One quirk of the U.S. health care system is the way it ties health insurance to the workplace. According to the U.S. Census Bureau, more than 55% of Americans get their health insurance through an employer — their own or a family member’s. The biggest problem with this arrangement is that if you lose your job, you lose your health coverage with it. Sometimes, people even stay at jobs they hate just because they need the health benefits — a phenomenon economists call “job lock.”
In 1986, Congress took its first step toward fixing this problem by passing the Consolidated Omnibus Budget Reconciliation Act, or COBRA. This law allows people who lost a job to keep their health coverage by paying all the premiums themselves. The coverage only lasts a limited time, but it helps tide people over until they can find a new job with health insurance coverage.
Today, COBRA isn’t as essential today as it was back in the 1980s. The health insurance marketplaces created by the 2010 Affordable Care Act (ACA) have made it much easier to find an affordable health insurance plan that’s not tied to work. However, COBRA coverage is still available, and it can offer a useful alternative to a marketplace plan in some situations.
How COBRA Coverage Works
COBRA is not a government-run health insurance plan like Medicare or Medicaid. It’s just a law that gives people extended access to coverage from private insurance companies. Essentially, it requires health insurance companies that provide group health plans to allow workers to continue their health coverage when they lose access to a plan from their workplace.
Workers can apply for COBRA benefits whenever they lose access to their group health plan. It doesn’t matter whether they’ve lost their jobs, left their jobs, or just reduced their work hours; if they had insurance from work and are about to lose it, they can keep it by paying the full cost themselves. And if the covered employee’s spouse and children were relying on the employee’s health plan, they can use COBRA to extend their coverage, as well.
The coverage COBRA provides is only temporary. In most cases, it lasts up to 18 months. However, in some circumstances (discussed below), former employees and their dependents can keep their COBRA coverage for up to 36 months. That gives them extra time to find a new job or become eligible for another source of health coverage, such as Medicare.
Several different government agencies are in charge of administering COBRA and making sure companies follow the law. These include:
- The U.S. Department of the Treasury. The Internal Revenue Service (IRS) makes regulations regarding COBRA eligibility, coverage, and payment. The Departments of Labor and the Treasury are jointly responsible for enforcing these rules.
- The U.S. Department of Labor (DOL). This department ensures that employees of private-sector employers get proper notification about their rights under COBRA and how to sign up. It provides detailed information for employees about COBRA on its website.
- The U.S. Department of Health and Human Services (HHS). HHS administers the parts of COBRA that apply to state and local government health plans.
Under COBRA, insurers must offer continuation coverage for anyone who was covered under a group health plan and then loses coverage due to a specific event. This includes former employees and their spouses, former spouses, and dependent children.
To get coverage through COBRA, you must meet three main requirements:
- Your plan qualifies for COBRA.
- You have lost coverage due to a qualifying event.
- You are a qualifying beneficiary.
Plans that Qualify for COBRA
Not all employees qualify for COBRA continuation coverage. The law applies only to people covered by group health plans, defined as plans provided by an employer to cover the cost of medical care for employees and their families. This includes health insurance plans, managed care such as health maintenance organizations (HMOs), and plans that pay for care directly out of the employer’s assets.
The definition of medical care is also important. Under the law, a group health plan can cover the cost of any or all of the following:
- Inpatient and outpatient hospital care
- Doctor visits
- Prescription drugs
- Dental care
- Vision care
Even if you definitely have a group health plan, that doesn’t guarantee you access to COBRA. Under federal law, COBRA only applies to group health plans offered by private-sector employers with at least 20 employees or by state and local governments. It does not apply to plans sponsored by churches, certain church-related organizations, or the federal government. However, there is a federal law similar to COBRA that provides extended coverage for federal employees. If you work for the federal government, contact your agency’s personnel office to learn about how to extend your health benefits.
In addition, some states have their own laws similar to COBRA, sometimes called mini-COBRA laws. These laws can require insurers to extend coverage to former employees at small businesses with fewer than 20 employees. To find out about mini-COBRA laws in your state, contact the office of your state insurance commissioner.
To be eligible for COBRA coverage, you must lose your health insurance due to a qualifying event. This could mean something that happens to you or to someone else whose plan you’re using.
