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Know your COBRA

It's a safety net for those who might lose their health insurance. Here are the rules regarding your eligibility, how long your rights last and how much it'll cost you.

If you've lost your job, don't panic yet about losing your health coverage, too. You could be eligible for the continuation of your benefits.

A federal law known as COBRA (short for the Consolidated Omnibus Budget Reconciliation Act of 1985) provides a vital bridge between health plans for qualified workers, their spouses and their dependent children when their health insurance otherwise might be cut off. Because of that security, COBRA has been hailed as a much-needed safety net for families in the midst of crisis, such as unemployment, divorce or death.

Under COBRA, if you voluntarily resign from a job or are terminated for any reason other than "gross misconduct" you are guaranteed the right to continue your former employer's group plan as individual or family health care coverage for up to 18 months, at your own expense. In many cases, your spouse and dependent children also are eligible for COBRA coverage, sometimes for as long as three years. However, individual plans -- that is, plans you buy on your own, rather than through work or an association -- are not subject to COBRA law, and once you lose that coverage, you won't be able to get an extension under COBRA.

Are you eligible for COBRA?
In general, three groups of people, known as beneficiaries, are eligible for COBRA coverage: employees or former employees in private business, their spouses and their dependent children. One of several types of "qualifying events" must occur in order to trigger COBRA, as outlined in the chart below. You then are eligible to buy COBRA for the maximum coverage period as determined by your beneficiary status and the qualifying event. Remember: You don't have to stay on COBRA the whole time -- nor will you always be able to -- if different coverage comes along.

COBRA coverage periods
 

Qualifying eventBeneficiary eligible for COBRAMaximum coverage time (months)
  • Termination of job
  • Reduced hours
  • Employee Spouse Dependent child18
  • Employee entitled to Medicare
  • Divorce or legal separation
  • Death of employee
  • Spouse Dependent child36
  • Loss of dependent-child status
  • Dependent child36


    COBRA eligibility also extends to workers in state and local government, as well as to workers classified as independent contractors. However, the law grants an exemption to the District of Columbia, federal employees, certain church-related organizations and firms employing fewer than 20 people. The IRS has said that employers must figure part-time workers into their employee total to determine if they can claim exemption.

    Even if you work at a small company that is exempt from federal law, you might not be completely out of luck. Many states have adopted their own laws, sometimes known as "mini-COBRA," that often grant broader rights in determining eligibility for coverage. Check with your state insurance department to find out if you are entitled to continued health-care coverage under a state COBRA plan.

    Employers with self-funded health plans (generally large corporations) are exempt from state regulation of their plans, but employers who buy coverage through outside insurers (generally smaller businesses) are subject to such laws.

    Keep in mind, too, that you must actually be covered under an employer health plan to be eligible for COBRA. If your employer has more than 20 workers but doesn't offer health coverage, or offers coverage to only certain groups of employees and you're not one of them, you won't be eligible for COBRA even if one of the qualifying events occurs -- nor will your spouse or children be eligible.

    Your COBRA coverage ends when:
     

    • You reach the last day of maximum coverage.
       
    • Premiums are not paid on a timely basis.
       
    • The employer ceases to maintain any group health plan.
       
    • You obtain coverage through another employer group health plan that does not contain any exclusion or limitation with respect to any pre-existing condition of a beneficiary.
       
    • A beneficiary is entitled to Medicare benefits.


    Paying for COBRA
    Eligibility isn't the only issue you should consider when it comes to COBRA. Cost is another major factor.
     

    Sticker shock: For some, COBRA still proves elusive

    The cost of the monthly premiums for COBRA can come as quite a surprise if you're accustomed to your employer picking up most of your health insurance tab via pretax paycheck deductions. When you opt to buy COBRA, you must pay the full premium amount -- which can be a hefty monthly sum, even for group health coverage. And don't forget to add as much as 2% on top of that for the administrative fees.

    "For a family, you figure COBRA coverage is going to be $400 or $500 a month instead of $40 or $50 a month. And in most cases, they're not even getting a tax breCOBRA_Insurance anymore," explains Paul Fronstin, a senior research associate with the Employee Benefits Research Institute (EBRI), a Washington-based nonprofit, nonpartisan organization that conducts research about employee benefits.

    For single people, you can expect to pay upwards of $200 a month. For disabled beneficiaries who receive an additional 11 months of coverage after the initial 18 months, the premium for those extra months may be increased to 150% of the plan's total cost of coverage.

    It's not surprising, then, that a 1996 survey conducted by Charles D. Spencer & Associates, covering 1.42 million workers at about 200 firms, concluded that just 28% of eligible people opted for COBRA.

    Still, for someone whose only other option is getting an individual health policy or who could wind up in a state's "high-risk pool" -- generally considered insurance of the last resort for people who can't get coverage in the open market -- COBRA is generally less expensive.

    And keep in mind that you can tCOBRA_Insurancee a tax deduction on your medical and dental expenses that exceed 7.5% of your adjusted gross income.
     


    When you're on COBRA, no longer will your employer be picking up a big chunk of the monthly premiums. You'll be responsible for paying the full amount, plus an administrative fee of up to 2%. You'll have to weigh your ability -- and desire -- to pay the extra expenses against your and your family's need for health coverage and the financial dangers of going without it.

    The fact is, though, that if you have children, you should have health insurance to help pay for all those routine check-ups and immunizations they need, plus the unexpected emergencies. One broken wrist could set you back thousands of dollars.

    And how are you feeling? If you have ongoing medical problems or need prescriptions frequently, you probably should opt for COBRA not only because the insurance coverage will help defray your out-of-pocket costs, but also because it will ensure that you don't inadvertently lock yourself out of the health-insurance market.

