How Does COBRA Work

Understanding how COBRA works can help you figure out how to keep health coverage after you're terminated from your job.

What is COBRA?

The Consolidated Omnibus Budget Reconciliation Act (COBRA) was passed by the U.S. Congress in 1985 to address those losing health benefits as a result of termination of employment. It is considered gap coverage to ensure that you have health insurance when you are in-between jobs or have otherwise lost benefits.

This federal law gives an employee the ability to pay the premiums that his employer was paying to be able to keep the group health insurance coverage offered by the previous employer. Whether your work hours have been reduced and you no longer qualify under a company's policies, were fired, or quit you can pay your employer's contribution in addition to your own to continue coverage.

Devised to amend the Employee Retirement Security Act, a federal law that established standards for pension plans among other things, COBRA is meant to offer extended coverage that otherwise may have expired.

While COBRA was signed into law in 1985, it didn't officially go into effect until 1986. That's why you will sometimes see it referred to as the Consolidated Omnibus Reconciliation Act of 1986. It has given former employees to retain plans and rates for their spouses and dependents.

While convenient, COBRA is not the only option for maintaining coverage. Health insurance is obviously a household necessity, not only for families but for those who also have major illnesses. COBRA gives you the opportunity to keep the same health insurance that you had with your employer, but you're also required to pay your employer's portion for that coverage. In addition to the added cost, often three times as expensive, not every employer or employee qualifies for COBRA.

Who qualifies for COBRA health insurance?

Eligibility for COBRA insurance will, at first, be largely dictated by the size of your employer. Just because your employer offers a health plan does not mean that they are required by law to provide you with continuation coverage through COBRA. In order to qualify for coverage under COBRA, you must be employed by a government agency, either state or local or you must be employed by a private-sector company that employs 20 or more people full-time. If part-time employees' hours can be combined to create the equivalent of 20 full-time employees, you will be eligible as well.

There are, however, exemptions granted by law to the District of Columbia, federal employees and some church-related organizations that employ less than 20 people.

Larger corporations will often times have self-funded health plans and are exempt from government regulation of their health coverage. However smaller employers that purchase coverage from outside insurers are still subject to the law.

If you were enrolled in your company's group health care insurance plan, even enrolling just the day before, prior to the qualifying event that caused you to lose your insurance you will qualify for coverage. Your family, including your dependents, spouse and sometimes former spouse are also eligible under these conditions. If you did not participate in a company sponsored health plan you would not be eligible for COBRA.

In the event of the death of an employee, employers must offer COBRA to surviving dependents and spouses as well. If your employer ceases to offer health coverage, if, for example, the employer goes bankrupt, employees are not eligible for coverage under COBRA.

What is a qualifying event?

When losing health insurance, there must be a qualifying event that makes them eligible for coverage under COBRA. With the exception of gross misconduct, a qualifying event for employees will include leaving your place of employment either voluntarily or involuntarily. A reduction of your hours causing you to lose your health benefits is also considered a qualifying event. Losing your health insurance due to eligibility for Medicare will also qualify you for COBRA.

A spouse or dependent children, who have been covered under health plans provided by an employee may also qualify for coverage from COBRA under certain conditions. If the insured employee passes away, a separation, or divorce from the insured employee, if a dependent reaches the age of 26, or the employee becomes eligible for Medicare and is taken off the health care plan provided by the employer then a spouse or dependent would become qualified for COBRA.

In order to initiate COBRA health coverage, the administrator of the plan must be informed of the qualifying event. An employer must notify the plan administrator of a qualifying event within 30 days if one of the following were to occur.

  • The employee has voluntarily or involuntarily left his position
  • The employee's hours have been reduced and no longer qualifies for health care under the company's policies
  • The employee died
  • The employee is now eligible for Medicare
  • The employer has filed for Chapter 11 bankruptcy

If a divorce or legal separation occurs or a child has lost dependent status then the employee, not the employer, has 60 days to inform the plan administrator.

Your employer should offer you a summary plan description (SPD) outlining the process of transitioning to COBRA. If you do not have a copy of the SPD or your company has not provided one you can contact the person or department that is in charge of employee benefits.

What is an election notice?