If you are an employee covered by a group health plan, qualifying events for you include:
- Losing your job for any reason other than “gross misconduct.” For instance, if you quit your job or are laid off, you are eligible for coverage. However, if your employer fires you for stealing from the company, you are not.
- A reduction in your work hours that makes you no longer eligible for the group plan. This usually means going down from full-time to part-time work. It doesn’t matter whether your employer reduced your hours or you chose to reduce them yourself.
If your spouse or dependent children are relying on your group plan for coverage, these are qualifying events for them as well. They can also qualify for COBRA on account of other events that cut them off from your employer’s plan. This can happen if:
- You die and they are no longer covered as your dependents.
- You become eligible for Medicare and can no longer keep your workplace health plan.
- You get a divorce or separate from your spouse, so that your former spouse is no longer covered as your dependent.
- Your child becomes too old to qualify as a dependent on your health plan. Under the ACA, this happens when the child reaches the age of 26.
The definition of a qualifying beneficiary for COBRA is pretty simple. You count as a qualifying beneficiary if you were covered by a group plan until a qualifying event occurred. You can be a qualifying beneficiary if you are:
- A covered employee. This includes independent contractors who are covered by an employer’s plan.
- The employee’s spouse or former spouse.
- The employee’s dependent child.
In general, former employees and their dependents can’t be qualified beneficiaries if they left the workplace’s group plan prior to the qualifying event. However, if you are a retired employee who loses access to retiree health benefits because your employer declares bankruptcy, you and your family may qualify for COBRA coverage.
Also, if you have a baby or adopt a child during the period you’re covered by COBRA, your new child automatically qualifies for family coverage under your plan. By law, the insurer must allow you to add your child to your COBRA insurance.
Benefits of COBRA Coverage
By law, all the health benefits provided by COBRA continuation coverage must be identical to the benefits active employees and their families receive. In most cases, this is the same coverage you had under your old group plan.
Your deductible, copayments, and coverage limits all stay exactly as they were. That means you can continue seeing the same doctors and taking the same medications you have now for the same price. You follow the same procedures for submitting a health insurance claim as you did before, and you use the same procedures to appeal a claim if it’s denied.
If you had the right to choose among multiple coverage options as an employee, you have the same right as a former employee using COBRA. You also have the right to change your health plan during the open enrollment period, just like current employees. If your former employer’s health coverage options change, you can choose among the new options just like current employees.
Duration of Coverage
How long your COBRA coverage lasts depends on when and how you lost your old group plan. If you lost your coverage because you lost your job, quit your job, or reduced the number of hours you work, you are allowed to continue your coverage for up to 18 months. Your spouse and dependent children can extend their coverage for the same period of time.
However, if you became eligible for Medicare less than 18 months before losing your group coverage, the rules are different. In this case, you no longer need health coverage for yourself, but your new plan can’t provide coverage for your family. In this situation, you can extend the coverage for your spouse and children for up to 36 months beyond the date you qualified for Medicare.
For all other qualifying events, the standard duration of coverage is 36 months. Spouses and dependent children can use COBRA for up to 36 months after the death of a covered employee, a divorce or separation, or a child reaching age 26.
You don’t have to keep your COBRA coverage for the entire period allowed by law. You can choose to drop it at any time if you get a new job or another source of insurance. Also, in some situations, your health plan can cut off your coverage early. This can happen if:
- You don’t pay your premiums in full and on time
- Your former employer stops offering a group health plan;
- You get coverage under another group health plan.
- You become entitled to Medicare.
- You engage in fraud or any other conduct that would allow the insurer to cut off coverage for a current employee of your former employer.
There are also certain situations in which you can extend your COBRA coverage past the original 18-month period. For instance, if a member of your family is disabled, you can extend the entire family’s coverage by an extra 11 months. You can also add a second 18-month stretch of COBRA coverage to your first one if you have a second qualifying event. Check out the DOL’s guide to COBRA for more details.
Cost of COBRA Coverage
Because all COBRA does is extend your existing coverage, its cost varies from plan to plan. However, most people should expect to pay a lot more for health insurance under COBRA than they paid for the same coverage as employees. That’s because most employees pay only a portion of their own health insurance costs while their employers cover the rest.
