COBRA Subsidy Questions

Here are some answers:

  • What is the COBRA subsidy? The COBRA subsidy is designed to help you pay for health insurance during unemployment. It pays for 65% of the cost of your COBRA premiums.
  • Who is eligible for the COBRA subsidy? You can get subsidy if you were laid off between September 1, 2008 and May 31, 2010. The subsidy lasts for up to 15 months.
  • What happens after 15 months? You can stay covered under COBRA for another 3 months (more in some states), but you will have to pay 100% of the premiums. For example, if you are currently paying $350 per month under the subsidy, your premiums will increase to $1000 per month.
  • Where can I find less expensive health coverage? While the benefits from COBRA are great, the cost is often too high. Take a look at our article Health Coverage Help During Unemployment for ways to find great health coverage for as low as $39 per month.

Severance Payments To Laid Off Workers Are Disappearing

The Wall Street Journal points out that fewer companies are paying severance to laid off employees.

As the recession persists, companies are cutting costs not only by letting workers go, but also through reducing the benefits provided to departing employees.  There are three key areas where employers are cutting back:

  • Severance Payments – Often, companies will provide serverance compensation that is based on how long you have been with the organization.  While the standard “two weeks of salary for every year worked” is a metric that many are familiar with, some companies are reducing this to one week per year of experience, or none at all.  Unless it is stated in an employment contract, employers are not obligated to make severance payments.

  • Health Benefits – In addition to severance payments, many large companies will extend your health insurance beyond your final date of employment.  Once this extension runs out, you would be eligible to continue the health coverage under COBRA, but without your employer footing the bill.  With the federal government’s COBRA subsidy in place, many employers have reduced or eliminated their continuation of medical insurance.  (To learn more, see Smart Unemployment’s COBRA overview.)
  • Outplacement Services – In the case of mass layoffs, companies will often provide their former employees help in finding a new job.  This can range from computer access, office space, or access to recruiters.  As you would expect, these services cost companies money, and are also being reduced for cost saving purposes.

COBRA: Cost Considerations

The cost of COBRA will depend on the state you live in and the type of health plan your former employer offered.

When working, your employer will generally pay some portion of your health coverage cost as part of your “benefits package.”  Effectively, the company subsidizes a portion of the health insurance premium.  The amount that a company will contribute depends on the type of health coverage offered, but averages around 75% of the premium, with the remainder of the cost coming out of your paycheck.

As a large organization, your employer gets a volume discount when purchasing what is referred to as group insurance.  In many cases, this group insurance is cheaper than what it would cost you to purchase health insurance on your own.

Under COBRA, you benefit from being able to continue on the group insurance plan at the group rate, but you are required to fund 100% of this cost, plus 2% for administrative fees.  According to the Kaiser Family Foundation and the Health Research & Educational Trust, in 2008 the average annual premium for employer sponsored health plans was $4,707 (or $392 per month) for individuals and $12,680 (or $1,057 per month) for families.

Good news!

With the passage of the American Recovery and Reinvestment Act in February 2009, there is now a subsidy that offsets 65% of the cost of COBRA insurance premiums.  To learn more, see our article about qualifying for the COBRA subsidy.

In addition to the COBRA subsidy, some companies may subsidize a portion of your COBRA costs as part of your separation agreement.  If you are already out of work and paying for COBRA, contact the human resources person at your former employer to see if they have made any changes to the policies.

Reminder

COBRA is retroactive.  If you choose not to sign up for the COBRA at the time of your departure, you still have a 60 day window to enroll.  If you allow time to pass between the date of your departure and the time you make the decision to sign up for COBRA, you will have to pay for the time period that has elapsed, but you will also be covered by the insurance for medical costs incurred over this time.