Employers are required by law to give notice to a person about the lose their health insurance. Called election notice, the employer must notify the employee within 14 days of receiving the qualifying event notice. The election notice must be in writing. If the administrator of the plan does not act, they are considered personally liable for breach of duty.

There are exceptions, however, to the notification rule. If an employee quits or reduces their work hours of their own accord, then the employer is not under obligation to notify the plan administrator. It is then the responsibility of the plan administrator to determine if a qualifying event has occurred. The time limit for both or either of the notification periods may also be extended.

Within 60 days of receiving election notice, an employee losing coverage or dependent, such as a spouse or young adult, to choose new health insurance coverage for themselves under COBRA guidelines. Employees or dependents of employees have to notify a COBRA administrator if they want to continue their health care coverage. This notice must be in writing.

How long do I have before I must pay the first COBRA premium?

You must pay your first premium bill with COBRA within 45 days of the date you decide to continue with health coverage under the plan. This, combined with the amount of time you have to decide to continue coverage can act as a buffer if you plan on obtaining health insurance elsewhere, as with a new job. However, that payment will cover the period starting with the date that coverage was lost. Under requirements of the law COBRA rules also give you a 30-day grace period after the due date of each successive payment.

Coverages of COBRA health insurance

One of the benefits of COBRA is that it provides the exact same coverage your company currently offers its employees. Often times it is identical insurance you had before you lost benefits. While disability and life insurance are not included, plans that covered dental, vision, and prescription drugs are considered health care benefits and will remain intact. Employer provided health care is often more robust than health care found on current health care markets, so you may wish to keep it.

How long does the COBRA coverage last?

COBRA insurance coverage typically lasts 18 months for those who have lost their health insurance coverage because of a termination or due to a reduction in hours. Whether or not you can keep your COBRA coverage will be determined by your qualifying event.

The average length a person is unemployed in the United States is around nine months. It's likely you will find a new job, hopefully one with benefits, before your insurance with COBRA is set to expire. Sometimes COBRA allows for situations where coverage can last up to 36 months.

There are instances when the coverage period for COBRA is shorter than 36 or 18 months. If you become eligible for an insurance plan through another employer or have become eligible for Medicare you will lose COBRA coverage. If your new employer does not offer health coverage or if you are not yet eligible for that coverage then, COBRA will still apply. If you don't pay your health care premiums through COBRA, you will also lose your coverage. If you become eligible for Social Security disability benefits your coverage through COBRA can be as long as 29 months.

Cost of COBRA health insurance coverage

COBRA insurance costs a lot more money than you were paying as an active employee with benefits. Because your employer is no longer subsidizing any portion of the plan, you will bear the full brunt of the cost. Not only will you be required to pay 100 percent of the premium, sometimes as much as three times what you paid as an employee, but a 2 percent administrative charge may also be added.

If you believe that you're going to be losing your coverage, it's a good idea to talk with someone within the human resources department, or whomever is in charge of your company's benefits. They can inform you of the full cost of your health insurance coverage, and you can plan for how much more expensive it's going to be. If you're unable to get this information from your employer, you can find out on your own.

If you've been employed for more than a year by your company, you can look at last year's W-2 to find out what your employer's contribution to your health insurance added up to. If you add that number to the amount that you paid in the same period, you can determine what the total cost of your health care coverage was last year. That may change slightly from year to year, but it will give you a rough estimation and possibly an exact dollar amount of what you will be expected to pay.

You may be given the option by your employer to drop out of "nontraditional" coverage such as vision care or dental coverage. This is often done with the idea that it will help you reduce costs since you probably don't have a job anymore. Being aware of health care laws can allow you to find health insurance that is more affordable. Health insurance on the private markets can be remarkably more expensive than plans found on state markets through the Affordable Care Act.

Losing your job counts as a qualifying event for the ACA so even if you are not in an enrollment period you should still be able to sign up for coverage. While the cost of coverage through the Affordable Care Act can be hundreds of dollars less per month, it may not offer all of the benefits that your employer's private plan provided. If you have lost your job though and have no income, subsidies may cover up to 100 percent of your monthly payment through the ACA. It's a good idea to look at all your options to find the one that fits your needs and your family's needs best.

If your COBRA coverage extends past 18 months, your premiums can rise significantly. Your employer could, if they choose, charge you up to 150 percent of the actual cost they are paying for your insurance.

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