COBRA refers to a health insurance option that can help you and your family stay covered after you no longer qualify for an employer’s group plan. This can happen either because you’re no longer employed, or because your work schedule has dropped below the minimum number of hours per week needed to receive those benefits. With COBRA, you continue to receive your health insurance benefits for a period of 18 to 36 months.
The catch? The employer is no longer required to subsidize the policy premium. Instead, you pay the full cost of coverage. This can be quite expensive — several times what you paid as a regular participant in the group plan. COBRA is thus intended as a “bridge” to ensure you have coverage until you find another job with an employer offering group health insurance, or get insured via another method.
Let’s take a look at COBRA, including how it works, what it costs, and some possible health insurance alternatives.
What is COBRA?
COBRA is an acronym derived from the Consolidated Omnibus Budget Reconciliation Act. This was a law passed by the U.S. Congress in 1985 that addressed a wide range of issues, many of which had nothing to do with insurance. However, one of its provisions specified that companies with at least 20 employees, and that provide group health insurance, must offer “continuation coverage” to qualified employees after they become ineligible for the group plan. The employee, for their part, must be willing to pay the full premium.
The COBRA insurance provision has been modified slightly over the years. But it continues to be relied upon by many Americans who find themselves suddenly without coverage due to changes in their employment.
How COBRA works
Under COBRA, companies that offer group health insurance must offer continuation coverage to you, your spouse and/or former spouse, and your dependent children if you are no longer eligible for the company’s plan.
This is subject to three eligibility criteria: Your company’s group health plan must be covered by COBRA, a qualifying event must occur, and you must be a qualifying beneficiary. Here’s how that breaks down.
- Plan coverage: COBRA applies to employers that had at least 20 employees for at least 50 percent of its typical business days in the previous calendar year. A part-time employee is counted as a fraction of a full-time employee based on their number of hours worked (for example, someone who works 20 hours a week counts as one-half of a full-time employee).
- Qualifying events: COBRA applies if you lose coverage under your employer’s group health plan due to termination of employment for any reason other than gross misconduct, or due to your work hours being reduced below the minimum needed to qualify for the plan. A spouse or dependent child may also qualify in the event you become entitled to Medicare or get a divorce. A child who loses dependent status, but is under the age of 26, also qualifies.
- Qualified beneficiary: An individual covered by the employer’s group health plan on the day before the qualifying event occurs.
When a qualifying event happens, the insurance company must be notified. How this notification happens depends on the type of qualifying event: If the event is an employment termination, hours reduction, death, or Medicare eligibility, then the employer will handle it. If the event is a divorce or child’s loss of dependent status, you must notify the insurer.
Once the insurance company is notified, and if you meet COBRA’s eligibility criteria, you’re sent an election notice outlining your coverages, costs, and other information. You have 60 days to choose whether or not to elect COBRA continuation coverage. If you initially choose to waive (decline) the coverage, you can later revoke that waiver and elect the coverage as long as the revocation happens during the 60-day period.
Regardless of when in the 60-day period you elect COBRA, your coverage is retroactive to the first day you were no longer eligible for the employer’s group health plan.
COBRA insurance benefits
One of COBRA’s advantages is that you can continue to receive the same benefits you enjoyed under the company’s group health plan. You’re also entitled to the same benefits, choices, and services as any regular plan participant, such as the opportunity to choose coverage options and healthcare provider networks during the company’s open enrollment period. Of course, you’re subject to the same rules and limits, such as copays, deductibles, coverage limits, and claims processes.
Your coverage can be terminated for a variety of reasons.
- You fail to pay premiums on time.
- The employer ceases its group health plan.
- A qualified beneficiary begins coverage under another group health plan, or qualifies for Medicare.
- A qualified beneficiary engages in an activity such as fraud, or other conduct that might reasonably justify termination of coverage.
How long does COBRA continuation coverage last?
