COBRA Health Insurance: How It Works, Its Pros and Cons

Your Guide To Understanding This Health Care Coverage Option

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COBRA (or the Consolidated Omnibus Budget Reconciliation Act) is a federal law that allows you to keep your employee health plan, even if you no longer work for your last employer. It enables individuals to remain on their health plan for limited periods of time under certain circumstances, including job loss, a reduction in hours worked, death, and other life events. But not everyone is qualified to receive these benefits.

In this guide, you'll learn how COBRA works, as well as the pros and cons you should consider as you decide if COBRA is right for you.

Key Takeaways

  • COBRA provides a good option for keeping your employer-sponsored health plan for a while after you leave your job, but the cost can be high.
  • Make an informed choice by looking at all your options during the 60-day enrollment period, and don’t focus on the premium alone.
  • Check if you qualify for coverage under a spouse's or domestic partner’s employer health plan, or compare to what's available through private health insurers and the Marketplace.
  • COBRA can be canceled for non-payment if you can’t afford the premiums.

What Is COBRA and How Does It Work?

"COBRA" stands for the Consolidated Omnibus Budget Reconciliation Act. The Act is a federal law that has required private insurers for employer-sponsored group health plans to keep job-based health coverage in place after qualifying events since 1986.

These events include being laid off or terminated except for “gross misconduct," and losing coverage due to a divorce or as a dependent after the death of the primary beneficiary. They also include having your work hours cut.

How Long Can You Stay on COBRA Coverage?

How long you can stay on COBRA depends on the event that made you eligible for coverage. You can stay on COBRA for up to 18 months in most cases, as long as you can pay your premiums. You may be eligible for even more time if a second event occurs in your life.

You could qualify for 11 more months if you're disabled when you become eligible, or if you become disabled within the first 60 days of becoming eligible for COBRA. You may be eligible for up to 36 months if you become eligible for Medicare within 18 months of your event.

Eligibility for COBRA Coverage for Dependents 

COBRA also covers spouses, former spouses, and dependent children under certain qualifying events. Dependents may qualify for up to 36 months if the primary beneficiary enrolls in Medicare, if the covered worker dies or is divorced, or if they reach the age of 26 and are no longer eligible for the parent's group insurance plan.

The cost of COBRA insurance can be high. Think about using your health savings account (HSA) funds if you have one to pay or offset the higher premiums, as well as for medical expenses. HSAs can’t be used to pay regular insurance premiums.

How to Sign Up for COBRA

Your employer or health insurance administrator must let you know you that you have a right to enroll in COBRA. You then have at least 60 days to decide if you want to sign up.

You must tell the plan sponsor if you think you qualify because of divorce, legal separation, or the loss of dependent/child status. You can elect to take COBRA even if the primary employee elects not to do so.

You must pay your first COBRA premium within 45 days of accepting your plan. Contact the administrator or your company’s human resources department for help if you're not clear about the process, or if you didn't receive a letter of eligibility.

Is It Worth Getting COBRA?

Getting or not getting COBRA or is up to you. It's your choice. The pros and cons are spelled out in two U.S. Department of Labor (DOL) publications:

Both can help you decide if you should enroll.

Pros and Cons of COBRA

Pros
  • COBRA allows you to maintain the same plan as you would if you were still an employee.

  • Spouses, former spouses, or children are eligible.

  • COBRA can help bridge the health insurance gap until you qualify for another health plan.

  • You have up to 60 days to accept if you don't sign up for COBRA right away. Coverage is retroactive.

  • You can keep using the same claims filing methods, doctors, and pharmacists that you're used to.

  • COBRA can save you money on out-of-pocket costs.

  • Employer-sponsored health plans may provide broader networks than non-group health plans if you travel out of state or have more than one home.

Cons
  • You will pay a high premium for COBRA plans.

  • You only have 60 days to take or decline COBRA coverage.

  • You can only stay on a COBRA plan for a limited time, often from 18 to 36 months.

  • You'll have to pay the premiums back to the date of your qualifying event if you wait to accept COBRA. Coverage is retroactive.

  • Your coverage changes under COBRA if your employer changes the plan’s coverage.

  • Not all employer group plans offer COBRA.

  • Your plan may not be available to you if you move out of state and the health network is limited.

Pros Explained

Your former employee group health plan may have provided you with coverage that you won't have access to through a private insurer or the Marketplace. Some employer plans include coverages that would otherwise require supplemental health insurance plans.

Maternity or childbirth benefits under an employer-sponsored group plan are governed under a different set of laws than Marketplace plans. They often provide better benefits. Choosing to maintain your employee benefits plan through COBRA can allow you to maintain access to these coverages.

Spouses, former spouses, and dependent children can still opt in to the former employer’s health plan under COBRA, even if the employee doesn't sign up. They should receive a notice telling them how to sign up.

Taking COBRA avoids having to switch plans and contribute out-of-pocket costs all over again after the year has started if you've already paid toward your out-of-pocket maximums. This could save you money.

Cons Explained

COBRA will be more costly than what you paid for coverage when you were an employee. Employer-sponsored health insurance is often provided at a portion of the actual cost because the employer pays for part of it. The former employer is not required to keep paying this portion of your premium under COBRA. You may also have to pay a 2% administration fee in some cases.

You'll find yourself without a plan if you don't find another job or insurance plan by the time your eligibility runs out. You can’t stay on a COBRA plan forever. The normal limit is 18 to 36 months.

Not all employer group plans offer COBRA. An employer with fewer than 20 employees may not be required to do so.

Alternative to COBRA

If you do not qualify (or choose to not take) COBRA coverage, you can enroll in a Marketplace plan instead. Marketplace, which is short for the Health Insurance Marketplace, was created as an enrollment service for medical insurance by the Affordable Care Act in 2010.

If your employer does not offer coverage, or you are in-between jobs at the moment, you may want to fill out a Marketplace application to see if you qualify for coverage. You will be able to choose from lower monthly premiums or savings on out-of-pocket costs based on your income.

When you lose job-based coverage, you qualify for a special enrollment period within the Marketplace. This means you have 60 days to enroll in a health plan, even if it is outside of the annual open enrollment period.