Understand COBRA

At some point, your COBRA insurance will expire and your employer will no longer be required to carry you on their health insurance plan. At that point, you will have to being searching for a health insurance carrier and I have a few suggestions as to how to go about doing that.

Research whether any of the professional organizations you are a member of can offer any sort of health insurance benefits. While this is rare, I have heard of organizations offering health insurance and it could be a great way to security health benefits. If you can’t get it through any sort of organizations or associations, you may have to go it alone.

Going it alone is difficult, but there are some online tools available to help you in your search. Kanetix is an online insurance comparison shopping engine that will be able to help you compare your health insurance options (and auto, homeowners, etc). Through Kanetix, NetQuote will be able to give you a quote for insurance with a major medical plan (MMP), preferred provider organizations (PPO), and point of service (POS) insurers; as well as coverage for dental coverage, maternity coverage, prescription benefit, and vision care benefit.

COBRA requires that your company offer you health insurance through their plan, you simply foot the entire bill. However, as many dot-com casualties learned, if your company goes out of business then there is no health insurance plan for you to be a part of – COBRA can’t help you because there’s no plan for you to be a part of. So, what are you supposed to do?

Well, for starters, find out if your company outsourced your health benefits, as many smaller companies will do. If your company did, you’re in luck because technically that company offers your health benefits and COBRA will require that they offer you health benefits even though your “real” company has gone bankrupt. This comes really at no cost to them because you’re paying your way.

If that’s not the case, unfortunately you’ll have to begin researching health insurance programs…

A Summary Plan Description (SPD) is the package your employer is legally required to mail to you upon the qualifying event. In fact, if the employer doesn’t make a good faith effort to mail you the package, you can sue for damages! However, if the employer can show that it made an effort to mail the package, then you have no grounds on which to sue them. Below is an example of a court case in which a former employee attempted to sue her former employer because she never received a Summary Plan Description and how the employer, ENI Technology, acted despicably.

In Sunderlin v. First Reliance Standard and ENI Technology (U.S. District Court, Western District of New York, Dkt. No. 00-CV-6253, November 4, 2002), Terry Sun sued ENI Technology on the grounds that ENI denied her disability benefits and that ENI failed to provide a Summary Plan Description in a timely manner.

Sunderlin had made numerous requests for an SPD but they were ignored for seemingly frivolous reasons. ENI responded to the first request by sending her a letter stating that the person she addressed the request to no longer worked there. Her second request was met with a copy of the disability insurance policy and subsequent requests were useless. ENI claimed that the insurance policy they mailed was the SPD.

The ruling of the court was that ERISA required that a plan administrator send a copy of the latest Summary Plan Description upon request and it must be accurate and comprehensive, explaining the rights and obligations of participants under the employer’s plan. And it has to be written in plain enough English so that the average participant can understand it!

The court, in reviewing the policy, decided the policy that ENI provided wasn’t an SPD because it failed to contain the name of the plan, the name or address of the administrator, or even explain the denial of claims procedure. It was obtuse, confusing, and even contained incorrect information. Ultimately, the court assessed a fine of $15 per day for 1165 days for a total award of $17,475 – even adding that ENI acted in bad faith throughout litigation.

COBRA technically applies to health plans and a health plan is subject to the COBRA rules if the employer employs twenty or more employees on more than fifty percent of its business days, counting both full-time and part-time employees. Part-time employees count as fractions of an employee based on their hours as a percent of a full work week, forty hours. If the health plan is subject to COBRA rules, your employer is required by law to notify you of their responsibility to provide COBRA in the event of a qualify event.

Now, If your employer no longer offers health coverage of any kind (say, because of bankruptcy) then they are not required to offer health coverage under COBRA (since it applies to the health plan, not the employer).

For example, if John is one of thirty employees working for Company A and he loses his job (a qualifying event) because Company A goes out business, then he is not eligible for health coverage under COBRA because that health coverage no longer exists. The fact that the employer must offer insurance under COBRA to John because he lost coverage because of a qualifying event is irrelevant because Company A no longer exists.

Qualifying events are those events that would cause someone to lose health coverage and the type of qualify event will define who the qualified beneficiaries are and how long the health plan will have to offer coverage. If one of those events occurs below (such as reduction of hours) doesn’t result in the loss of health coverage, then technically it’s not a qualifying event (but at that point the distinction wouldn’t matter because the employee wouldn’t need COBRA since he or she would still be covered by his or her employer’s health plan).

