What Is COBRA?

 What You Need to Know

COBRA allows you to continue coverage under your employer-sponsored group healthcare plan for a certain time period if you lose or leave your job.

Spouses and dependents may also apply for continuing healthcare coverage under COBRA.

Because COBRA is expensive and, in most cases, lasts only 18 months, it’s important to explore all of your alternatives before signing up for this option.

Leaving or losing a job almost always means losing employer-sponsored health insurance. Fortunately, U.S. law provides a way for workers and their families to continue their group health coverage for limited periods of time.

Under COBRA ( the Consolidated Omnibus Budget Reconciliation Act), group health plans sponsored by employers who hire 20 or more full- or part-time employees must offer healthcare coverage to qualified employees, spouses and dependent children who would otherwise lose it. The worker then has at least 60 days to decide whether to accept the coverage, which usually runs for up to 18 months. State and local government jobs also fall under the jurisdiction of COBRA.¹

What Coverage Can Be Continued Through COBRA?

COBRA allows individuals and families to continue to receive medical, dental and vision coverage, and to continue to participate in employee assistance programs and, in some cases, healthcare flexible spending accounts (FSAs).

Who Qualifies for COBRA?

It’s important to keep in mind two terms when thinking about who can sign up for COBRA: “qualified beneficiary” and “qualifying event.” 

Anyone who fits the definition of a “qualified beneficiary” may sign up for COBRA. Qualified beneficiaries are employees, spouses, former spouses and dependent children of employees who were covered by a group health plan on the day before a “qualifying event” occurred. Each beneficiary may sign up separately. If a company declares bankruptcy but continues to operate, COBRA may still remain available for laid-off workers. 

In some cases, people other than employees, such as independent contractors and directors who sit on a company or corporation’s board may also be considered qualified beneficiaries.²

“Qualifying events”³ for employees include:

• Termination of employment for any reason other than “gross misconduct.”
•  A reduction in hours that results in the employee no longer being eligible for employer-provided group health insurance.

Spouses and dependents may experience a qualifying event if:

• The covered employee loses their job for any reason other than “gross misconduct.”
• The covered employee undergoes a reduction in hours.

Spouses and dependents may also experience what’s known as a secondary qualifying event in the following circumstances: 

• The covered employee becomes entitled to Medicare.
• The covered employee and spouse divorce or legally separate. 
• The covered employee dies.
• A child on the plan loses dependent child status, which means he or she reaches the age of 26, the maximum age allowed for coverage under a parents’ group health plan.

If these secondary qualifying events happen after the initial job loss or reduction in hours, spouses and dependents may be eligible for up to three years of COBRA coverage.

How Long Can You Keep COBRA?

Usually, COBRA continuing coverage lasts 18 months after you become unemployed. However, the period of coverage may be longer in some situations — a total of 29 months, for example, if the beneficiary has a disability. Spouses and dependents may be eligible to continue coverage for a total of up to 36 months if they experience a second qualifying event.⁶

How Much Will You Pay for COBRA?

Cost is a major drawback of COBRA coverage because in almost all cases your employer will no longer be chipping in anything for your premium. Under COBRA you must pay the full premium costs plus a possible 2% administrative fee. That can be a significant increase, considering that the average employer pays about 80% of annual premiums for plan members.

According to the Kaiser Family Foundation, the average annual premiums for family-based, employer-sponsored health insurance was more than $21,000 in 2020. ⁴

While employed, you would be paying only 20% of that, or $4,200 per year. With COBRA, you’ll pay the full $21,000 plus the administrative fee. 

That said, you can’t be charged more than 102% of the cost of the plan. (In cases of disability the charge may be 150% of costs.) You make payments directly to the health insurance company or COBRA plan administrator.

In some cases, your former employer may choose to pay some or all of your COBRA premiums. This may happen if your employer is undergoing a merger or acquisition, has furloughed you, or is offering severance. In these cases, you may find you pay the full cost of insurance and get a reimbursement from your former employer afterwards. Or, the employer may pay the health plan directly.⁵

What Notices Do You Receive Under COBRA?

If you qualify for continuing coverage under COBRA, in most cases your employer must notify your health plan within 30 days of the qualifying event — for example, the end of employment, a reduction in hours, the death of the employee or when the employee becomes eligible for Medicare. Once the health plan has been notified, it must provide qualified beneficiaries with a COBRA election notice within 14 days. The notice will include an application for coverage, cost information and deadlines of at least 60 days for signing up. Keep in mind that you must sign up for COBRA during the specific time frame and COBRA bills must be paid on time or you risk losing coverage. Your plan will tell you if you can apply online or need to do so by mail. 

