How Much Does COBRA Health Insurance Cost?

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If you're trying to stretch your dollars, COBRA premiums won't help. They're expensive. Image ©Getty Images

If you’ve lost or quit your job, gotten a divorce, or aged out of your parent’s health insurance, you may bey 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 COBRA health insurance will cost 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% 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.

And employers tend to pay the majority of the total premiums. 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% 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% 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 usually tell you how much your employer has been contributing each month toward your health insurance benefits. With this information and a few old paychecks showing your own contributions toward your health insurance premiums, you may be able to figure out your COBRA premiums yourself if you’re switching from a job-based family plan to a COBRA family plan or from job-based single coverage to COBRA single coverage.

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, it may be easier to ask your employee benefits office or human resources office how much your COBRA premiums will be based on 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 employee rather than for a family. He or she will then add what the company would have been contributing toward that premium, what the single employee would have been contributing toward that premium, and the 2% 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 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 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.

The future of the ACA is uncertain under the Trump Administration, but for the time being, nothing has changed. Premium subsidies are still available, and coverage is still guaranteed issue. This will continue to be the case for at least 2017, and probably another couple years after that.

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. 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.

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. 

Updated by Louise Norris.

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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