How Does COBRA Coverage Work?

Consolidated Omnibus Budget Reconciliation Act (COBRA) health insurance continuation coverage is a federally-mandated requirement on most employers that dictates they continue to offer health insurance coverage to former employees for a length of time. The former employee must pay all of the premiums associated with the coverage. This gives employees time to seek another job, and not lose their health insurance in the meantime.

What is COBRA?

• COBRA was signed into law in 1986. It requires most employers to allow their former employees to retain their current health care coverage while they look for a new job. The purpose of COBRA was to allow former employees time to find a new job and enroll in a new health care insurance plan without causing a coverage gap in the meantime. The employee pays all of the premiums --- including any portion that the employer used to pay. While this makes the coverage more expensive than when the individual was employed, the premiums on a group health plan are almost always less than those on an individual plan. Before COBRA, the latter was the employee's only option to remain covered while unemployed.

Who is Eligible?

• Employees who have group health insurance coverage prior to their departure from an employer are eligible for COBRA benefits. This eligibility applies whether the employee's departure was voluntary or not. The only exception is if the employee was terminated for gross misconduct. An employee is also eligible if his hours are reduced to the point where he is no longer eligible for group health insurance coverage through his employer. The basic eligibility period is 18 months after termination or a reduction in hours. If the employee finds another job and enrolls in a new health care plan before then, COBRA eligibility will end at that point.

When Can You Extend COBRA?

• It is possible to extend COBRA coverage when certain qualifying events occur. If health insurance stops due to the employee's death, coverage to the spouse and dependent children can continue an extra 18 months if they were covered under the original policy. This also applies if the employee and spouse divorce or enter into a legal separation. If a dependent child loses her dependent status, she will also be eligible for a full 36 months of coverage.

When Does Your COBRA End?

• COBRA coverage ends when the employee enrolls in a new health care plan or after 18 months, whichever is sooner (unless another qualifying event like the death of the employee occurs). If the new plan excludes the employee for preexisting conditions, she may maintain her COBRA coverage before the 18 months elapse. If the former employee is still unemployed but enrolls in an individual plan, coverage eligibility will end. An employee must assess the premium costs associated with the new plan against the COBRA coverage to decide which is financially more advantageous to keep.