By law, an insurance company can’t charge you more for your coverage under COBRA than 102% of what it charged for that same coverage before the qualifying event. However, that means the entire amount it charged, not just the portion you paid out of pocket. It also includes the share paid by the employer, which is typically more than half of the total.
According to the Society for Human Resource Management, large companies paid about 70% of their employees’ health care costs in 2019. So, for example, if the total cost of your insurance coverage was $400 per month, your employer would have paid roughly $280 of that while you paid $120. However, if you continue your coverage under COBRA, you become responsible for the entire $400 per month — more than three times what came out of your paycheck as an employee.
In fact, your coverage under COBRA would actually cost a bit more than this. As noted above, your COBRA premium can’t exceed 102% of your previous cost — the full amount paid by you and your employer, plus an administrative fee equal to 2% of the total. Tack on this 2% fee, and your premium cost rises to $408 per month.
Moreover, this amount can rise over time. If your former employer switches to a new group plan with higher premiums, you must pay the new, higher premium plus the 2% administrative fee. For example, if the premium for your old employer went up to $450 per month, a typical employee would pay only $135, but you would pay $459.
The good news is you don’t have to make your first premium payment under COBRA right away. When you sign up for COBRA, you have up to 45 days to make your initial premium payment. After that, you have a 30-day grace period for each additional payment that comes due. The insurer can suspend your coverage if you miss a payment, but you get it back as long as you make the payment within the grace period. However, if you don’t pay by the end of the grace period, the insurer can cut off your coverage permanently.
Health Coverage Tax Credit
If the full cost of COBRA coverage is more than you can afford, there’s a federal tax credit known as the Health Coverage Tax Credit that can help you pay for it. If you qualify for this credit, it pays 72.5% of your health insurance premiums, while you pay the remaining 27.5%. Thus, if your total cost under COBRA would normally be $408, you would pay only $112.20.
Two kinds of people are eligible for this credit:
- People receiving benefits under the Trade Adjustment Assistance (TAA) Program because they lost a job due to the negative effects of global trade
- People who receive pension payments from the Pension Benefit Guaranty Corporation
In addition, qualified family members of people in either group can claim the tax credit if their family member dies, enrolls in Medicare, or finalizes a divorce that cuts them off from their insurance. They can claim the credit for up to 24 months after this happens.
If you qualify for this tax credit, there are two ways to collect it. You can claim it on your income tax return at the end of the year, or you can request it as an advance monthly payment to help you cover your health insurance premium costs throughout the year. For more information about the Health Coverage Tax Credit, visit the IRS website.
How to Enroll in COBRA
Because COBRA is private insurance, the process for signing up varies from one insurance company to another. However, the federal government imposes some guidelines. It requires group health plans to set rules for how they offer COBRA coverage, how beneficiaries sign up for it, and how they can cancel it. It also requires group health plans to notify all employees about their COBRA rights in writing.
Under federal law, you, your employer, and your group health plan all have to provide notices regarding COBRA at various times. These include:
- Summary Plan Description. When you sign up for a group health plan, it must provide you with a Summary Plan Description, or SPD. This document explains how the plan works, outlines all its benefits, and explains your rights under the plan, including COBRA rights. The insurer must provide an SPD within 90 days after you join the plan.
- COBRA General Notice. Also within 90 days, the plan must also provide a notice to all employees and their spouses outlining their COBRA rights. This can be part of the SPD or a separate document. It must include a general description of the COBRA coverage the plan offers and information about how to notify the plan of a qualifying event. It must also provide a name, address, and phone number of someone you can contact for more information.
- COBRA Qualifying Event Notice. This is a notice sent to the insurer by either you or your employer to tell it about a qualifying event. Your employer sends the notice if you’ve lost or left your job, reduced your hours, become eligible for Medicare, or died leaving your family without health coverage. Your employer must also notify the plan if the company becomes bankrupt. You must notify the plan if you become divorced or legally separated or if your child loses dependent status. Both the SPD and the General Notice should include instructions about how to notify the plan in any of these situations. However, if the plan hasn’t provided this information, you can give notice by contacting the person who handles employee benefits for your company.
