The new Affordable Care Act health plans offered through Covered California will help many people move out of an expensive COBRA plan and into an insurance plan with lower premiums. However, COBRA is considered “employer offered” health insurance that meets minimum essential benefits and value. Because of this many people and families on, or offered, COBRA will NOT be eligible for tax credits to reduce the monthly premiums of Covered California plans.
COBRA is employer sponsored health insurance
I was recently working with a gentleman who was trying to map out his family’s alternatives if he left his corporate job to start his own business. Because was entitled to COBRA, which is considered employer sponsored health insurance; he and his family would not be eligible for the premium assistance until the COBRA plan ended after 18 months. There was a dim light at the end of the tunnel for his family.
The key to unlock the COBRA latch
If the COBRA health plan premiums are more than 9.5% of the household income, then his family would become eligible for premium assistance. Of course, even without the premium assistance the family health plans through Covered California may still be less expensive that those offered through COBRA. There is nothing to stop anyone from dropping COBRA coverage and enrolling in an ACA compliant health plan. The family just may not be eligible for the premium assistance.
You may want to keep COBRA if…
There may be several reasons to accept or keep a COBRA plan.
- It is retroactive to when the employee separates from his or her employer. No gap in coverage.
- If the former employee, partner, spouse or child is undergoing medical treatment, it may not be the time to disrupt that process.
- The new ACA health plans may not include your current physicians and hospitals in any of their networks. That would be very disruptive if someone in the family was undergoing treatment and had to switch doctors.
- You may have reached or are close to reaching the deductible or maximum out-of-pocket (MOOP) on the COBRA plan. With a new plan, the deductible clock is reset. There is no deductible carry over, even if the new plan is with the same insurer. If it is early in the calendar year and the rest of the medical expenses will be covered because you have met your MOOP it would be foolish to switch plans in most cases.
What triggers COBRA?
There are several scenarios that will activate the offering of a COBRA plan. People who drop or decline COBRA and accept the premium assistance may get a shock if the IRS determines they weren’t entitled to the tax credits because the COBRA premium didn’t exceed 9.5% of household income.
The Department of Labor website lists the following events that will trigger COBRA if you employer (more than 20 employees) must offer the health plan.
Qualifying Events – Qualifying events are certain events that would cause an individual to lose health coverage. The type of qualifying event will determine who the qualified beneficiaries are and the amount of time that a plan must offer the health coverage to them under COBRA. A plan, at its discretion, may provide longer periods of continuation coverage.
Qualifying Events for Employees:
- Voluntary or involuntary termination of employment for reasons other than gross misconduct
- Reduction in the number of hours of employment
Qualifying Events for Spouses:
- Voluntary or involuntary termination of the covered employee’s employment for any reason other than gross misconduct
- Reduction in the hours worked by the covered employee
- Covered employee’s becoming entitled to Medicare
- Divorce or legal separation of the covered employee
- Death of the covered employee
Qualifying Events for Dependent Children:
- Loss of dependent child status under the plan rules
- Voluntary or involuntary termination of the covered employee’s employment for any reason other than gross misconduct
- Reduction in the hours worked by the covered employee
- Covered employee’s becoming entitled to Medicare
- Divorce or legal separation of the covered employee
- Death of the covered employee
I’m retiring and planning for the future
Technically, household income will be based on the last Federal 1040 income tax return for 2012. Yet, people will be applying for coverage and premium assistance for calendar 2014 may have income and household situations be very different from 2012. If you have left a job or retired in 2013 and have determined that the COBRA premiums will be greater than 9.5% of the household, make sure you have documents to back up your claim.
Keep all records, invoices, statements
I don’t know what sort of documentation Covered California may request to determine eligibility for premium assistance when a COBRA plan is in effect. In addition, the documentation will have to satisfy the IRS if they ever request information regarding household income eligibility. In this situation, keep all records of COBRA statements, check stubs and anything that can verify the household income. Then it might be wise to talk to a tax preparer if you have any questions about the type of income that the IRS will consider in its calculations.
IRS: Questions on Individual Shared Responsibility Provision of ACA