COBRA and Retroactive Health Insurance Coverage

Health insurance can be a complicated subject. This article is about the specific situation where you recently ended a job and haven’t yet started either a new job with benefits or alternative health coverage. Should you take the COBRA coverage, or not?

COBRA Quick Summary
COBRA stands for the Consolidated Omnibus Budget Reconciliation Act of 1986, which requires the option to extend health insurance coverage for up to 18 months (more in some cases) after a “qualifying event” under a “qualifying employer”. In general, a qualifying employer is one with 20+ full-time employees. A common qualifying event is when you lose your job due to either voluntary or involuntary reasons (things like gross misconduct are excluded). So it applies both if you’re laid off and if you quit on your own. You are required by law to receive a notice about your COBRA options within 14 days after the plan administrator receives notice of a qualifying event.

However, the employee must pay the paying the full cost of the premium (both employer and employee portions), plus up to a 2% administrative charge. This means that it can be expensive. I believe that the last time I quit, my single-person coverage cost over $800 a month. The bill for a family with kids could easily be over $2,000 month.

Continuous Coverage and Retroactive Clause
Due to this high cost, you may consider skipping it and taking your chances. However, if something happens and you have a gap in coverage longer than 63 days, then your next health insurance no longer has to cover any pre-existing conditions. This can be a really big deal, and may scare you into signing up for expensive COBRA benefits right away. But there’s a final wrinkle.

You have 60 days after you lose your benefits to elect to pay for COBRA coverage. However, even if you enroll on Day 60, your coverage is retroactive to Day 1. Of course, you’ll have to pay the retroactive premiums for that period. Thus, you could technically waive your COBRA coverage initially, and then wait to see if you incur any medical bills. If you manage to get on a new health plan on Day 30 or Day 55 with no medical bills, then you’ll still be guaranteed full coverage going forward and you won’t have paid anything during your gap. If you can’t find new coverage within 63 days or rack up medical bills higher than the premiums, then you can rescind your waiver and retroactively activate your COBRA benefits. Effectively, you get a do-over.

Bottom Line

Under current law, it is very important to maintain “continuous coverage” in order to guarantee that your future insurance can’t exclude pre-existing conditions. Otherwise, if for example you hurt your back during a gap, you may never be covered by insurance for back problems again. However, if you expect your gap in coverage to be under 60 days, then you can use the retroactive clause under COBRA to try and avoid paying for COBRA during that time. If you are going to use this do-over, be very careful with your dates. You can wait 60 days to elect for coverage, and then you actually have another 45 days to make the payment to cover the period from the date of election to the date of lost coverage. If you send in a premium payment, make sure it is for the correct amount and use certified mail and return receipt to document everything. Legally, payment is considered to be made on the date it is sent to the plan. Don’t cut things too close.

I have read articles that recommend using these extra 45 days on top of the initial 60 days to allow you to wait 105 days before having to commit. Their reasoning is that most insurance companies will not pursue you (sue you, ding your credit, etc.) for the insurance premium if you simply never send it in and tell them you no longer want coverage. I don’t agree with this logic and it seems rather risky, but I think it is okay to use the 45 day period if you are tight on funds and need more time to pay the premium.

Sources: Wikipedia, Department of Labor COBRA FAQ, DoL Employee Brochure (PDF), DoL HIPAA FAQ.

Comments

  1. Kurt @ Money Counselor says:

    This is a nice academic discussion, but ignores practical reality, I fear. The most common reason people are faced with a COBRA decision is a layoff. Absorbing a massive COBRA premium into a household budget just crippled by the loss of a wage-earner’s income is simply impossible, for many, without, say, skipping mortgage payments. So while maintaining continuous coverage is important, the real world question is: What should people do who cannot afford COBRA premiums, period?

  2. I did this very thing changing jobs one time when I had a 90-day contract to hire. I got hired 45 days in so I didn’t have to deal with the 45 day grace period.

    Most nerve-wracking time of my life. If I can help it, I’ll never do this again but when you’re in a pinch it’s not a bad tactic.

  3. “Otherwise, if for example you hurt your back during a gap, you may never be covered by insurance for back problems again”

    To be fair, that particular problem will go away in 2014 when the ACA is rolled out.

  4. Shane is right, in about 15 months everyone will have guaranteed issue of insurance regardless of health status as part of the healthcare reform law.

  5. Not picking sides here, but the official position of Romney camp is that he does not support the exclusion of pre-existing conditions in all cases, only in cases of continuous coverage.

    http://www.nytimes.com/2012/09/11/us/politics/romneys-pledge-shows-repealing-health-law-to-be-complex.html

    http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/09/10/who-would-be-left-out-of-romneys-preexisting-conditions-plan-about-89-million-americans/

    I would like to not have to worry about these things as well and be able to make some big decisions, but I think it’s best to wait at least until after the election in November. If ACA does not get overwritten, then I agree it will be moot in 2014.