- COBRA Election Notice. Once it receives notice of a qualifying event, the group plan must send out an election notice to each qualified beneficiary within 14 days. This notice explains your right to continuation coverage and what you must do to “elect” (sign up for) it. It should provide all the information you need to make an informed decision about enrolling in COBRA, including the cost.
- COBRA Notice of Unavailability of Continuation Coverage. In some cases, a group health plan may deny your request to continue your coverage under COBRA. If it does this, it must send you a notice within 14 days telling you of the denial and explaining the reason for it.
- COBRA Notice of Early Termination of Continuation Coverage. If your plan cuts off your COBRA coverage early — for instance, because you failed to pay your premiums — it must send you a notice as soon as possible to tell you so. This notice must explain why your coverage is ending, when it will end, and any rights you have to apply for other coverage.
By law, your plan must give you at least 60 days to decide whether you want COBRA coverage. This 60-day period starts either on the day it sends out the COBRA election notice or the day your workplace coverage ends, whichever is later.
Each member of your family can choose independently whether or not to elect COBRA coverage. For instance, if both you and your spouse are entitled to coverage under COBRA, you can choose COBRA while your spouse chooses some other plan, or vice versa. However, if you and your spouse both choose COBRA, either of you can sign up for both of you. You can also sign up on behalf of any dependent children in your home.
If you decide to elect COBRA, simply follow the instructions in the election notice to notify the plan administrator. Once you sign up, your coverage is retroactive to the date you became eligible. The election notice should tell you where to send your monthly payments and when they are due. As noted above, you have 45 days to make your first payment.
If you decide to waive COBRA coverage — that is, if you choose not to sign up for it — you are allowed to change your mind and sign up at any time within the election period. If you do this, your coverage starts on the day you revoked your waiver.
In addition, if you participate in the TAA program, you have a second chance to sign up for COBRA. This period lasts 60 days from the first day of the month you begin receiving TAA benefits. See the DOL guide for details.
Pros and Cons of Using COBRA
The biggest advantage of electing COBRA coverage is that it allows you to keep your health plan exactly as is. You and all your family members can continue to see the same doctors, use the same pharmacy, take the same medications, and pay the same prices as always. And all your procedures for filing a claim remain unchanged. A job loss — or any event that would qualify you for COBRA — creates a big upheaval in your life, so it’s a relief to know that you don’t have to make any changes in your medical care at the same time.
Another advantage of keeping your group health plan rather than switching to an individual plan is that group plans sometimes provide bigger care networks. This can come in handy if you travel frequently out of state.
The biggest downside of COBRA coverage is the cost. According to the Kaiser Family Foundation (KFF), group health insurance premiums in 2020 cost an average of $7,470 per year ($622.50 per month) for an individual. Of course, most employees don’t pay this much because the employer typically covers most of the cost. But under COBRA, you must pay the full premium cost yourself.
By contrast, the KFF reports that the average cost of an individual Silver-level plan purchased on the ACA health insurance marketplace in 2020 was only $442 per month for a 40-year-old. Moreover, many people who buy marketplace plans qualify for subsidies that lower the cost still more. In 2020, the average subsidized cost of a Silver plan was $307 per month for a 40-year-old earning $40,000 per year and only $60 per month for one making $20,000 per year.
Another big downside of COBRA coverage is that it’s only temporary. It only lasts 18 months for most people, and no longer than 36 months. That’s probably enough time to find a new job with health benefits, if that’s what you want, but if you’ve decided to leave your job and get a college degree or become a freelancer, COBRA won’t be able to keep you insured for the long term.
Alternatives to COBRA for Health Insurance
When it was first passed in 1986, COBRA was the best way for many people to stay insured after losing a job. However, today there are many other coverage options worth considering. Before signing up for COBRA, see whether you could get a better rate for insurance through one of these alternatives
1. A Relative’s Workplace Plan
Under the 1996 Health Insurance Portability and Accountability Act (HIPAA), if you or your dependents lose access to a group health plan, you have a chance to enroll in a different group plan without waiting for the open enrollment period. The 30-day period after you lose access counts as a special enrollment period during which you can sign up in any plan that’s open to spouses and other dependents.
