How COBRA Insurance Works

COBRA was set up to offer temporary health care coverage to workers, but it comes at a cost. If you choose to enroll in COBRA, you're generally responsible for your own monthly premiums and out-of-pocket expenses. Your group health plan is allowed to charge you 100 percent of the plan's cost, plus an administrative surcharge of up to 2 percent. So how much are we talking?

In 2020, the average annual cost of group health care coverage in the U.S. was a whopping $21,342 for families and $7,470 for individuals, according to Kaiser Family Foundation. Covered employees with family plans paid an average of 27 percent of that cost, or about $5,700 annually, with the employer picking up the rest. Those with individual plans contributed an average of 17 percent of the bill, or about $1,270 annually. But those on COBRA typically had to pay the full cost, plus the administrative fee.

The thought of paying nearly $7,500 a year for individual coverage, or $21,000 for family care, is shocking. And not surprisingly, many workers simply can't afford it, and thus decline. During the Great Recession of the late 2000s, Congress tried to help by offering a 65 percent COBRA premium subsidy through the American Recovery and Reinvestment Act. While this helped some people afford the coverage, many turned it down, citing COBRA's still-too-high cost.

In 2010, the Affordable Care Act (aka Obamacare) was signed into law, providing people with more options through its marketplace. Obamacare also provides subsidies to lower-income people to further lower the cost. Short-term health plans are also offered in many states. Typically available to most people for a year, they're affordable, although they don't cover much. It's also wise to investigate whether you're qualified for Medicaid or the Children's Health Insurance Program (CHIP).

It is possible that a former employer will cover some, or all, of your COBRA fees. This may happen as part of a buy-out agreement, or during a merger or acquisition. Sometimes this is part of a recruitment strategy. In general, however, workers are responsible for the entire bill.

While health care in the U.S. is costly in general, no matter the plan, it's often a necessary expense. And as anyone with a pre-existing medical condition can testify, any lapse in health insurance can result in long waiting periods or exclusion from coverage entirely. COBRA, while expensive, exists to make sure that lapse doesn't happen.

COBRA coverage is pricey. But are you even eligible? First, your health insurance has to be offered by a private-sector business, or state or local government, that employs at least 20 people who work at least half of the year. This number includes both full- and part-time workers.

Next, you must have had a "qualifying event" that caused you to lose your group health care coverage. Qualifying events include loss of job (voluntary or otherwise), reduction of hours from full to part time, and eligibility for Medicare. If you're seeking COBRA as the dependent of a covered employee, qualifying events include divorce, legal separation and the death of the covered employee. In addition, any plans that cover dependent children up to age 26 must also offer them COBRA coverage until the same age.

While it's true that COBRA is available whether you leave a job voluntarily or are fired, rules stipulate that termination for "gross misconduct" automatically disqualifies you and your dependents from COBRA eligibility. Interestingly, though, neither COBRA legislation nor the court systems have clearly defined "gross misconduct."

Finally, to be eligible for COBRA you must be a qualified beneficiary, which is someone who was enrolled in a group plan on the day before the qualifying event occurred. In general, this means you're the covered employee, the employee's spouse or ex, or the employee's child.

Should you lose your job because your company goes bankrupt, bankruptcy usually means that the group health insurance plan is lost as well. If there's no plan to continue, COBRA can offer no assistance. In other words, a continuation of benefits through COBRA only applies when you lose your ability to participate in an existing group health plan. If your company chooses to end its group plan, COBRA benefits no longer apply.

Coverage through COBRA isn't automatic, and there are some instances when you have to take the initiative. But there are some guidelines that both employers and their group health plan providers must follow in order to notify employees about their rights regarding COBRA.

First, within 90 days of signing up for group health insurance, group health plans are required to furnish participants with pertinent COBRA information, contained in the policy's summary plan description, plus provide a general notice about COBRA rights.

Later, if a certain COBRA-qualifying event occurs, such as an employee's termination or death, employers are required to notify their health insurance carrier within 30 days. But it's your responsibility to contact your insurance plan if the qualifying event is a divorce, legal separation or your child's loss of dependent status.

Once the insurance provider learns of a qualifying event, it has 14 days to contact the qualified beneficiaries and let them know they're eligible for COBRA, plus give instructions on how to sign up. You then have an election window of at least 60 days to make a decision. If you waive COBRA, then later decide to take it, you can do so as long as you're still within your election window.

COBRA coverage lasts either 18 or 36 months from the day of eligibility, depending on the qualifying event that occurred. If you leave your job or have your hours reduced, you get 18 months of coverage. But your spouse or dependent kids can receive 36 months of coverage if you die, get divorced or become legally separated. There's also a potential 11-month extension of COBRA to 29 months for people who become disabled during the first 60 days of coverage.

Finally, coverage under COBRA is retroactive to the date of the qualifying event, and the first payment can be due within 45 days after you elect to participate.

As we know, health insurance might be expensive, but it's often precious as well. In a time when companies attract employees not just by the wages they offer, but also by the company's benefits, health care coverage is an extremely influential aspect when deciding which job to choose. Knowing that we have the option to continue these benefits (albeit at our own cost) is a great relief to many in the workforce.