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COBRA Health Insurance

COBRA health insurance laws are designed to protect employees and their dependents by allowing them to continue their group health insurance plan even after the employee leaves their employer or ceases to work full-time. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) requires that companies with 20 or more full-time employees offer this COBRA continuation coverage at no more than 102% of the regular total group rate to employees for up to 36 months following a “qualifying event” for a “qualified beneficiary”.

Let’s break down the COBRA laws into some simple and easy to understand language so that you will be able to clearly understand how the COBRA laws will protect you and also what your health plan options are.

The COBRA Definition of “Group Health Plan”

First of all, for the purposes of the COBRA laws, a group health plan is defined as a medical expense plan, a dental plan, a vision care plan, a prescription drug plan, and all of these types of plans whether or not they are funded by the employer (self-funded or self-insured it is called) or administered by a private insurance company. It is important to note that long term care plans and voluntary benefit plans under which the employer’s only involvement is to process payroll deductions do not fall under the COBRA act. Any company with a group health plan according to the definition above and that has 20 or more full-time employees is subject to COBRA.

The Penalty for Not Following the COBRA Act Rules

You should now have a good idea of whether or not your company should fall under the COBRA act rules. The penalty can be steep for not complying with the COBRA laws as failure to comply with the act can result in an excise tax of up to $100 per day for every person not given COBRA coverage who should have been (this excise tax is levied on the employer and if involved often on the insurer or HMO).

The COBRA Definition of a “Qualified Beneficiary”

The next important term that you should know for the COBRA rules is “Qualified Beneficiary”. A qualified beneficiary is defined as any employee, or the spouse or dependent child of the employee, who on the day before a qualifying event was covered under the employee’s group health plan. The definition also goes a little further and includes any child who is born to or placed for adoption with the employee during COBRA coverage.

As you can see from the above definition, it is more than just the employee who can be labeled as a qualifying beneficiary and in turn be eligible for COBRA. Understanding what a qualified beneficiary is defined as is very important in determining who is eligible for COBRA benefits.

The COBRA Definition of a “Qualifying Event”

The next important term that you need to know for the COBRA rules is “Qualifying Event”. A qualifying event is any of these following things if it results in a loss of health insurance coverage by a qualified beneficiary:

1. The death of a covered employee. 2. The termination of an employee for any reason other than gross misconduct. This includes quitting, retiring, or being fired for something other than gross misconduct. 3. A reduction of the employee’s hours so that the employee or dependent is ineligible for coverage (for instance, many company’s will only offer health benefits to full time workers so if your hours are scaled back and transition from full time to part time labor then this is one of the scenarios that this is talking about). 4. The divorce or legal separation of the covered employee and his or her spouse. 5. The employee’s eligibility for Medicare (this is considered a qualifying event for the employee’s spouse and children). 6. A child’s ceasing to be an eligible dependent under the plan.

What the COBRA Act Provides For

Ok, so we now know what a qualified beneficiary is and we now also know what a qualifying event is. Here is the simplest way to understand what the COBRA act provides for: when a qualifying event happens to a qualified beneficiary then that qualified beneficiary is entitled to elect group continuation coverage without having to provide evidence of insurability (“evidence of insurability” meaning that no medical records, health history, physical exam or any other type of health underwriting is necessary – and therefore it follows that the insurance company administering the group health plan [or the employer in the case of self insurance] cannot exclude coverage of any pre-existing conditions or refuse to provide coverage).

The length of this COBRA continuation coverage is usually anywhere from 18-36 months depending on the qualifying event. Here are some of the more common qualifying events and the associated length of time that each qualified beneficiary must be allowed to continue coverage (note that coverage must be allowed until the earliest of the following):

• 18 months for employees and dependents when the employee’s employment has terminated or coverage has been terminated because of a reduction in hours. This period is extended to 29 months for a qualified beneficiary if the Social Security Administration determines that the beneficiary was or became totally disabled at any time during the first 60 days of COBRA coverage. • 36 months for other qualifying events. • The date the plan terminates for all employees. • The date the coverage ceases because of a failure to make timely payment of premium for the qualified beneficiary’s coverage. • The date the qualified beneficiary subsequently becomes entitled to Medicare or becomes covered (as either employee or dependent) under another group health plan, provided the other group health plan does not contain an exclusion or limitation with respect to any preexisting condition. If the new plan does not cover a preexisting condition, the COBRA coverage can be continued until the earlier of (1) the remainder of the 18 or 36 month period or (2) the time when the preexisting conditions provision no longer applies.

The Time Period for Electing COBRA

As soon as a qualifying event occurs and the employer knows about it then the employer has 30 days to notify the benefit administrator (typically the health insurance company). As soon as the benefit administrator is notified then the benefit administrator has 14 days to notify all qualified beneficiaries. It is important to note that when certain qualifying events happen such as a divorce then the employer may not even know that a qualifying event has happened. If this is the case (the employer could not be reasonably expected to know that a qualifying event has happened) then the employee has 60 days to inform the employer or else there will be no COBRA coverage extended.

The Cost of COBRA

The maximum cost that COBRA will be is limited to 102% of the total normal group plan rate (150% for months 19-29 in the case of someone who is disabled and gets the additional months of COBRA coverage past 18 months). VERY IMPORTANT: the premium that you will pay is NOT limited to 102% of the portion of the premium that you paid before COBRA but rather 102% of your full premium. Many people do not truly know the full cost of their group health insurance because typically their employer will pay all or most of their premiums. For instance, if your total premium cost was $1,000/month pre-COBRA and your employer paid $800/monthly and you paid $200/monthly then the maximum rate that you would be charged for COBRA is $1,020/monthly ($1,000 X 102%).

Electing COBRA vs. Obtaining Individual Health Insurance

COBRA continuation coverage is not automatic. You can choose or reject the COBRA coverage and you can also cancel at anytime after you have began COBRA. Everything else being equal, a group health plan (COBRA) will be approximately 2-3 times the cost of a similar individual health insurance plan (often even when you compare plans from the same insurance company).

The benefits are pretty close to the same between individual and group (maternity coverage is one difference) but the huge difference is that while on COBRA you cannot have any of your pre-existing conditions (prior health problems) excluded while on an individual health insurance plan they can exclude coverage for minor health problems that you have had in the past or even deny the application if you have major health problems. (Note that state insurance laws will not allow an insurance company to cancel your policy or refuse to cover health problems that you develop after the coverage is in force – the only thing that they can say they will not cover potentially is the preexisting health problems).

So if you are somewhat healthy then you probably will not want to elect a COBRA plan simply because you will be paying a lot more than you should be for health insurance. If you have some serious health problems (cancer, heart disease, rheumatoid arthritis, severe obesity, etc.) then you should stay on COBRA for the full 18-36 month period. (Once your COBRA time period is up then you may be eligible for a guaranteed issue individual health insurance plan where they cannot exclude coverage for preexisting conditions or deny coverage. These types of plans are called HIPAA health insurance plans).

Save $100’s/Month Over a COBRA Plan

Regardless of your situation, be sure and do your research. Many people have saved upwards of $500/month simply by investigating the different plan quotes and rates. Even if you can save yourself $200/month then at the end of your 18 months that adds up to $3600 or a nice little sum of money for a vacation. Speak with an independent insurance agent that is knowledgeable about your COBRA options.

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