Under COBRA, the employer’s group health plan is required to provide continuation coverage for a limited period of either 18 or 36 months (assuming coverage isn’t terminated for one of the reasons listed above).
The length of time depends on the type of qualifying event. When the qualifying event is a termination of employment or reduction of hours, you’re entitled to 18 months of coverage. If, however, you become eligible for Medicare benefits less than 18 months before that qualifying event, your COBRA coverage can last until 36 months after your Medicare eligibility date.
There are also two situations in which you can extend the 18-month coverage period. One is if you or any of the qualified beneficiaries in your family becomes disabled. In this case, you may be entitled to an additional 11 months of coverage. The other situation is if you experience a second qualifying event; for instance, if you divorce during the 18-month period. In this case, you may be entitled to a second 18-month period, for a total of 36 months of coverage.
Paying for COBRA continuation coverage
In most cases, the employer’s group health plan requires you to pay for COBRA continuation coverage. By law, this cannot exceed 102% of the premium cost for a regular plan participant (the extra 2% may be factored in for additional administrative costs). You can expect to make your first payment within 45 days of your COBRA election. The plan must allow you to pay in monthly installments, and may allow other payment intervals, such as weekly or quarterly.
COBRA continuation coverage tends to be expensive. According to a 2020 report by the Kaiser Family Foundation (KFF), average COBRA annual premiums are $7,188 for a single person and $20,576 for a family of four.
Again, COBRA isn’t designed as a long-term insurance solution. It’s intended to be a bridge that ensures you and your family can stay covered for what is hoped to be a short time between employment, or until you can line up an alternative source for health insurance (more about that below).
But with all that in mind, there are a few strategies you can follow to help manage your COBRA costs:
- Choose a less expensive provider network, such as a preferred provider organization (PPO) or a health maintenance organization (HMO) during your company group plan’s open enrollment period. You can also consider choosing a high deductible plan, if available.
- See if you qualify for the Health Coverage Tax Credit, which can pay up to 72.5% of qualified health insurance premiums. This is a federal tax credit designed to aid workers who lose their jobs due to negative effects of global trade. Note that it’s set to expire on December 31, 2021.
- You may be able to claim COBRA premiums and other medical expenses as a deduction on your federal tax return. Your tax preparer can advise you on this.
- If you have a Health Savings Account (HSA), you can use it to help pay your premiums. HSA funds can also be used to pay for qualified medical, dental, vision, and prescription drugs. Additionally, with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, HSA funds can be used to pay for over-the-counter prescriptions.
Some alternatives to COBRA
Because of the relatively high cost of COBRA continuation coverage, you owe it to yourself to review other healthcare insurance options.
Your spouse’s group health plan
If your spouse works for a company that provides a group health insurance benefit, it may be worth checking to see if you can be insured on their policy as a dependent.
Note that you might not be able to enroll until the company’s open enrollment period. This usually takes place near the end of a calendar year, for coverage in the following year.
Short term health insurance
Sometimes referred to as temporary health insurance, this is coverage that lasts for a limited term (generally one to 12 months) that you choose. Depending on the provider, you may be able to get coverage quickly, and it may be much cheaper than COBRA. You may also be able to drop the coverage before the end of the chosen term, with no penalty, if you find a job and are able to participate in your new employer’s group health plan.
Note that short term insurance plans do have some limitations. They generally don’t cover pre-existing conditions. They may also not cover things such as maternity/newborn care, mental health, and substance abuse issues. You should check the plan’s details carefully to make sure it’s right for you.
Insurance purchased through a government-run exchange
You can try shopping for a health insurance policy on a government-run online exchange. The US federal government’s exchange is at healthcare.gov. Your state may have one as well (as of 2021, 15 US states had one).
Insurers selling on these exchanges are required to offer multiple policies with varying levels of coverage at corresponding premiums, to help you save money. They’re also required to provide the 10 essential healthcare benefits with all policies.