    People who have "pre-existing conditions" -- meaning medical problems that exist before you buy a policy -- find it much more difficult to buy individual health coverage because their policies can often be "medically underwritten." That is, insurers can consider the health of the applicants when deciding whether to insure someone. They could reject you for coverage completely or exclude coverage of your existing condition -- which goes against the very reason you need health insurance (some states, though, like Washington, ban that practice, and federal law forbids all group health plans from medically underwriting you).

    However, the federal Health Insurance Portability and Accountability Act (HIPAA) guarantees that people who have continuous health coverage -- and meet certain other qualifications -- can't be denied insurance even if they have pre-existing conditions. So if you forgo COBRA and thus create a gap in your coverage, you would lose your HIPAA protection when you later decide to buy insurance.

    Two other factors to review when considering COBRA: the extent of your health-plan benefits and your network of doctors and other health-care providers. If your plan has extensive benefits, you might want to stay on COBRA even if you're eligible for coverage under your spouse's health-care plan. The IRS says you have that right. And you might not want to risk losing a favorite doctor if you have to switch plans.

    If you decide against COBRA, you still can consider buying individual insurance or even a short-term policy to tide you over until you land a new job with health benefits.

    Your coverage offered under COBRA must be identical to the coverage you had before. "An employer can't allow employees to choose a less-expensive plan," notes Paul Fronstin, a senior research associate with the Employee Benefits Research Institute, a Washington-based nonprofit, nonpartisan organization that conducts research about employee benefits. However, employers can -- but are not required to -- give you the option of dropping such "noncore" benefits as dental and vision care. On the other hand, if you were covered by, say, three different health plans at the same time (for hospitalization, prescriptions, medical, etc.), you have the right to elect to continue coverage in any or all of them.

    The rules for beginning COBRA
    Both you and your employer must follow proper procedure to initiate COBRA, or else you could forfeit your rights to coverage.

    The employer must notify the health plan administrator within 30 days after an employee's death, job termination, reduced hours of employment or eligibility for Medicare.

    In cases of divorce, legal marital separation, or a child's loss of dependent status, it is your or your family's responsibility to notify the health plan administrator within 60 days of the event.

    Once notified, the plan administrator then has 14 days to alert you and your family members -- in person or by first-class mail -- about your right to elect COBRA. The IRS gets tough here: If the plan administrator fails to act, he or she can be held personally liable for breaching their duties.

    There are two exceptions to the notification rule, if the plan allows them: First, the time limit for both notification periods can be extended; and second, employers may be relieved of the obligation to notify plan administrators that the employees quit or reduced their work hours. It is then up to the plan administrator to determine if a qualifying event has occurred. You should find out in advance what your health plan allows.

    You, your spouse and your children have 60 days to decide whether to buy COBRA. This election period is counted from the date your eligibility notification is sent to you or the date that you lost your health coverage, whichever is later. Your COBRA coverage will be retroactive to the date that you lost your benefits (as long as you pay the premium).

    During the election period when you have to choose whether to buy COBRA, you might initially decide not to, which means you waive your right to coverage. However, as long as the election period hasn't expired, you can change your mind and revoke your waiver, and COBRA coverage would then start on the day the waiver was revoked. Bear in mind that if you visit a doctor during the period you initially waived COBRA, you will not be reimbursed for that claim even if you later decide to buy COBRA. In this case, COBRA is not retroactive to the date you lost your employer-sponsored plan.

    Other COBRA tidbits
    Here are a few other things you should keep in mind:
     

    • Premium payments. After you elect COBRA, you have to pay the first premium within 45 days. And that first premium is likely to be high because it covers the period retroactive to the date coverage ended through your employer. Successive payments are due according to health-plan requirements, but COBRA rules allow for a 30-day grace period after each due date for payment.
       
    • Extensions. Although COBRA sets specific time limits on coverage, there is nothing stopping the health plan from extending your benefits beyond the coverage period.
       
    • Notification rights. The U.S. Department of Labor has jurisdiction over issues involving notification of private-sector employees about COBRA coverage. Employers who fail to comply with the notification rules face fines of up to $110 for every day that no notice is sent after the deadline. In addition, the IRS can assess an excise tax against any company that does not comply with COBRA regulations.
       
    • Life insurance. COBRA mCOBRA_Insurancees no provisions for life insurance.
       
    • New workers. Newly hired employees must be given an initial general notice about their COBRA rights.
       
    • Plan description. COBRA information must be contained in the summary of the health-plan description employees must receive when they are new to the plan.
       
    • Switching plans. If your employer offers an open enrollment period to active employees and you're on COBRA, you must also be given the option to switch plans during that time.
       
    • Conversion plans. If the health plan offers the option of converting from a group plan to an individual policy under COBRA, you must be given that option and allowed to convert within 180 days before COBRA ends. But you'll pay individual, not group, rates, and switching to individual coverage could weCOBRA_Insuranceen any HIPAA protections you have.
       
    • Moving. If you relocate out of your COBRA health plan's coverage area, you will lose your COBRA benefits; the employer is not required to offer you a plan in your new area.
       
    • Premium costs. Your premiums can be increased if the costs of the health plan increase for everyone at the workplace, but generally they must be fixed in advance of each 12-month cycle. The plan must also allow you to pay premiums on a monthly basis if you want.
       
    • Premium notices. Neither the health plan nor the employer is required to send you monthly premium notices, so mCOBRA_Insurancee sure you pay attention to due dates.
       
    • Disability. People eligible for Social Security disability benefits may receive COBRA coverage for 29 months.


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