For instance, if you lose your job but your spouse is employed, you could sign up as a dependent on their plan. A dependent child who loses coverage from one parent’s plan could join the other parent’s. And, in some states, you can get coverage as a domestic partner on the plan of a partner who lives with you but isn’t married to you.
2. The Health Insurance Marketplace
Losing your workplace coverage also gives you a chance to sign up for private insurance through the federal health insurance marketplace or your state marketplace. On these sites, you can compare the benefits and costs of different private health insurance options available in your area. You can also learn whether you qualify for tax credits that can reduce your monthly premiums and other health care costs, such as deductibles and copayments. Having access to COBRA doesn’t affect your eligibility for a tax credit.
Your special enrollment period for a marketplace plan runs for 120 days: 60 days before and 60 days after the date your work-based coverage ends. You can also sign up at any time during the regular open enrollment period, which runs from November 1 through December 15 each year.
If you need extra time to choose a plan, you can use COBRA to provide coverage for you in the short term and sign up for a marketplace plan at the next open enrollment period. You can also sign up for a marketplace plan when your COBRA coverage runs out, or when a new event — such as marriage or the birth of a child — triggers a special enrollment period. However, if you choose to end your COBRA coverage early, you must wait until open enrollment to sign up for a marketplace plan.
3. Medicaid and CHIP
When you visit the health insurance marketplace, you can find out whether you qualify for free or low-cost health insurance from the government. For instance, low-income and disabled adults can qualify for Medicaid. Dependent children can get coverage through the Children’s Health Insurance Program (CHIP), even if their parents earn too much to qualify for Medicaid.
If you or a family member qualifies for Medicaid or CHIP, you can enroll at any time without having to wait for an open enrollment period. Once you sign up, your coverage starts right away. You can sign up for these programs directly from the health insurance marketplace. Alternatively, you can contact your state Medicaid office to apply for Medicaid. You can learn more about CHIP by visiting the official website at InsureKidsNow.gov or by calling 1-877-KIDS-NOW (1-877-543-7669).
4. Short-Term Insurance
If you can’t find any other source of affordable health coverage, it could be worth checking out short-term insurance plans. These plans provide coverage for less than a year at prices that can be much lower than marketplace insurance plans. For instance, AgileHealthInsurance offers plans starting at less than $99 per month.
However, there’s a reason these plans are so cheap: they provide much less coverage than traditional insurance. Short-term plans are exempt from ACA rules that require health insurance to cover certain essential benefits — such as hospital stays, doctor visits, prescription drugs, and mental health — with no annual or lifetime caps on coverage. Short-term plans don’t have to cover all essential benefits, and they’re allowed to limit the total amount they pay out.
The DOL recommends short-term insurance only as a stopgap measure. It can fill in a break in coverage between the time a workplace plan ends and a new one begins, or cover the transition from a workplace plan to an ACA marketplace plan. However, it’s not a good idea to rely on short-term insurance plans as your main source of coverage for the long term.
COBRA isn’t the only choice for health insurance after a job loss anymore — and in most cases, it isn’t the best. For most people who have lost a job, the health insurance marketplace offers decent health insurance at significantly lower prices. It’s much cheaper if you qualify for a subsidy, but usually cheaper even if you don’t.
However, in some cases, it can make sense to keep your old workplace plan through COBRA even if it costs more. For instance, if you’re currently receiving treatment for a serious disease like cancer, it could be worth paying extra to ensure you don’t have to switch doctors in the middle of your treatment. And if you know you’re going to start a new job with a new health plan in a few months, using COBRA could be an easier way to stay covered in the meantime than signing up for an ACA plan.
COBRA can also be useful for those who don’t qualify for a subsidized marketplace plan. For instance, if you change jobs and your new employer offers affordable health coverage for you but not for your family members, they can’t qualify for subsidies on account of the ACA family glitch. For them, using COBRA to extend the coverage from your old plan might be cheaper than paying full price for a marketplace plan. Check prices at Healthcare.gov and compare them to your COBRA cost to see which is a better deal.