What Are Your Responsibilities While on COBRA?

In order to receive COBRA, you, your spouse and your dependents must be aware of some important rules.

In cases of divorce, separation or a child’s loss of dependent status, it is up to the covered employee or other qualified beneficiary to notify the plan about the event and their COBRA eligibility. The amount of time you have to notify the plan can vary, but under COBRA rules it must be at least 60 days.⁷

Once COBRA is offered to you, you have at least 60 days to sign up for it. Coverage is retroactive from the day after the qualifying event. After you elect COBRA, you have 45 days to make your first premium payment. If you don’t, the health plan can terminate your benefits. 

You’ll learn from the plan when payments are due each month and whether you need to mail them in or have them deducted from your bank account. You also will have a 30-day grace period. If you miss that grace period, your plan can cancel your coverage.

TIP: If you have a health savings account, you can use your tax-advantaged funds to pay for COBRA premiums for yourself, your spouse and your dependents..

What If You Are Retiring?

If you are retiring before you reach eligibility age for Medicare (65, unless you are disabled), that is considered a qualifying event, and you and your dependents will be eligible for COBRA.

Before you sign up, be sure to check if your employer offers retiree healthcare benefits and if early retirees are eligible to receive them. Retirement health coverage from your employer will last as long as the company offers it, and it will likely be more affordable than COBRA.

What If You Are Eligible for Medicare?

If you become eligible for Medicare less than 18 month before leaving or losing a job, your spouse and dependents can receive COBRA coverage for up to 36 months after the date you qualify for Medicare. If, for example, an employee becomes eligible for Medicare 6 month before the date their employment ends, COBRA coverage will be an option for a spouse and dependents for 30 months (30 months minus 6 months). ⁸

Important: If you sign up for COBRA and then become eligible for Medicare, you should still sign up for Medicare Part B. COBRA coverage is not considered a qualified alternative healthcare plan. Therefore, if you wait until COBRA ends to sign up for Part B coverage, you will likely face ongoing late penalties.⁹

What Are the Alternatives to COBRA?

Because COBRA is expensive and short-term, it makes sense to explore other health insurance options, including:

• Coverage through a spouse’s plan: If it is available to you, having your spouse add you to their employee-sponsored health plan can be one of the easiest and most affordable ways to replace your health insurance.
• The Affordable Care Act Health Insurance Exchange: When you lose or leave a job, that is a qualifying event under ACA rules. That grants you a special enrollment period to sign up for ACA coverage outside of the annual open enrollment period. Visit healthcare.gov to find out about the exchange healthcare plans available to you. Choosing Obamacare may be your most affordable option if your income has dropped to where you qualify for ACA premium subsidies. 
• Private health insurance: You can also buy individual coverage directly from health insurance companies through the private marketplace. You usually sign up for these through an insurance broker or agent. This can be expensive, especially compared to subsidized ACA coverage..
• Medicaid: If losing or leaving your job means a drastic loss in income, don’t overlook the possibility of Medicaid and other state and local assistance programs. States determine what income level is required for Medicaid eligibility. For more information visit Medicaid.gov. 
• Short-Term Health Insurance: Short-term plans offer temporary, stopgap coverage, often used to bridge the gap between major medical insurance. While generally cheaper than other options, they also offer fewer benefits and may not cover preexisting conditions. 

What Are the Pros of COBRA?

COBRA helps guard against the risks of becoming uninsured and having to pay out of pocket for your healthcare for a set period of time.

Continuing coverage also means you can continue to see your physician and other health plan providers as well as keep any prescription drug coverage. This is especially important for someone who is in the midst of treatment for a medical condition. 

What Are the Cons of COBRA?

Cost is the main barrier to COBRA. You may pay far less for insurance through the Affordable Care Act exchanges, especially if you qualify for a premium subsidy. Also, COBRA lasts only for a limited period of time.

With COBRA you are still tied to your former employer. If that employer should discontinue its health plan, for whatever reason, you will no longer have coverage. Or, if the employer makes significant changes in the plan while you are under COBRA, you will have no choice but to accept those changes.

Next Steps

For years COBRA has been a reliable, although costly, way to remain insured when employer insurance is interrupted. But it’s important to research all of your healthcare options carefully to find the most affordable coverage that meets your needs. That’s especially true if you qualify for an ACA exchange subsidy premium.