As an employee, there are two types of qualifying events where COBRA would apply:

1. Termination (of employment) for any reason except gross misconduct.
2. Reduction in work hours.

As the spouse of an employee, there are five types of qualifying events where COBRA would apply:

1. Termination of the covered employee’s employment for any reason except gross misconduct.
2. Reduction work hours by the covered employee.
3. Covered employee becoming covered by Medicare.
4. Divoce or legal separation.
5. Death of covered employee.

As the dependent children of an employee, there is only one qualify event where COBRA would apply:

1. Loss of dependent child status.

If your employer offered a flexible spending account then under COBRA you would be allowed to continue the FSA until the end of its period. So, if let’s say your FSA accounts ran from January to December and you left your job in March, a COBRA would allow you to continue requesting reimbursements until December of this year. You would not be able to elect FSA coverage after December though, so next year you’d be without a FSA.

The biggest thing to remember about paying for a COBRA is that all payments are made on an after-tax basis. Whereas you paid for your health benefits pre-tax before, they are now after-tax, which can make the increases even bigger. Another important thing to remember about payments for a COBRA are that the rules are strict and unyielding. A bill will be sent monthly and premium payments are due at the first of the month with no notices of delinquency if you miss a payment. If full payment is not postmarked within 30 days after the due date of the current month, the COBRA coverage will be terminated. They won’t call, they won’t write, they just end the coverage. It is very important that you follow up, either with a telephone call or through a web interface (if available), each payment because the rules are so unforgiving.

If you fall on financial hardship, which is often the case with any of the qualifying events, it is acceptable for a third party to make COBRA payments though the payment rules are still in effect. Also, in some states, the state itself may subsidize COBRA premiums for individuals under a certain income level.

Here are the other guidelines:

1. Include the social security number of the insured on the check.
2. Make it out to your plan administrator, not your former employer.
3. Review the package sent by your administrator, this will include additional guidelines.

How much your COBRA health plan will cost depends on how much it cost your employer and you prior to the qualifying event plus an administrative fee of 2% (specified in the COBRA bill). In the package your employer should have sent you (contact your employer’s benefits or human resources department if you haven’t received a package in the mail) it should detail how much each of your coverages should cost (medical, dental, vision, FSA/HSA, etc).

This price will be much higher than what you paid as an employee. For example, my medical plan cost me a mere $20 per month and that premium jumped to nearly $390 per month in the COBRA information sent to me in the mail. Your employer is no longer footing a large portion of the bill, unfortunately that burden now falls on you.

How long you may continue coverage under your former employer’s medical coverage is called a continuation period and this period will differ based on the qualifying event and your own specific scenario. The continuation period starts with the qualifying event and not the date COBRA is elected.

If you lose your coverage because of termination, retirement, layoff, strike, or reduction in hours, the maximum continuation period is 18 months. If you were disabled before or within the first 60 days of COBRA coverage, then the period increases to 29 months.

If dependents lose coverage because of divorce, separation, death, loss of dependent status, or because of Medicare entitlement, the maximum continuation period is 36 months.

The continuation period may also end for an individual, before the original period of 18, 29, or 36 months if:

1. The qualified person becomes covered by Medicare.
2. The qualified person becomes covered by another group health plan that doesn’t contain a pre-existing condition limitation or exclusion, or where the pre-existing condition limitation doesn’t apply because there has been enough previous creditable coverage to satisfy the new plan’s limitation time period. In non-legal speak, the qualified person, who would otherwise be excluded, isn’t.
3. Premium isn’t paid.
4. The employers group health plan is terminated, but the continuation period can be completed under a different plan.

One of the beauties of COBRA is that you have 60 days to decide whether you want to elect for a COBRA (and then 45 days after that to pay your first premium) and you can often use that 60 days to your advantage. Anytime within that 60 days, you can elect for COBRA coverage and it will be applied retroactively. For example:

On March 1, 2006, Michael learns that the company he’s working for will be downsizing and that he will be RIF’d (Reduction In Force) at the end of the month. Michael interviews with another company and is extended an offer that won’t start until June of that year. For the period of April and May, Michael will be without medical coverage from either his former employer or his new employer and will need to rely on a COBRA. However, on April 1st, Michael doesn’t need to immediately sign up for a COBRA. Since it can be applied retroactively, he can wait until he needs it within those 60 days before he starts it.

In the above example, if Michael doesn’t need medical insurance at all in the sixty days between jobs, he doesn’t have to elect for COBRA. If let’s say he needs it in May, he would have to elect for the COBRA and pay the premiums for April and May. It’s a great way to be “covered” but not covered and you can avoid paying premiums you don’t have to.

This is also how you can be covered, medically, if you resign from a company on a Friday and don’t start work until Monday. COBRA will cover you in the two days period you are without coverage.