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A Good Time to Make Friends with COBRA

COBRA is a federal law, technically part of the 1985 Consolidated Omnibus Budget Reconciliation Act, that allows many workers to continue their employer health care coverage after they leave the employer, or otherwise lose their employer’s coverage due to reduced hours, death, divorce, or other factors. COBRA coverage applies to employees working for employers with 20 or more workers during at least half of the working days in the previous year, with the exception of church plans. Employers with fewer than 20 workers may still be subject to COBRA-like coverage under state law, so check with your state’s department of insurance.

Generally, the worker can elect to continue health care coverage under COBRA for up to 18 months after coverage is lost, and up to 29 months if someone in the family is disabled. You can even elect COBRA should the employer file for Chapter 11 bankruptcy. COBRA coverage also may be allowed for up to 36 months for the spouse or dependent children of a worker if they lose their coverage because of divorce, legal separation, or death of the worker.

Even if you become covered under a new employer plan or Medicare, you may be able to continue with your old medical plan under COBRA if the new arrangement doesn’t cover a pre-existing medical problem you have. Generally, under federal law a new employer’s plan cannot exclude coverage for a pre-existing condition for longer than 12 months after you start the waiting period for coverage, though under some scenarios the exclusion could be as long as 18 months. You can even use COBRA if you simply prefer to remain under your old employer’s plan. However, you should not decline coverage under Medicare without first consulting with your Social Security office or Medicare. You could lose future benefits.

Be aware that COBRA is optional. Coverage is not automatic. You must sign up for it within 60 days after the end of your old coverage.The big question is, should you elect COBRA? To answer this, keep several key points in mind. First, it’s financially critical to maintain health care coverage. A devastating illness not covered by a health plan could bankrupt you. It’s important to keep continuous coverage, whether through COBRA or an alternative. Any gaps and a new carrier could delay coverage for pre-existing conditions, or simply catch you uninsured. If you can’t find better options, COBRA may be your last resort—but it may not necessarily be your first resort.

For one thing, COBRA can be expensive. That’s because to stay in your old employer’s plan under COBRA, you’ll have to pay the entire cost of the coverage, and up to an additional two percent for administrative charges. It can be even more if a disability is involved. Because employers typically pay for a significant portion or sometimes all of the coverage (sometimes including dependents), suddenly footing that bill can be expensive — perhaps even more expensive than buying outside coverage. Footing it during a layoff is obviously even more difficult.

So before choosing COBRA, shop around for alternatives. Just don’t let the COBRA option expire if you don’t have something else in place by then. If you’re in good health, you may be able to pick up a policy providing similar coverage for less money. Relatively inexpensive short-term health plans for a few months also can be an option if you know you’ll soon be entering a new employer’s plan. Or you may find an individual plan for a better price or better benefits.

Study any new employer’s plan, especially for pre-existing condition exclusions. A serious pre-existing condition may suggest that you’ll want to stay with the COBRA plan, even if you choose to also be covered under the new plan. If the new plan requires a waiting period, you also may want to continue COBRA coverage for that waiting period. Maintaining COBRA coverage also could protect your right to buy individual coverage later on with no pre-existing condition exclusion.

This article was submitted by the Financial Planning Association, the membership organization for the financial planning community. FPA members are dedicated to supporting the financial planning process in order to help people achieve their goals and dreams. Submission of this article does not imply an endorsement or recommendation of the Financial Resource Center site.