COBRA Insurance: A good option for Pre-Medicare Retirees?

cobra insurance

By Jenn King

Maybe you’ve heard of COBRA as a back up health insurance plan if you were to ever lose your job, but have you considered how COBRA can also help you make that transition into retirement a little easier?

The Consolidated Omnibus Budget Reconciliation Act (COBRA) was a law signed by President Reagan in 1985 and among other things, mandated an insurance program that gives employees the ability to continue health insurance coverage after leaving employment.  It is regulated by the Department of Labor. 

Generally, COBRA coverage allows you to continue your health insurance coverage for a period of 18-36 months in the case of:

  • Voluntary or involuntary job loss - 18 months

  • Reduction in hours worked that would cause you to lose your health insurance – 18 months

  • A qualified beneficiary experiences a 2nd Qualifying event, i.e. Death or divorce from a covered employee, Medicare entitlement (in some cases), or loss of a dependent child status under the plan – 36 months

Let’s start with an example to see how this works…..

Mark, age 64, has decided to retire from his employer this year.  He is still 1 year from Medicare eligibility, but has decided he and wife Samantha, age 63 are ready to start their retirement and begin the traveling they’ve always dreamed of doing while they are healthy to do so.  Mark has decided to use his COBRA option and continue with their current health insurance plan because they like all the doctors they have and don’t want to make a change.

What things did Mark need to consider in that decision?

COBRA ELIGIBILITY –  

  • Does his employer provide COBRA?  Yes, they are required to offer COBRA because there are more than 20 employees.

    • What if his company had LESS THAN 20 employees?

Depending on the state Mark lives in there may be something called “Mini-COBRA”.  These are state continuation laws for COBRA that require employers to have the COBRA option if they have as low as 2 full-time employees.  Only 6 states do NOT have state continuation requirements:  Alabama, Alaska, Hawaii, Indiana, Michigan & Montana.

Note: To confirm the rules of your state, you would want to check with the State Insurance Commissioner’s office.

  • Mark knew he qualified as he was covered under his employer’s plan at least 3 months prior to his retirement and end of health insurance coverage.   

COST – COBRA is expensive.  When he was working for his company the cost of the health insurance was shared with his employer.  Now Mark will need to pay 100% of the premium - both his and his employer’s share of the costs PLUS up to a 2% administration fee.  The average cost of COBRA of employer-sponsored health coverage by firms is about $7,000 for single coverage and $20,000 for family coverage. 

LIMITED TIMELINE TO ENROLL – Mark had 60 days to decide from the time he received his COBRA election notification from the employer or the day he lost coverage, whichever was later.

TIMELINE TO MEDICARE – COBRA could carry Mark and Samantha for 18 months.  Mark will turn 65 in 12 months and then will transition to Medicare.  Samantha will be able continue her 18 months COBRA coverage for 6 months after Mark’s transition to Medicare, but she would still have 6 months until she is eligible for Medicare.   

Samantha would have to find other health insurance coverage for those final 6 months.  This could be in the form of Affordable Care Act (ACA) coverage or Non-ACA Short Term Insurance Plans – all of which we’ll cover in future blog posts. 

To illustrate one of the nuances of Medicare timing with COBRA, let’s change the example just slightly where Mark is age 66 and Samantha is 63.  Mark has worked PAST his age 65 Medicare eligibility and stayed on his employer plan with Samantha receiving dependent group health insurance benefits.  Now Mark is retiring at 66 and will transition directly to Medicare.  However, Samantha cannot because she still has 24 months until she can get on Medicare. 

Does Samantha have any different options when her COBRA coverage ends in 18 months? 

YES - If an employee became entitled to Medicare less than 18 months before the qualifying COBRA event, COBRA coverage for the employee's spouse and dependents can last until 36 months after the date the employee becomes entitled to Medicare. 

Mark was eligible for Medicare 12 months before his qualifying COBRA event -retirement.  So Samantha can keep her COBRA coverage 24 months (36 – 12) from the time Mike retires – Samantha’s age 63.  This would extend her COBRA coverage to when she transitions to Medicare at A65.

Of course, there are other options Mark could choose from to carry he and Samantha to Medicare.  Is there a reason why he would have chosen one of the more expensive options?

  • He’s already met his out of pocket maximum for the year – If he and Samantha met their deductible by March because of some unexpected high cost medical care and he is going to retire in April, it would not make sense move to a new plan where they have to start over with a new deductible.

  • Ongoing medical treatment – If they were in the middle of extensive ongoing medical treatment, they might not want to change plans/doctors/prescription coverage mid-treatment.

Other COBRA nuances that are important to note:

  • If the termination of your health insurance plan was because your company was sold or went bankrupt, COBRA is NOT available.  COBRA is only available if there is a health insurance plan in existence to carry out COBRA.

  • COBRA and Mini-COBRA do not apply to companies who provide self-insured health insurance.  So, if your company provides their own health insurance and does not utilize a health insurance company for their health coverage, they are NOT required to offer COBRA.

We will be covering other options Mark and Samantha have available to them throughout the course of this blog series.   If COBRA seems like it could be a good solution for you and your family, a great beginning resource is the Department of Labor website.  You will also want to consult with your company’s HR department as each group health insurance plan has a Summary Plan Description that will lay out the specifics of how COBRA works for your firm.

ONLINE VIDEO COURSE

For additional guidance about COBRA, we recommend watching the following video: Health Insurance Before Medicare. This is a self-help online course created by Paragon that is meant to help pre-retirees and retirees better understand common planning issues before the age of 65 in greater detail.

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