exchanges that allows people to shop for an individual plan. People with an ACA plan also qualify for subsidies to help pay for premiums if they meet household income guidelines. 

However, there still only one way to keep your employer-sponsored coverage after losing your job -- COBRA. COBRA lets you do that for up to 18 months. Also, your spouse and dependents in some cases can stay covered for up to three years.

You can elect COBRA for you and your family if you otherwise would lose coverage because:

  • You quit your job.
  • You were fired, unless it was for "gross misconduct."
  • Your hours were reduced.

In addition, dependents can elect COBRA if they lose eligibility for coverage because of:

  • Death of the covered employee
  • Age -- an adult child turns 26 and can no longer stay on a parent's plan
  • Divorce or legal separation from the covered spouse
  • Eligibility by the covered employee for Medicare.

Keep in mind that you must be covered by the employer-sponsored plan at the time of your job loss or other event. If not, you aren't eligible for COBRA.

How does COBRA work?

COBRA lets you extend your former employer's health plan. You benefit from the same coverage, though your former employer stops contributing money to pay for coverage. 

COBRA applies to private-sector companies with 20 or more employees as well as state and local governments. Some states also have "mini-COBRA" laws that apply to employers with fewer than 20 workers.

The employer must notify the health plan within 30 days if you lose or quit your job, die or become entitled to Medicare. You have 60 days to decide whether to sign up for COBRA. 

If you have a family health plan, not all family members have to enroll in COBRA. For instance, you can waive the option, but your spouse and kids could still elect COBRA, or vice versa.

If you waive COBRA coverage, you can revoke the waiver later -- as long as you're still within the 60-day election period. The coverage is retroactive to the qualifying event, as long as you pay the premiums retroactively.

You can also cancel COBRA coverage at any time -- you're not locked into an 18-month commitment when you sign up.

COBRA coverage ends if you:

  • Reach the end of your coverage period
  • Stop paying premiums
  • Become eligible for Medicare

COBRA coverage also ends if the employer:

  • Goes out of business
  • Stops offering health insurance benefits to workers

If the employer simply changes health plans, you can switch to the new plan like everybody else, but you can't keep the old plan.

How much does COBRA cost?

COBRA requires you to pay 100% of the health insurance costs plus up to 2% adminstrative fee. You no longer get any help from your former employer. 

How much COBRA costs varies by how much the plan costs the employer. The average annual employer-sponsored health insurance costs for family coverage is more than $20,000. Employees usually pick up well less than half -- the employer pays the rest. However, with a COBRA plan, the former employee has to pick up all the costs -- oftentimes, four times what the former employee was paying in premiums for coverage when employed. 

COBRA is pricey, but there are some possible avenues to help. One possibility is to use Health Savings Account (HSA) to help pay for COBRA. HSAs are found in high-deductible health plans. These savings accounts let people save tax-free money for health care costs. Those costs include COBRA. 

Another option is federal income tax credits, but eligiblity is limited. The U.S. Department of Labor offers a Health Coverage Tax Credit (HCTC) for people who lose their jobs because of the “negative effects of global trade.” The HCTC pays 72.5% of premiums. If you’re eligible, the HCTC could help make your COBRA premiums similar to what you were playing when you were employed.

COBRA coverage alternatives

Consider all your options before you elect COBRA coverage. You could find a more affordable deal elsewhere.

Here are your choices besides COBRA:

  • Buy a health plan through the health insurance marketplace. Losing employer-sponsored coverage entitles you to purchase coverage outside the normal open enrollment period -- and there's no question of qualifying. Under the health care reform law, insurers can't charge much higher premiums or reject your application because of your health. You might also be eligible for financial assistance to purchase a marketplace plan if your income falls below 400% of the federal poverty level. That's about $103,000 for a family of four. 
  • Buy a health plan through an insurance agent, insurance company or website. (See “How to buy an individual health insurance plan.”) You can buy an ACA-compliant health plan with benefits that match those offered in the marketplaces, but you can't get a subsidy or tax credit if you buy outside the marketplaces. On the other hand, you may find plans not offered in the marketplaces with more convenient provider networks, your preferred doctors or benefits that go above and beyond what marketplace plans provide.
  • Sign up for coverage with your new employer when you get another job.
  • Ask your spouse to add you as a dependent on his or her employer-sponsored plan.
  • Check whether your children are eligible for coverage through the federal and state Children's Health Insurance Program, a federal and state health insurance program for low- and moderate-income families.
  • Buy a short-term health plan. These low-cost plans don't provide nearly the same level of protection. For instance, you might have trouble finding a short-term plan that covers prescription drugs and mental health care.  These plans are good for a year and you can renew two more times. A handful of states forbid the sale of short-term plans and more states restrict how long you can keep a short-term plan. 

If you decide on a COBRA alternative, make sure to check the provider networks and what's covered. You likely won't want to lose your doctor and certain protections you've come to expect in your employer-sponsored plan.