What is COBRA

What happens to an employee’s benefits if their hours get cut?  What happens if an employee gets laid off?  Do they immediately lose health coverage?  What about their family?  

The Consolidated Omnibus Budget Reconciliation Act (COBRA) is continuation of coverage that allows an employee and the employee’s dependents to continue benefits in the event of job loss or reduction in hours.  But how does COBRA work, who is eligible, what does it cost, and what are the pros and cons? Let’s discuss.

Employers with 50 or more full-time equivalent employees (FTE; part-time and full-time employee calculation) in the United States are required to provide health insurance to their employees by paying part of their premiums. Additionally, an employer below the 50 FTE requirement can still offers benefit. If the employee becomes ineligible to receive the employer’s benefits due to getting laid off or falling below the threshold of hours to qualify, the employer can stop paying its part of the premiums.  COBRA, which was established in 1986, allows the employee and dependents to retain the same health coverage if they are willing to pay for it themselves.  In addition to former employees and former dependents and spouses of those employees, COBRA also allows retirees continued health coverage at group rates that otherwise may have been terminated.  Yes, they will likely pay more through COBRA than they did as an employee, but COBRA is typically cheaper than an individual health care plan.

COBRA is a continuation of coverage that can include medical, prescription drugs, dental, vision, and flexible spending account (FSA) benefits.  It does not however include disability or life insurance.

To be eligible for COBRA, there are different sets of criteria.  In addition to meeting these, eligible employees can only receive COBRA coverage after a “qualifying event”.  First, usually employers with 20+ full-time employees are mandated to offer COBRA coverage.  Multiple part-time employees’ hours can be combined to create a full-time equivalent employee.  Employees of the private sector, state, and local governments have COBRA corresponding plans.  Second, an employee must be enrolled in a company-sponsored group healthcare plan on the day before the “qualifying event” occurs and the plan must’ve been effective for at least half of the previous calendar year.  If an employer is going out of business and is no longer offering healthcare coverage to other employees, the departing employee will no longer be eligible for COBRA benefits.

An employee’s “qualifying event” is either one of two things:

A spouse is entitled to COBRA if:

COBRA coverage extends for a limited period of 18-36 months depending on circumstance.  A former employee may extend past 18 months if a qualified beneficiary is disabled or if a second qualifying event occurs such as death of a covered employee, legal separation or divorce, employee becoming entitled for Medicare, or loss of dependent child status occurs.

The cost of COBRA healthcare can often be a surprise to the ex-employee.  The term “group-rate” can be a bit misleading as it’s sometimes perceived as a discount.  That’s not the case.  Often employers pay a significant portion of the premium – anywhere from 50-100% of the costs.  After employment is terminated, the individual is required to pay the entire amount with the addition of administrative fees.  

Drawbacks of  COBRA for employees are the cost, the limited coverage period, and the continued dependency on the employer.  If the employer decides to change health insurance plans, the COBRA beneficiary must accept those changes even if they’re not happy with them.  If the employer goes out of business and no longer offers insurance, COBRA benefits will be terminated.

However, COBRA is still usually less expensive compared to most individual healthcare plans and definitely less expensive than being uninsured. In addition to the cost being less than an individual plan, another pro of COBRA is that the former employee can continue with the same physician, within the same medical network.  The beneficiaries can also retain coverage for preexisting conditions and regular prescription drugs.  

Need help understanding COBRA rules and regulations ?  Contact The Grigg Group!

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