Understand COBRA

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.

If you experience a “qualifying event” such as voluntary resignation, your former employer’s COBRA Administrator will mail you a package (they are legally obligated to mail it to you, they will likely not give you a copy if you ask in person) detailing your COBRA rights, how to enroll, and payment information. You will want to read this package very carefully. Usually most former employees are qualified to receive COBRA but here is a clearer list:

1. An employee and his or her dependents who would otherwise lose coverage because of a reduction in scheduled work hours or termination for a reason other than gross misconduct.
2. A spouse and/or children who would lose coverage because of divorce or legal separation.
3. A surviving spouse and/or children who would lose coverage because of death.
4. A spouse and/or children who would lose coverage because of an employee’s entitled to Medicare.
5. An employee’s child who would lose coverage because they no longer meet the definition of being a dependent.

As you can see, the list is pretty comprehensive and covers most situations. Unless you were dismissed because of gross misconduct, you and your dependents are likely qualified for COBRA.

COBRA stands for the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985, a bill that was passed in 1986, and it amends the Employee Retirement Income Security Act (ERISA), the IRS Code and the Public Health Service Act. So, what does COBRA do? Well, it requires that a group health plan must offer every qualified person the opportunity to continue the same coverage they had while an employee or a dependent, after they cease to become one. In most instances, it gives an employee that has been terminated or has voluntarily resigned, the opportunity to continue their existing level of medical coverage.

The actual scope of individuals that are covered is quite broad because COBRA also applies to dependents of employees as well, which can included spouses, children, etc.; and the but the cost will usually be much higher. The reason for this difference is price is because your employer will no longer be paying part of the premium, that financial burden falls entirely on the insured.

In the remainder of this site, I will discuss to you the various details of COBRA plans that may be of interest.