COBRA Basics

By request, I am discussing COBRA today. It is a more popular topic than ever because our unemployment rate is hovering above 9%. Many people think COBRA is a special kind of health coverage. It isn't! It is the same plan you were covered by while you were working.

As a newly hired employee at most companies (or state and local governments), you may be offered the ability to get medical coverage through the company. The cost of the coverage is relatively low compared to the price you would pay if you bought the coverage yourself.

One of the many reasons that the coverage is cheaper is because the employer pays a large portion of the cost for you. Employees usually only pay between 20% and 30% of the cost of the insurance while their employer pays the rest.

When you leave the company, your medical insurance ends. This is probably the worst time for you to have to pay for health insurance and many people go without it while they are out of work or in between jobs.

In 1986, Congress passed the COBRA law (Consolidated Omnibus Budget Reconciliation Act). The law required employers to temporarily extend the health care coverage they offer to their active employees to those leaving their medical plans. This could be those who leave the company for another job, get laid off, spouses who are now divorced, children who are now too old to be covered under their parent's plan, etc.Depending on the reason you losing your coverage, you could be eligible to have COBRA for18 - 36 months.

About two weeks after your coverage ends, you will get a packet in the mail explaining how you can enroll in COBRA coverage. Once you complete the paperwork and pay, your COBRA coverage begins. The effective date is the day after your active coverage ends so there is no gap.

It all sounds great so far. You get to keep the coverage you had when you were working, right? Not so fast... the biggest problem with COBRA is that since you are no longer working, you don't get the "benefit" of your employer paying 70% or 80% of the cost of your health coverage. Now you are paying the full cost on your own (plus a 2% administrative fee).

So while COBRA sounds good, many people opt to skip it. Recently, as part of a large stimulus package to help the economy, Congress passed a law (ARRA) that requires employers to pay 65% of the COBRA costs for their recently laid off workers. The government repays the employer so it is really the government paying the 65%. The government gets this money from Americans who pay taxes.

The idea is that the amount a laid off worker would pay is about the same as they would pay if they had been working. The 65% COBRA subsidy is close to the 70% or so that the employer paid as a "benefit" to active workers.

There are rules about who is eligible and how long you can get the subsidy (up to 9 months) so click here to read more. Hurry, the COBRA subsidy ends soon!