Aug 19, 2020

Retiring Early? Here’s What You Need To Know About COBRA

Any plan for bridging the gap between an early retirement and becoming eligible for Medicare at age 65 needs to include a discussion about COBRA health benefits. Legislators in Washington D.C. love a catchy acronym, and “COBRA” definitely fits the mold. Like the reptile COBRA is named after, failing to plan for healthcare expenses before Medicare coverage kicks in can sneak up and bite you when you least expect it. The struggle to find affordable and comprehensive health insurance prior to qualifying for Medicare can be difficult, and in certain situations, COBRA continuation coverage might be part of your best solution.

What Is COBRA?

When members of the Ways and Means Committee in the House of Representatives became concerned with “reports of the growing number of Americans without health insurance coverage,” they began to debate the COBRA Act, a way for employees to extend their health benefits in certain situations. COBRA, which stands for the Consolidated Omnibus Budget Reconciliation Act, was ultimately signed into law by President Ronald Reagan in 1985.

This landmark piece of legislation amended the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code and the Public Health Service Act by requiring “an employer who sponsors group health plans to give the plan’s qualified beneficiaries the opportunity to elect continuation coverage under the plan when the beneficiaries might otherwise lose coverage upon the occurrence of certain qualifying events” (Geissal v. Moore Medical Corp., 524 U.S. 74, 1998).

In layman's terms, COBRA allows eligible employees and their dependents to continue their existing health insurance coverage at group rates, a benefit they would otherwise lose when transitioning to retirement. Sounds pretty easy right? Wrong. COBRA health benefits are complicated, limited in duration and expensive. Consequently, it is vital to plan for the increase in cost for health insurance before entering early retirement.

Do I Qualify for COBRA?

To qualify for continuation of coverage under COBRA you must meet three elements:

          • your employer’s group health plan must be considered covered by COBRA
          • a qualifying event must occur
          • you must be a qualified beneficiary

If your employer has at least 20 employees for more than 50% of its typical business days in the previous calendar year, the sponsored group health plan is considered “covered” by COBRA. A qualified beneficiary is simply an employee who was covered by the group health plan on the day before a qualifying event occurs. (Retirement is typically considered a “qualifying event.”)

If you qualify, you will have at minimum a 60-day election period to decide whether or not to elect continuation coverage under COBRA. The 60 days will begin on either the date you receive notice for electing COBRA or the date you would lose coverage due to retirement, whichever is later. It is critical to decide early in your 60-day election period, because even if you decide to forego continuation of coverage under COBRA, you are permitted to subsequently revoke your waiver of coverage and elect to continue coverage as long as you are still within the 60-day period.

If your family is covered under your employer’s health plan, they are also considered “qualified beneficiaries” and will be eligible to continue coverage under COBRA. In other words, if you retire and your spouse has already left the workforce, you and your spouse can both elect to choose continued coverage under COBRA.

What Is Covered and How Long Does It Last?

What health benefits are covered is simple. How long your COBRA continuation coverage lasts is complicated.

In simplest terms, if you retire prior to becoming eligible for Medicare at age 65, you can plan on you, your spouse and dependents qualifying for an 18-month period where you can maintain the identical health plan you had with your employer. For example, if you decide to retire at the age of 55, you and your dependents will be eligible for at least 18 months of continuation coverage. Whether or not you qualify for an extension beyond the initial 18-month period is where things get problematic.

Certain qualifying events allow you to extend the maximum period of continuation coverage under COBRA to 36 months. You may be entitled to an 18-month extension (36 months total) if you experience a second qualifying event, such as the death of a covered employee, divorce or a covered employee qualifying for Medicare within a certain timeframe. There is also the opportunity to extend your COBRA benefits for an additional 11 months (29 months total) if one of the qualified beneficiaries in a family is disabled and meets additional requirements established by the Social Security Administration (SSA).

A more common scenario where COBRA coverage might extend beyond the initial 18-month period involves whether the employee will become eligible for Medicare less than 18 months before the qualifying event occurs. If that is the case, continuation of coverage for the employee and his or her dependents must be available for up to 36 months after the date the employee becomes eligible to Medicare. For example, if you qualify for Medicare in August 2020 and subsequently retire eight months later in March 2021, COBRA coverage would be available for your spouse and dependents until July 2023 – 28 months later (36 months minus the 8 months of employment while entitled to Medicare before officially retiring.)

Don’t forget, your employer may allow for a longer period than required under the COBRA Act, and you should understand those benefits prior to retirement by reviewing your health plan’s Summary Plan Description (SPD) and a general notice regarding your COBRA rights.

Be aware that any extension under COBRA will not include policies that only provide life insurance or disability benefits. Also, it is possible to lose your continuation of coverage early, for such reasons as a failure to pay your premiums in full and on time, your employer terminating its group health plan altogether or if a qualified beneficiary qualifies for Medicare benefits during the continuation period.

How Much Does It Cost?

By far the biggest downside to COBRA is the cost: While you can continue your coverage after retirement, you will lose the employee subsidy. As a result, your employer will no longer contribute to your health plan costs. When calculating how much you pay for COBRA continuation of coverage, your health plan will calculate the total cost paid for by both you and your employer plus an additional 2% for administrative costs.

When considering whether you have enough to retire, plan on paying 102% of the annual premium charged by your health plan provider. And if you are receiving the 11-month disability extension, those premiums can be increased by as much as 150%. Bottom line, COBRA continuation coverage can be expensive.

How To Offset Some of The Cost

The simplest choice when considering how to offset an increase in healthcare costs is to increase your cash reserves. But if you are enrolled in a high-deductible plan and not enrolled in Medicare, you can fund a Health Savings Account (HSA) with pretax dollars, grow that investment tax-free and subsequently spend the money on qualified medical expenses without paying taxes. Furthermore, the balance of your HSA account carries forward each year and transitions with you into retirement. The HSA is one of your most powerful tools to help offset the potential increase in healthcare costs if retiring prior to Medicare eligibility. To learn more on health savings accounts, click here.

Stay tuned for Part 2 of our series on Health Insurance and what your other options are.

 
The information has been obtained from sources we consider to be reliable but we cannot guarantee the accuracy. 
 

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