How Much Does COBRA Health Insurance Cost?

COBRA Makes Keeping Your Coverage Convenient, But Not Necessarily Economical

COBRA lets you keep your employer-sponsored plan, but you may find it expensive
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If you lose or quit your job, get a divorce, or age out of your parent’s health insurance, you may be eligible for COBRA. COBRA allows you to keep the same employer-sponsored health plan you had before your job loss or divorce. But being eligible for COBRA doesn’t necessarily mean you can afford it.

How much your health insurance will cost under COBRA depends on how much that same health plan cost prior to switching to COBRA coverage.

Your monthly COBRA premiums will be the total cost of your health plan premium plus a 2 percent service charge.

But, brace for sticker shock if you’re used to having your health insurance premiums subsidized by your employer, your ex-spouse’s employer, or your parent’s employer. Since premiums for job-based health insurance are usually paid in part by the employer and in part with funds deducted from your paychecks, it’s common to be unaware of the true cost of your health plan premiums even if you know how much has been coming out of your paychecks.

Employers tend to pay the majority of the total premiums (but this stops once you switch to COBRA). A 2016 Kaiser Family Foundation analysis indicated that employers pay an average of 82 percent of the cost of their employees' health insurance, and 71 percent of the total family premium for employees who add family members to their coverage.

To determine your COBRA premiums, you’ll have to add what your employer has been contributing toward your premiums to what you’ve been paying in premiums, and then add the 2 percent service charge.

An Example

Let’s say you have $125 taken from each paycheck for health insurance. You get paid twice per month, so your portion of the monthly premiums is $250. Your employer contributes $400 per month toward your health insurance premiums, so the total cost of your job-based health plan is $650 per month.

To figure the 2 percent service charge, multiply that $650 monthly premium by 0.02. You’ll get $13. Add this $13 service charge the $650 premium cost and your COBRA health insurance cost will be $663 per month.

Where to Get the Information You Need

Your employee benefits or human resources office can tell you how much your COBRA premiums would be, but there may be circumstances under which you want to figure it out without alerting your employer to the fact that you're considering leaving your job.

Your HR department can tell you how much your employer has been contributing each month toward your health insurance benefits. From there, you just need to look at your paystubs to see how much you've been contributing each month in total premiums. Add your contributions to your employer's contributions, and then add 2 percent to the total.

However, if you’re switching from a job-based family plan to COBRA single coverage, for example, because you’re getting divorced or aging off of your parent’s plan, it will be more difficult to calculate the premiums this way yourself because you’re not comparing apples to apples. In this case, you'll want to ask your employee benefits office or human resources office how much your COBRA premiums will be after accounting for your changing family status.

For example, let’s say you’re currently enrolled in a family plan through your spouse’s employer. You’re getting a divorce, so you need to switch to COBRA for a single person since your spouse will continue to cover the kids. The employee benefits officer will look up the health insurance premium for the same health plan you have now, but using the rates for a single individual rather than for a family. He or she will then add what the company would have been contributing toward that premium, what the single individual would have been contributing toward that premium (this would have been your portion of the payroll deduction that your spouse was paying for the family plan), and the 2 percent service charge, to get your premium for COBRA coverage with that health plan as a single person.

Another Reason for Sticker Shock

As if the sticker shock associated with paying both the employee’s portion and the employer’s portion of the health plan premium isn’t enough, there’s another financial hit lurking in the background with COBRA: income taxes.

When your employer takes money from each of your paychecks to pay your part of the health insurance premium, that money is taken out of your paycheck before your income taxes are figured. Similar to contributions to your 401(k) retirement plan, health plan premiums taken from your paycheck pre-tax make your income look smaller. The smaller your income looks, the lower your income taxes will be.

However, when you lose access to your job-based coverage and switch to COBRA coverage, you’re paying your COBRA premiums with after-tax money. You lose the tax-free benefit of the premiums being deducted from your paycheck pre-tax.

In some cases, you may be able to compensate for this tax hit by deducting part or all of your COBRA premiums, but not everybody is eligible for this deduction. To learn more about who can take a tax deduction for health insurance premiums, see " Is Health Insurance Tax Deductible?"

Are There Other Alternatives?

The individual health insurance market has always been an alternative to COBRA. Historically, individual market plans were less expensive than COBRA, but the catch was that coverage was only available to people who could pass medical underwriting, which meant they had to be reasonably healthy. People with pre-existing conditions often didn't have a realistic alternative to COBRA.

The ACA (Obamacare) created new alternatives to COBRA by making coverage in the individual market guaranteed-issue regardless of medical history, and by providing premium subsidies for applicants with modest to middle-class incomes.

That could change, however, under the American Health Care Act (AHCA), which was passed by the House of Representatives in May 2017. Under the House version of the bill, pre-existing conditions could once again become an obstacle to obtaining coverage in the individual market, but only for people who experience a gap in coverage. As the bill stands in May 2017, a person coming off of an employer-sponsored plan would be able to enter the individual market with standard premiums, regardless of medical history, as long as they had been continuously insured for the previous 12 months (this was not the case prior to the ACA; although the AHCA gives states the option of rolling back some of the ACA's protections for people with pre-existing conditions, it does not revert things to the way they were prior to 2014).

The ACA also created premium subsidies for people who purchase coverage in the individual market (in the state exchange), making individual market coverage more affordable for people with modest incomes. The AHCA also allows for premium subsidies to make individual market coverage more affordable than it would otherwise be. The AHCA subsidies would be available to people with higher incomes, but they would be smaller for people with low incomes and for those who face particularly high health insurance premiums, including older people. This Kaiser Family Foundation calculator will let you see how ACA and AHCA subsidies would compare in your area.

So if you're leaving a job or getting divorced and losing access to your spouse's employer-sponsored health plan, you've got an alternative to COBRA if you prefer to obtain coverage in the individual market. Involuntary loss of coverage (which includes losing coverage because you voluntarily quit your job) is a qualifying event, and makes you eligible for a special enrollment period in the individual market, either in the exchange or off-exchange. This is true even if you're eligible to continue the employer-sponsored plan via COBRA (note that premium subsidies under the ACA are only available in the exchange)

Your employer will send you a notification letting you know that you're eligible for COBRA, how much it will cost, and informing you that you've got 60 days to decide whether to continue your health plan with COBRA. During that time, you can compare the price and coverage available to you in the individual market, and decide which one presents a better value. 

Where Can I Get More Information About COBRA?

The U.S. Department of Labor oversees COBRA compliance. They have a list of frequently asked questions about COBRA, and you can contact them at 1-866-4-USA-DOL (1-866-487-2365).

A Word From Verywell

If you're losing access to an employer-sponsored plan that has worked well for you, it's reassuring to know that in many cases, COBRA gives you the option to purchase that plan for at least 18 months. But since that can be an expensive proposition, it's also good to understand the options available in the individual market, so that you can make the best choice for yourself and your family.

Sources:

Kaiser Family Foundation. Employer Health Benefits, 2016 Summary of Findings.

United States Department of Labor. Health Plans & Benefits: Continuation of health Coverage—COBRA.

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