COBRA Decoder: What It Really Costs

The recently enacted COBRA subsidy continues to cause headaches and questions not only for consumers, but also for employers/insurers who handle COBRA health care plans.

This confusion can end up costing insured former employees money, in the form of premiums they may not necessarily need to pay.

The Background
The federal stimulus plan enacted earlier this year included a subsidy to help people pay for health insurance though the Consolidated Omnibus Budget Reconciliation Act, or COBRA. COBRA lets you to obtain health insurance from your former employer at roughly the same group rate that the employer pays for up to 18 months after losing your job.

The bills for this coverage can be overwhelming, especially for someone who just lost their job and is trying to make do on a reduced income.

The good news: there is now a 65% COBRA subsidy available for employees who were involuntarily terminated on or after Sept. 1, 2008. The former employee would only need to pay 35% of the premium, for a maximum of nine months. (After that point, they'd once again be responsible for paying the entire premium, if they want to keep the coverage.)

The Timeline
The subsidy was approved in mid-February, with employers required to notify eligible individuals about it by April 18.

Once they were notified, people who didn't already have COBRA coverage (or those who initially did but later dropped it) got a second chance: they had a 60-day period after notification in which to enroll.

Meaning, by mid-June most people who wanted the subsidy had signed up and sent their first payment. But soon (perhaps now), they may have gotten an unexpected surprise in the form of an additional bill.

What You Need to Pay
What exactly will it cost to activate your coverage through the COBRA subsidy? That depends on who you ask.

Many employers/insurers are requiring people to pay for retroactive coverage starting with the first premium date after the subsidy started (generally, this would be March 1). Meaning, even if someone didn't sign up for COBRA until June, they would still need to send a "catch-up" payment to cover their portion of the premiums for the previous three months.

"Even at 35%, paying for three months of coverage can still be a big chunk of money," says Karen McLeese, in-house counsel and vice president of Employee Benefit Regulatory Affairs at CBIZ Employee Services (Stock Quote: CBZ).

The affected individuals – who probably avoided all non-necessary medical care during this period since they were, at that point, uninsured – may not understand why they should now have to pay for coverage they didn't use.

"To try and make someone pay for coverage starting March 1 when they didn't even know about the subsidy until sometime in April doesn't seem fair," says Wendy Nice Barnes, vice president of eHealthInsurance, a major online health insurance resource.

Worse, many people didn't find out about this retroactive requirement until they had already sent their initial monthly payment for May or June – a payment that would essentially be wasted, since their coverage wouldn't be effective until they paid for the prior months.

Lots of Confusion
But do you really have to pay for that period? Few people seem to know for sure. When first contacted for this story, Barnes said, "I've gotten both answers. So that tells you how much confusion there is."

After researching the issue, Barnes says several sources had told her that people who want to use the subsidy must indeed "elect back to March 1 and pay the appropriate premium."

However, McLeese says many insurers have now decided consumers do not need to pay for coverage during that period in question, "but it still counts toward the nine-month limit."

With even the experts unable to agree, it's no wonder consumers are confused. "My name has been on tons of press releases over the years," says an eHealthInsurance PR rep. "I never hear from consumers, but after people spotted the COBRA subsidy press releases, I've gotten literally hundreds of calls and e-mails from consumers who are desperate for help in understanding it."

Where Things Stand – and What You Should Do
A U.S. Department of Labor rep referred MainStreet to a Q&A prepared by the IRS on the topic. The Q&A still leaves things murky – it addresses the issue of when the subsidy can begin but doesn't specifically state when it must begin.

Bottom line: there's a big grey area, leaving insurers on their own to interpret the rules. As a result, it's important to call your insurer and ask them to clarify exactly what you need to pay, and whether there will be any gaps in your coverage (or, worse, elimination of your coverage completely) if you don’t pay for a prior period. Unfortunately, you really have no choice but to abide by whatever policy your particular insurer is enforcing or you risk ending up with no coverage at all.

For more information, check the DOL's COBRA Web site or call 866-444-3272 to speak to a governmental benefits advisor.

Related Stories:

Laid Off? How to Get COBRA

Five Health Insurance Tips for the Unemployed

When Is It OK to Bad Mouth Your Job?


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