COBRA: Continuing Health Insurance After a Job Loss
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The Consolidated Omnibus Budget Reconciliation Act, known as COBRA, is a federal law that allows employees to continue their employer-provided health insurance after they are laid off or fired, or they otherwise become ineligible for benefits (for example, because they quit or their hours are reduced below the employer's minimum to receive benefits). The employee has to pay the full premium at the employer-negotiated group rate, which is typically less expensive than it would be to buy an individual policy on the open market.
Private employers must comply with COBRA if they have at least 20 employees. (Smaller employers may be covered by a similar state law.) Employees who are covered by the employer's health insurance plan on the day before a "qualifying event" -- an event that would cause them to lose their coverage, such as a layoff, cut in hours, or divorce from a spouse -- are eligible to continue their benefits through COBRA.
A qualifying event is something that would cause an employee or an employee's dependent to lose health care coverage through the employer.
The following are qualifying events for employees:
- The employer terminates the employment relationship for reasons other than gross misconduct. For example, an employee who is laid off is a mass downsizing or fired for being a poor fit is eligible for COBRA.
- The employee quits.
- The employee's hours are reduced below the threshold to receive benefits under the employer's plan. For example, if an employer requires employees to work at least 32 hours a week to be eligible for benefits, and an employee’s hours are cut to 24 per week, that would be a qualifying event.
An employee's spouse and dependents are also eligible for COBRA coverage in these circumstances:
- The spouse and the employee divorce or legally separate.
- The employee dies.
- The employee has a qualifying event, as explained above.
- The employee becomes entitled to Medicare.
- For a dependent child, the child loses dependent status under the plan (for example, because the child ages out of the employer’s plan).
Duration of COBRA Benefits
For an employee, COBRA coverage lasts for up to 18 months. A spouse or dependent child who becomes eligible for any reason other than the employee's qualifying event can continue COBRA coverage for up to 36 months. For example, if the employee dies, the spouse can continue coverage for 36 months.
Different rules apply in some circumstances. For example, if a spouse is receiving COBRA coverage because the employee was laid off, both the employee and spouse would be entitled to receive benefits for 18 months. However, if the employee dies during this 18-month period, the spouse's eligibility would be extended to 36 months. COBRA coverage can also be extended (to a total of 29 months) if the person receiving benefits has a disability and meets other requirements.
Paying for COBRA
The employee or other beneficiary (spouse or dependent child) must pay the full premium to continue COBRA benefits. Congress temporarily changed this rule to provide a partial subsidy, which paid 65% of the COBRA premium. However, this subsidy protected only those who became eligible for benefits due to an involuntary employment termination between September 1, 2008, and May 31, 2010. The subsidy is no longer in effect, so recipients must once again pay the full cost of coverage. Because recipients pay the employer’s negotiated group rate rather than the cost of an individual policy on the open market, they typically save money on insurance by using COBRA.
How COBRA Works
The administrator of your employer's health care plan (either your employer, if it administers its own plan, or a third party administrator) is required to send you a set of notices about your right to COBRA benefits. Once a qualifying event takes place, either the employer or the employee must notify the plan administrator (who is responsible for giving notice depends on the type of event).
After learning of a qualifying event, the administrator must send out an election notice, informing beneficiaries that they have a right to choose COBRA coverage. Beneficiaries then have 60 days to inform the administrator whether or not they want to continue insurance coverage through COBRA.