Another advantage is the availability of tax credits and cost sharing reductions (government subsidies for qualifying applicants). These credits and subsidies can help bring down your total cost.
Insurance purchased outside of a government-run exchange
You can also buy directly from a health insurance company; through a health insurance agent or broker; or through an online, independent, health insurance marketplace.
Companies selling policies this way are not required to provide multiple prices. While this means you’ll have fewer options, it may also mean you can find a policy cheaper than any of the options on the government run exchange. Note, however, that you’ll be ineligible for any tax credits or subsidies.
Contact an agent
Finally, you might want to consider contacting an agent or broker who offers healthcare insurance. Agents are trained and licensed by the state to provide personalized service and counsel, typically at no cost to you. If you’re using the federal government’s health insurance exchange, you can also talk to an “assister,” which is a certified insurance expert who can help you navigate your options.
COBRA’s pros and cons
Once you weigh everything — the costs, the coverages, the other benefits — you may indeed find that COBRA continuing coverage is your best insurance option. So as you consider your choices, just keep these pros and cons in mind.
- You can keep the same doctor, health plan, and network providers you used when you participated in your employer’s group plan.
- You retain coverage for existing conditions and prescription drugs.
- Considering the high cost of medical services, it’s probably a better option than being uninsured.
- High cost: Because the employer is no longer obligated to subsidize coverage, you may end up paying the full premium.
- COBRA offers just a limited period of coverage — 18 to 36 months, depending on your situation.
- You’ll remain dependent on the employer. So if they decide to make changes to their group health plan (or discontinue it altogether), you’ll need to accept these changes.
Frequently asked questions
How do I qualify for COBRA?
You may qualify for COBRA if all of the following apply:
- Your employer has a group health plan, and
- Employed at least 20 people for 50 of its typical workdays in the prior year, and
- Your employment is terminated or your work hours dip below what is required to be a regular participant in the group health plan.
Does my employer have to offer me COBRA?
If both the employer and you meet COBRA’s qualification criteria, then it must offer you the COBRA option.
Is it worth it to get COBRA insurance?
It depends on your insurance needs, and what other coverage options are available to you. While COBRA is often quite expensive (and more expensive than other options), it does offer some advantages, such as the ability to continue with your same doctor and health plan. You should review multiple health insurance options to decide if buying COBRA continuing coverage is worth it to you.
Does COBRA continuation coverage start immediately?
Yes. If you qualify for COBRA, you’ll have 60 days from the end of your participation in your employer’s group health plan to elect it. Once you elect COBRA, coverage is retroactive to the first day you’re no longer a regular participant in the group plan.
The following example should help illustrate this:
Let’s say your employment ends on June 30, so starting July 1 you’re no longer a participant in the employer’s group health plan. Your company offers you COBRA, and gives you 60 days (until August 30) to make your election. On July 15 you contact the group plan and let them know that you’re electing COBRA. The coverage will go into effect, and be retroactive to July 1.
Why is COBRA so expensive?
COBRA is expensive because in most cases, the employer is no longer subsidizing your insurance premium. Instead, you’re paying the full premium, which can increase your costs several fold.
According to a 2020 report by KFF, the national average employee contribution to a group health plan was only about 17% of the total premium for single coverage and 27% of the premium for family coverage, while the employer subsidy pays for the remaining 83% and 73 respectively. When you elect COBRA, you pay 100% of the premium yourself.
- If you’re no longer eligible for an employer’s group health plan, you may be able to continue your coverage for 18 to 36 months though COBRA.
- COBRA tends to be expensive, but there are some things you can do to help manage those costs.
- If COBRA isn’t right for you, there are other options. These include shopping for policies through an online marketplace, or contacting an agent who sells health insurance.
Losing a job is often a very stressful experience. Among the many things you now have to think about is what to do about health insurance. COBRA may help ease your mind a bit. It’s designed to help you stay insured while you look for new employment.