COBRA

What It Means

COBRA (Consolidated Omnibus Budget Reconciliation Act) is a U.S. federal law requiring group health-insurance plans sponsored by employers with 20 or more employees to offer continued health-insurance coverage to workers after they leave their jobs. The law also states that a worker’s dependents have a right to continue receiving health-insurance coverage under the conditions of the company’s health-care plan after a worker has discontinued his or her employment. COBRA allows departing employees to extend their coverage for up to 18 months. Their dependents are permitted to extend their insurance coverage for as many as 36 months. COBRA is available to employees and their dependents and spouses whether or not the employee leaves the job voluntarily. This means that employees who are fired are eligible for COBRA benefits. Only those employees who can be shown to have caused destruction willfully to the business may be denied COBRA benefits.

Under COBRA the departing employee is required to pay the entire premium (the fee for insurance coverage) plus a 2 percent service charge in order to continue receiving health benefits for himself and his dependents. Insurance premiums are usually paid on a monthly basis. The terms of an insurance plan may require the sponsoring company to pay $500 a month to insure one employee. The employee may be asked to contribute an additional $60 per month, which is deducted from his paycheck. According to COBRA a departing employee would be required to pay $560 per month plus another $11.20 (the 2 percent service fee) to continue receiving health benefits. Although costly, the COBRA fee is substantially less than what the individual would pay if he were to purchase his own health-insurance policy.

When Did It Begin?

The COBRA bill became a law in the United States on April 7, 1986; however, its official name is the Consolidated Omnibus Reconciliation Act of 1985. Because it was not passed until the following year, the law is sometimes identified in print as the Consolidated Omnibus Reconciliation Act of 1986. To avoid confusion and because it is easier to say, most people refer to the legislation simply as COBRA. In the years after the legislation was passed, many employers complained that COBRA’s rules were difficult to understand. Many companies with 50 or more employees hired outside firms to interpret COBRA and to make sure that the employer was abiding by the law in its dealings with employees. Many employers were irritated by this added expense. As a result of the complexity of the law and the expenses associated with managing employee health insurance, many employees were denied the opportunity of taking advantage of COBRA in the years immediately following the legislation.

Congress revised COBRA legislation in 1999 in attempt to reduce confusion and to ensure that continued health-insurance coverage was provided for deserving employees. The new guidelines clarified employers’ responsibilities to their employees and limited some of the employees’ options for continued coverage. According to the first version of the act, a COBRA recipient could choose the amount of coverage he or she wanted to continue receiving. For example, the recipient could choose to continue with major medical coverage but to discontinue coverage for prescription drugs and dental care. According to the new plan, however, the recipient may be asked either to continue with all of the coverage available in a health plan or to discontinue the insurance policy.

More Detailed Information

Several different events at a workplace can make an employee eligible for COBRA. These events are called qualifying events. They include voluntary or involuntary termination of employment, an employee’s failure or inability to return to work after a medical leave, the bankruptcy of the business, and a reduction of an employee’s hours from full- to part-time. Many employers who offer health insurance allow only full-time employees (those who work 40 or more hours per week) to receive this benefit. During slow periods of business when profits are down, employers often reduce their workers’ weekly hours to save money on payroll expenses. When this happens, a worker not only loses weekly income, he or she may also lose health insurance and other benefits. If this person is able to pay the premiums, COBRA allows him or her to continue receiving the same level of health insurance that the company provided before cutting his or her hours.

Provided they are part of the employee’s insurance plan at the time of the qualifying event, an employee’s spouse and dependents are eligible for COBRA upon the employee’s death, on the occasion of a separation or divorce, or if there is a change in the status of one of the dependents included on the policy. Most insurance policies cover spouses and children up to age 21 or 22, provided those children are still in school. By the time most students graduated from college, they are no longer covered on working parents’ health-insurance policies. Many of these graduates leave school without jobs that provide health insurance. Under COBRA these recently graduated students can extend the insurance coverage they had for another 18 months. This gives them a year and a half to find a job that offers health-insurance benefits.

COBRA legislation assigns several important responsibilities to the employer. First, the employer is required to make any new employee who qualifies for the company’s health-insurance plan aware of his or her right to continue health-insurance benefits at the time that the employee begins working. If an employee formerly ineligible for health insurance becomes eligible, the employer must discuss COBRA when reviewing the company’s health-care plan with the newly eligible employee. The company has 30 days after a qualifying event (the termination of an employee, for example) to notify the insurance company about the employee’s change in status. Upon receiving the update, the insurance company then has 14 days to contact the former employee and review the costs and benefits included in continued coverage. The former employee has 60 days to decide whether or not he or she wishes to continue receiving coverage.

If the employee wishes to extend coverage, the insurance coverage is retroactive to the day that the qualifying event occurred. For example, if an employee was fired on May 15, 2007, the insurance company may not receive notice until as late as June 14, 2007. The insurance company, in turn, may not contact the former employee until June 28, and the former employee may not decide to accept coverage until August 28. However, if that person does accept the coverage, his COBRA insurance be effective as of May 15, 2007, and would last until November 15 of the following year. The employer would have the right to terminate the COBRA policy if the recipient was more than 30 days late with a payment or if the recipient accepted a new job that provided health insurance. The company would also be permitted to terminate coverage if the recipient became eligible for Medicare (a publicly funded health-insurance program for the disabled and people aged 65 and over).

Recent Trends

In the 1940s and 1950s many businesses offered continued health-insurance coverage to retirees. They were able to do this because the U.S. economy was thriving after World War II and because there were relatively few retirees seeking coverage. With the introduction of Medicare, employers’ responsibilities for their retirees’ health insurance were reduced. Over the years, companies have been less willing to offer health benefits to retirees at affordable rates. Beginning in the early 1990s changes in accounting and tax laws made retiree health-insurance plans substantially more expensive for employers. As a result, most employers who continued offering this coverage required their retirees to pay for a larger portion of the insurance.

The rising cost of health insurance for the elderly has been a pressing concern in the United States since the changes in retirement health benefits in the 1990s. Many retirees take advantage of their rights under COBRA to continue receiving health-insurance benefits for the first 18 months after retirement. While maintaining coverage through COBRA keeps a retiree insured, it is extremely costly for many retired people because the retiree must pay 102 percent of the cost his employer paid per month to continue his insurance. If the 18 months expires before the retiree turns 65, then that person must seek other insurance options before he becomes available for Medicare.