COBRA: A Summary

The Center for Medicare Advocacy (the Center) is experiencing an increase in inquiries about obtaining health insurance coverage under COBRA, the Consolidated Budget Reconciliation Act of 1985.[1]  This higher volume is likely related to the large number of employees moving into their 60s and seeking an understanding of their rights in retirement.  This CMA Alert provides a summary of key COBRA issues for retirees.  More detailed information is available on the Center’s website.

Private employers who offer Employee Group Health Plan (EGHP) coverage and normally employ 20 or more workers on a typical business day during the preceding calendar year must offer COBRA coverage to employees and their dependents who lose their health insurance because of certain specified events.[2] State and local governments employing twenty or more employees also must offer such continuation coverage.[3]

An individual eligible to purchase COBRA is referred to as a “qualified beneficiary.”[4] In order to be a qualified beneficiary, the individual must have been covered under a group health plan on the day before a “qualifying event”[5] (see list below). Qualified beneficiaries include covered employees; spouses; dependent children; [6] and retirees, their dependents, or their spouses if the retiree’s former employer files a petition for bankruptcy.[7]

There are six events causing loss of coverage that qualify an individual for COBRA coverage:

1. The death of the covered employee;
2. The termination, other than for gross misconduct, or reduction in hours of the covered employee’s employment;[8]
3. The divorce or legal separation of the covered employee from the employee’s spouse;
4. The covered employee’s entitlement to Medicare;[9]
5. A dependent child’s losing dependent status; and
6. The filing for bankruptcy by a retiree’s former employer.[10]

Covered employees and their dependents must be given notice of their COBRA rights when first eligible to participate under the plan.[11] Often the notice is included in the Summary Plan Description (SPD) that describes plan benefits and plan rights.  The covered employee and their dependents receive a second notice of COBRA rights, generally within 45 days after they experience a qualifying event.[12]  The qualified beneficiaries then have 60 days in which to elect COBRA coverage.[13]

The coverage offered to qualified beneficiaries must be identical to the coverage provided to employees in the same kind of job who have not experienced a qualifying event.[14]  Thus, an employer cannot offer Medicare wrap-around coverage as a COBRA benefit when similarly situated active employees are entitled to full health insurance coverage.  If, however, coverage is expanded or reduced for current workers, it must be modified in the same manner for qualified beneficiaries.[15]

A plan may not condition COBRA coverage upon, nor discriminate because of, a lack of evidence of insurability.[16]  Thus, a plan may not deny COBRA coverage or limit the scope of coverage available to qualified beneficiaries because of their health status or medical conditions.

COBRA coverage lasts 18 or 36 months, depending on the qualifying event.[17]  For events that have an 18-month period, coverage may be extended beyond that period, for a total of 36 months, if the qualified beneficiary experiences another qualifying event during that time frame.[18] An Internal Revenue Service (IRS) ruling, however, clarifies that where the second qualifying event is the covered employee’s becoming entitled to Medicare, and where Medicare entitlement would not result in a loss of coverage, the qualified beneficiary is not entitled to an extension of COBRA coverage.[19]

Medicare beneficiaries who want to exercise their option to purchase health care under the COBRA continuation of care provisions should carefully review how COBRA coordinates with Medicare.[20]  In particular, they should be aware that COBRA coverage may be creditable for Medicare Part D, but not for Part B, and enroll in Medicare accordingly.

COBRA coverage will end early if: 1) the employer stops offering group health coverage; (2) the qualified beneficiary fails to pay premiums; (3) the qualified beneficiary becomes entitled to Medicare; or (4) the qualified beneficiary becomes covered under another group health plan that contains no limitation for preexisting conditions.[21]

COBRA can be a helpful way to maintain health insurance offered by a recent employer.  It can provide a measure of breathing room by avoiding a gap in health insurance coverage after a termination or reduction in employment.  Medicare beneficiaries, however, should do their research carefully to avoid future penalties or gaps in coverage.

September 24, 2015 – A Chiplin