The Consolidated Omnibus Budget Reconciliation Act, or COBRA, was created in 1986 to offer working people a health-insurance safety net in case of job loss.
If you leave or lose your job, you and your family can generally keep your employer-sponsored health plan for 18 to 36 months by enrolling under COBRA. You can also enroll if you’re still employed but aren’t working enough hours to qualify for a company health plan.
COBRA insurance costs are high, though, because you’re paying the full amount yourself. Recent changes in the insurance market mean you have other options after losing job-related coverage.
What You Need to Know
You have 60 days to decide whether to accept COBRA coverage once it’s offered to you. You keep your employer plan and access to your doctors, but you’ll pay 100% of the premium, along with an administrative fee.
In an emergency or other situations, your employer can cover part or all of your premium for a certain amount of time. There are ways you can lower the cost as well.
You can also shop for health plans in either the government-run Affordable Care Act (ACA) Health Insurance Marketplace or the private market for individual policies.
Why Is COBRA So Expensive?
When the notice of eligibility for COBRA coverage arrives, you might experience sticker shock.
Previously, your employer paid most of the costs of your healthcare. Under COBRA insurance, you pay 100% of the premium yourself, plus up to a 2% additional charge for plan administration.
The Kaiser Family Foundation estimated that in 2019 the average annual premium for family coverage in an employer-sponsored health plan was over $20,000. Of that amount, the average employee paid only about $6,000. This means the average COBRA enrollee could pay more than three times as much for their health plan as they paid when they were on the job.
Your tax bill could grow, too. In an employer-sponsored plan, your monthly premium payment is deducted pretax from your paycheck. Pretax deductions shrink taxable income, lowering your tax bill. When you switch to COBRA, you lose that pretax deduction.
One big plus that COBRA provides is an extra 11 months of coverage beyond the usual 18-month limit for participants with qualifying disabilities. But those extra 11 months will be more expensive. Your premium price could rise to 150% of its initial cost.
Keep in Mind
Under COBRA insurance, you pay 100% of the premium yourself, plus up to a 2% additional charge for plan administration.
Do Employers Pay COBRA Costs?
In some situations, your former company could pay part or all of your COBRA premium.
For example, your employer might offer subsidized COBRA coverage if you were furloughed because of a crisis like the COVID-19 pandemic. Your employer would pick up the full premium, and you would reimburse the company when the furlough ends.
Your employer might also cover all or part of your COBRA coverage as a form of severance pay. In this case, you would get the COBRA subsidy tax-free.
How Can You Lower Your COBRA Costs?
If you’d like to keep your employer coverage, some COBRA features can make it more affordable.
- If you’re still enrolled in COBRA during your employer’s next Open Enrollment Period, you can switch to a lower-priced plan, if there’s one available.
- If you itemize deductions on your federal income tax return, your COBRA premium may be tax-deductible.
- If your total qualifying medical and dental expenses, including COBRA premiums, paid during the tax year are at least 10% of your adjusted annual gross income, your COBRA premiums are deductible. You can’t deduct any portion of the premium paid by your employer.
- If you have funds in a health savings account (HSA), you can use them to pay COBRA premiums.
- You can only contribute to an HSA while you’re enrolled in a high-deductible health plan linked to the HSA. But as long as there’s money in the account, you can use it to pay qualified medical expenses.
- A federal Health Coverage Tax Credit program has been temporarily available to pay up to 72.5% of COBRA premium costs for workers in a few categories. The credit will expire at the end of 2020, however.
What Are Alternatives to COBRA Coverage?
When you qualify for COBRA enrollment, you get a 60-day window to consider your options. You can also get coverage through the private market for individual health insurance or the state and federal Health Insurance Marketplace set up under the Affordable Care Act (ACA). (And if you have the option, you can have your spouse or partner add you to their coverage.)
Word of Advice
Choosing the right health insurance is a matter of balancing costs against the kind of coverage you need
ACA plans are popular for their premium subsidies. These are discounts for health plans sold in the state and federal ACA Marketplaces. ACA plans cover 10 “essential benefit” categories including hospitalization, emergency care and preventive care, and may not impose annual or lifetime caps on the cost of your care.
You’re eligible for a subsidy if your previous year’s income was between 100% and 400% of the federal poverty level. That translates to a 2020 annual income between $12,409 and $49,960 for a single person and between $21,330 and $85,320 for a family of three.
ACA plans are in four categories: bronze, silver, gold and platinum. Bronze plans offer the lowest monthly costs and the highest deductibles, while platinum plans have the highest premiums but provide more coverage.
Independent Health Insurance
This is a good option if your income is too high to qualify for an ACA premium subsidy. Independent health insurance policies are individual plans sold by private insurers outside the federal or state Marketplaces.
Private insurers have more freedom to design a plan, so you might be able to get benefits or access to providers that you couldn’t get from ACA plans in your price range.
Unlike COBRA coverage but like ACA Marketplace plans, you can keep your independent health plan as long as the insurer offers it.
Short-Term Health Insurance
Another low-cost alternative is a short-term, or limited-duration health policy.
Not all states offer short-term medical plans, and the rules on them vary from state to state. Policies commonly offer coverage for three months, with the opportunity to renew for a certain amount of time.
Insurers offering short-term policies can raise premium prices based on your medical history. They can also refuse you coverage if you have a preexisting condition. And short-term plans aren’t required to cover the essential benefits offered under ACA plans.
Given the high cost of COBRA, should you still consider it as an option? For many the answer is yes. If you’re having health issues, for example, keeping access to your regular doctor could be vital.
Choosing the right health insurance is a matter of balancing costs against the kind of coverage you need. Use the 60-day period before your COBRA eligibility closes to consider what’s best for you.