  6. If I’m not mistaken, COBRA comes into play when you retire as well.

    Also, I was going to mention the ACA and pre-existing conditions, but it was already mentioned here. There was an article recently that said if Obama is re-elected, the ACA is pretty much cemented. There’s parts of it that have begun to take affect that will be hard to undo.

    Speaking of ACA– I seem to recall our HR department saying that high deductable plans would likely be affected by the ACA, which in turn could affect an HSA. I’ve always been interested in an HSA, but can’t have one, because our health plan is not high deductable. I was thinking an HSA would be good to have post retirement for dental for sure, and of course, medical if needed.

  7. I have to agree with Kurt, why didn’t you mention the layoff aspect of COBRA?

  8. A good thing about Cobra is you can pay the premiums from a health savings account. (HSA). I voluntary left my job earlier this year and took cobra for a few months before I got my individual coverage.

    I was surprised at how obsessed people are about their health insurance. Most of my co-workers’s first question when they found out I was quitting was “but what are you going to do about health insurance”! My individual plan underwriting was simple. Applied one day, and the next day I was approved with my policy.

  9. What do you do if you can’t afford COBRA premiums, and can’t get any other coverage? Well, first I would try and apply for a cheap individual plan at a site like eHealthInsurance. To lower premiums, go high deductible. If you can’t afford that, I would look into governmental assistance.

  10. To everyone,

    I’ve been debating on whether or not I should continue to make my COBRA premiums or just go for a cheap individual plan from USAA or eHealthInsurance. A few months back I was diagnosed as having degenerative discs and I’m not sure how much of an impact that will have when it comes to getting a new plan. My options are as follows:

    I can continue to pay $340 a month for COBRA (Which I rarely use, hardly ever go to the doctors office)

    Opt for a cheaper individual plan, but wouldn’t my degenerative discs be deemed as preexisting?

    Just not do anything, and wait until I’m rehired to get on to another plan. But wouldn’t the gap in insurance screw me over with my preexisting condition?

    Any suggestions or recommendations?

  11. I recently left my full-time engineering job to be a SAHM with our newborn. For a variety of reasons, I decided to leave my job a month before I had the baby (primary of which being that I would not get paid maternity leave, and the stress of my job was not worth pre-term labor). I had never thought I would need COBRA, since my husband works at the same employer and I assumed I would just go on his insurance (spouse leaving their job is a qualifying event…) and that would be that. BUT — I did the math, and found out that since I had already maxed out my deductible (both my husband and I have a high deductible plan), that it would be cheaper for me to carry myself under COBRA for the rest of the year, then to add myself to his insurance and start over with a much higher deductible. And because I do have a high deductible plan, my COBRA premiums were much cheaper than any of the other health plans that my employer offers. Just my anecdote, but I was not laid off, I have a working husband with good insurance and I still chose COBRA – so it’s more useful than it seems, especially if you leave your job in the middle of the year. ALSO — I learned that if you do leave your job, leave at the very beginning of the month. So, for example, leave August 1st — that way you have your regular insurance all the way through August 31st, and then you have an additional 60 days from August 31st to opt-in to COBRA.

  12. Mario, if you leave COBRA and try to get insurance through USAA or ehealthinsurance, you will have to undergo what they call “medical underwriting.” This process is where you fill out the detailed health questionnaire about your medical history dating back five years. They will want to know everything about your health. After you submit your application and it goes to underwriting, the insurance company will make a determination as to whether or not they will give you coverage.

    I recently went through the same exact process you are thinking about. I even checked with USAA. I left my job and tried to pick up a policy through I found through ehealthinsurance, but I was denied because of a few minor conditions (high cholesterol, etc). I am relatively young, mid-30′s and in good shape (fit, work out regularly).

    Instead of a cheap policy, I had to select what’s called a HIPAA policy which is essentially the same exact policy I applied for but nearly triple the price $274/month for me vice the $100 I applied for. The HIPAA policy is guaranteed acceptance as long as you meet certain criteria, which includes no longer than 62 (or 63) day gap in insurance coverage in the last 18 months (I think) and you have to exhaust your COBRA coverage as well before eligible.

    I would strongly recommend you try to find a good insurance broker near you who has your best interest in mind. It won’t cost you anything to use them and they can give you some good advice on the way forward. Most of all, don’t give up your insurance until you are absolutely certain you have a replacement lined up. Good luck.

  13. “Otherwise, if for example you hurt your back during a gap, you may never be covered by insurance for back problems again.”

    I haven’t looked it up, but I’m fairly certain this is not true. If memory serves, in the case of non-continuous coverage, HIPAA allows the group insurance provider to exclude coverage for a pre-existing condition for a period of one year. After one year, the group insurance provider must cover it.

  14. I can’t seem to find any information about how to recover out of pocket expenses for Office visits & prescription medications that I incurred from the time my coverage ended until I elected Cobra. Can I send in receipts and expect to be reimbursed?

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