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

Your Guide To Understanding This Health Care Coverage Option

Businesswoman carrying cardboard box in office
••• JGI/Tom Grill / Getty Images

If you find yourself unemployed and worried about your options for a good health insurance plan, COBRA is one choice that allows you to continue your employee health insurance benefits, even if you no longer work for your last employer. Before deciding whether you should sign up for COBRA, there are pros and cons to consider and important steps to take to make sure you get coverage in time.

From April 1, 2021, to September 30, 2021, the federal government will be covering 100% of COBRA premiums as part of the American Rescue Plan. Those who left their jobs voluntarily or who gain access to coverage from a new employer will not be eligible.

What Is COBRA and How Does It Work?

COBRA stands for the Consolidated Omnibus Budget Reconciliation Act, a provision under federal law that since 1986 has required private insurers for employer-sponsored group health benefit plans to offer continuation of job-based health coverage after qualifying events such as:

  • Being laid off or otherwise terminated, except for “gross misconduct”
  • Losing coverage due to a divorce
  • Losing coverage as a dependent following the death of the primary beneficiary
  • Having your work hours cut
  • Quitting your job

How Long Can You Stay on COBRA Coverage?

The length of time you can stay on COBRA depends on your circumstances and what qualifying event made you eligible for coverage. In most circumstances, as long as you pay your premiums, you can stay on COBRA for up to 18 months. If a second “qualifying event” occurs, you may be eligible for longer.

If you are disabled when you become eligible, or become disabled within the first 60 days of becoming eligible for COBRA, you could qualify for an additional 11 months.

If you become eligible for Medicare within 18 months of your qualifying event, you may be eligible for COBRA for up to 36 months.

Dependents have additional coverage options.

Can Dependents Apply for COBRA Coverage?

Yes, COBRA provides protection to spouses, former spouses, and dependent children under certain qualifying events.

Eligibility for COBRA Coverage for Dependents 

Dependents may qualify for coverage for up to 36 months under the following circumstances:

  • If the primary beneficiary enrolls in Medicare.
  • The divorce or death of the covered employee.
  • They turn 26 and are no longer eligible for the parent's group insurance plan.

The cost of COBRA insurance can be high. If you have an HSA, consider using your HSA funds to pay or offset the higher premiums as well as for medical expenses. This is allowed, although HSAs usually can’t be used to pay regular insurance premiums.

How To Sign Up for COBRA

Your employer or health insurance administrator is required to notify you of your eligibility to enroll in COBRA. Then you have at least 60 days to decide whether to sign up.

If you are a dependent, you must notify the plan sponsor if you believe you qualify because of divorce, legal separation, or loss of dependent-child status to be eligible. As a dependent, you may elect to take COBRA even if the primary employee policyholder elects not to.

Once you sign up, you have to pay your initial premium for COBRA within 45 days of accepting your COBRA plan. If you are unclear about the process, or you did not receive a letter of eligibility, contact the health insurance administrator or the company’s human resources (HR) department for help.

Is It Worth Getting COBRA Insurance?

COBRA is optional. These pros and cons, spelled out in two U.S. Department of Labor (DOL) publications, “FAQs on COBRA Continuation Health Coverage for Employers and Advisers” and “An Employee's Guide to Health Benefits Under COBRA,” can help you decide if you should sign up.

Pros and Cons of COBRA

  • COBRA allows you to maintain the same plan as 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.

  • If you do not sign up for COBRA right away, you have up to 60 days to accept; coverage is retroactive.

  • Continue to use the same claims filing methods, doctors, pharmacists, etc. you are 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, especially if you travel out of state or have multiple residences.

  • 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, usually 18-36 months.

  • If you wait to accept COBRA, you will have to pay the premiums backdated to the qualifying event date because 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 insurance plan may have provided you coverage that you may not have access to through a private insurer or the marketplace. Some employer health insurance includes coverages that would otherwise require supplemental health insurance plans. For example, the maternity or childbirth benefits under an employer-sponsored group plan are governed under a different set of laws than marketplace plans, often providing better benefits. Choosing to maintain your employee benefits plan through COBRA can allow you to maintain access to these coverages.
  • Even if the employee does not sign up for COBRA coverage, their spouse, former spouse, and dependent children still can opt in to the former employer’s health plan under COBRA. Beneficiaries will receive an election notice giving them the necessary information for signing up.
  • If you have already paid toward your out-of-pocket maximums or covered your deductible on your existing plan, taking COBRA avoids having to switch plans and contributing to these out-of-pocket costs all over again after the year has started. This could save you money.

Cons Explained

  • COBRA will be more expensive than what you paid for coverage when you were an employee. This is because employer-sponsored health insurance is usually provided to you at a portion of the actual cost if the employer pays for part of it while you are an employee. Under COBRA, the former employer is not required to continue to pay the portion of your premium that it used to pay. In some cases, you may also have to pay a 2% administration fee.
  • If you do not find another job or health insurance plan by the time your eligibility for coverage runs out, you will find yourself without health insurance, because you can’t stay on a COBRA plan forever. The normal limit is 18 to 36 months, depending on the situation.
  • Not all employer group plans offer COBRA. For example, if you worked for an employer with fewer than 20 employees, it may not be required to offer a COBRA plan.

Key Take

  • COBRA provides a good option for keeping your employer-sponsored health benefits temporarily. The cost can be high, but if you have some savings in an HSA, that can help offset your costs.
  • Make an informed decision by looking at all your options during the 60-day enrollment period, and don’t focus on the premium alone.
  • Explore other options before making your decision. Check if you qualify under a spouse's or domestic partner’s employer health insurance plan, or see what is available through private health insurers and the marketplace.
  • Consider the savings if you have already met your deductible and maximum out-of-pocket costs for the year. 
  • Remember that COBRA can be canceled for non-payment if you can’t afford the premiums.