New decade. New personal finance-savvy you.
What is COBRA?
The Consolidated Omnibus Budget Reconciliation Act, known as COBRA, was passed by Congress in 1986. COBRA provides employees and their family members the right to purchase continuing health insurance at the group health rates when coverage is lost due to certain specified events. The group health rate is the rate the employer was charged for the insurance. These rates are usually less expensive than plans purchased individually.
COBRA applies to employers who employ 20 or more employees on more than 50 percent of their typical business days. Part-time employees are counted as a fraction of an employee. This means two half-time employees represent one full-time employee. The law applies to both private businesses and the public sector.
Individuals who benefit from COBRA are referred to as qualified beneficiaries. A qualified beneficiary is typically the individual who was insured by a group health plan on the day before the qualifying event took place. The qualifying event must have caused the beneficiary to lose their health insurance. Qualified beneficiaries include employees, their spouses, former spouses, dependent children, and dependent stepchildren.
To qualify for COBRA, beneficiaries must have lost insurance due to a specified event. These events include:
- Reduction in an employee’s hours.
- Termination of an employee’s employment for reasons other than gross misconduct.
- The employee now qualifies for Medicare.
- The death of an employee.
- Divorce or legal separation.
To qualify for COBRA, the employer must still offer its employees health insurance. If the employer goes out of business, the employees and dependents are not entitled to COBRA.
If the employer changes its employees’ group health coverage, the same coverage must be offered to qualified beneficiaries.
Employers may require qualified beneficiaries to pay for the COBRA coverage, and may charge a 2 percent administrative fee. The cost for continuing COBRA coverage is often more expensive than the amount the employee previously paid, since employers typically pay a portion of employees’ health insurance. For example, if the employee’s premiums were $200 per month and the employer’s premiums were $800 per month, the qualified beneficiary may be required to pay $1,000 per month for the identical group health plan. COBRA premiums may increase if the costs of the plan increases.
COBRA beneficiaries must be allowed to make monthly payments upon request. The first payment must be made within 45 days of electing COBRA insurance. Payments must cover any retroactive COBRA coverage. If the payment is not made by the first date of coverage, the plan can cancel the beneficiary’s coverage and then reinstate it upon receipt of payment. Beneficiaries are responsible for all co-pay fees and deductibles that were administered in the employee’s health plan.
Beneficiaries who lost coverage due to termination of employment or a reduction in work hours are generally eligible for COBRA for up to 18 months. In some cases, beneficiaries may be eligible for COBRA for up to 36 months. Beneficiaries may lose their COBRA benefits if they become fully eligible for another group health plan or Medicare.
Individuals who qualify for COBRA must be offered the identical group health coverage that they received before the qualifying specified event. This includes:
- Physician’s appointments.
- Inpatient and outpatient care.
- Surgery and other major medical procedures.
- Prescription drugs.
- Dental and vision care.