What is COBRA and How Does It Work?

What is COBRA and How Does It Work?

Updated October 27, 2020
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What is COBRA and How Does It Work?

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COBRA coverage is expensive, but it provides continuance of your health insurance coverage if you lose your job.

If you lose your job or go down to part-time, you may find yourself without benefits – most notably, health insurance. Luckily, the Consolidated Omnibus Budget Reconciliation Act of 1985 (better known as COBRA) offers the option to continue healthcare coverage, provided you are willing to pay for it out of your own pocket.

How Does COBRA Work?

Employers who offer health insurance as a benefit will typically pay a portion of the coverage cost, whether just for you or the whole family. Typically this is only offered for full-time employees who work above a threshold number of hours (usually 32 hours or more per week). If you are no longer eligible for benefits – whether due to a reduction in hours or getting laid off – your employer won't offer the same benefit. COBRA gives you the option to keep the coverage, but at your expense. In other words, you must cover the entire premium, not just the portion your employer is not paying on your behalf – and then some.

Typically, when you opt for COBRA coverage, you pay 102% of the premium amount. The additional 2% will cover the administrative cost incurred for providing health insurance. You typically have up to 60 days after your benefit eligibility changes to decide if you want to accept the coverage. If you decide to continue benefits through COBRA, your coverage date will be retroactive to the date you separated from your employer.

Who Qualifies For COBRA Coverage?

Three things need to be in place for you to be eligible or COBRA coverage:

  1. Your plan must be covered by COBRA. Only employers with more than 20 employees must offer it by law, but there are a few loopholes around it. Find out if your plan offers it before moving forward.
  2. There must be a qualifying event. Typically, you must have lost your job for a reason other than gross misconduct. The list of qualifying events includes quitting your job (you don't have to be let go), a loss of hours, divorce, and death of the policyholder.
  3. You must be the policyholder or covered beneficiary before the qualifying event. For example, you can't add a spouse that wasn't on the policy before you lost your job.

How Much Does COBRA Cost?

Just as every policy has a different cost, so does the COBRA Coverage. If you aren't sure of your insurance premiums' full cost, find out the percentage your employer covers. You'll then have an idea of the general cost. Most companies also charge an 'upcharge' for administrative costs relating to COBRA. The average is 2%, but it could vary.

How Long Does COBRA Coverage Last?

The length of COBRA coverage depends on the qualifying event that preceded coverage. Employees that lost their job or lost hours can usually continue coverage for 18 months after their last day of coverage. The same duration applies to the policyholder as well as any previously covered beneficiaries.

Other things that can affect how long COBRA coverage lasts:

  • If the employee becomes covered by Medicare, the spouse and any covered dependents can maintain COBRA for 36 months
  • If the employee and spouse divorce, the spouse and any covered dependents can maintain COBRA coverage for 36 months
  • If the employee dies, the spouse and covered beneficiaries can maintain COBRA for 36 months
  • If the employer no longer covers dependent children, you could opt for COBRA coverage for that child for 36 months

How Does COBRA Compare to Regular Insurance?

COBRA coverage is the same as your regular coverage while you were employed. You may have the option to keep other coverage options, such as vision or dental insurance too. If you opt-in, you continue the same coverage with the same deductible, co-pays, and maximum out-of-pocket amounts.

Ultimately, the most considerable difference between COBRA and 'regular insurance' is the premiums you'll pay. It may be worth checking the marketplace for other plans to have something to compare to, especially if you are looking to cut costs. You may find that the COBRA plan costs just as much as a new insurance policy, but it's worth checking.

Putting premiums aside, COBRA insurance and regular insurance will have similarities, including:

  • A certain deductible
  • A specific co-pay amount for each type of medical visit
  • Illnesses, procedures, and medical visits that are and aren't covered

The Pros and Cons of COBRA Insurance

Pros Cons
You keep the same insurance you have and are used to using. The premiums are usually very high.
You don't have to worry about a lapse in coverage. It's only temporary coverage.
You don't have to worry about being denied for a pre-existing condition. If you move out of state, you'll likely lose your benefits.

COBRA Alternatives

Since COBRA is costly, you may want to explore your alternatives:

Marketplace Insurance

Shop the marketplace at www.healthcare.gov to see what options you have. Make sure you compare the deductibles, premiums, co-pays, and covered services before switching. Don't just jump at the first policy that has a lower premium. A lower premium is usually associated with a plan that has a higher deductible or less coverage.

Become a Dependent

If your spouse works for a company that offers group health insurance, you may be able to become his/her dependent. Losing your job is a qualifying event that may allow you to become a dependent on their insurance even if outside of the open enrollment period.

Apply for Medicaid

Check out the income requirements for Medicaid in your area to determine if you qualify. Even if it's temporary, it may be a much more affordable alternative while you figure things out.

Does COBRA Automatically Kick In?

No. You will not be automatically enrolled in COBRA continuation coverage. Rather, your employer must let the plan administrator know of the qualifying event within 30 days of occurrence. Once the plan administrator receives notice, they have 14 days to send you information about your COBRA options. You then have 60 days to decide whether you want to opt-in or not. If you do, you must send payment by the due date or risk losing the option to take COBRA coverage.

It might be expensive, but COBRA may offer you the continuation of coverage you need while you look for another job or wait for your new coverage to start. But look at all of your options to make sure you choose the option that makes the most financial sense and provides the coverage that's right for you.