Understand COBRA in case layoff strikes

The U.S. economy appears to have dodged the recession bullet for the moment, but turmoil still exists in the labor market.

As a fed, your job is reasonably secure, but what about your spouse? Even in the best of times, layoffs can occur in anyone's future, even yours. That's why Dennis Filangeri, a certified financial planner in San Diego, says you should be familiar with COBRA.

COBRA is a federal law—technically part of the 1985 Consolidated Omnibus Budget Reconciliation Act—that allows many workers to continue to be covered by an employer's health care plan after they leave the employer or otherwise lose coverage due to reduced hours, death, divorce or other factors.

COBRA coverage applies to employees working for employers with 20 or more workers during at least half of the working days in the previous year, with the exception of church plans. Employers with fewer than 20 workers may still be subject to COBRA-like coverage under state law, so check with your state's department of insurance.

Generally, a worker can elect to continue health care coverage under COBRA for up to 18 months after coverage is lost, and up to 29 months if someone in the family is disabled. You can even elect COBRA should the employer file for Chapter 11 bankruptcy. COBRA coverage also may be allowed for up to 36 months for the spouse or dependent children of a worker if they lose their coverage because of divorce, legal separation or death of the worker.

Even if you become covered under a new employer plan or Medicare, you may be able to continue with your old medical plan under COBRA if the new arrangement doesn't cover a pre-existing medical problem. Generally, under federal law a new employer's plan cannot exclude coverage for a pre-existing condition for longer than 12 months after you start the waiting period for coverage, although under some scenarios the exclusion could be as long as 18 months.

You can even use COBRA if you simply prefer to remain under your old employer's plan. However, you should not decline coverage under Medicare without first consulting your Social Security office or Medicare. You could lose future benefits.

Be aware that COBRA is optional. Coverage is not automatic. You must sign up for it within 60 days after the end of your old coverage.

The big question is, should you elect COBRA? To answer this, keep several key points in mind. First, it's financially critical to maintain health care coverage. A devastating illness not covered by a health plan could bankrupt you. It's important to keep continuous coverage, whether through COBRA or an alternative. Any gaps, and a new carrier could delay coverage for pre-existing conditions or simply catch you uninsured.

If you can't find better options, COBRA may be your last resort. But it may not necessarily be your first resort.

For one thing, COBRA can be expensive. That's because to stay in your old employer's plan under COBRA, you'll have to pay the entire cost of the coverage and up to an additional 2 percent for administrative charges. It can be even more if a disability is involved. Because employers typically pay for a significant portion of your health coverage, suddenly having to foot the entire bill can be expensive—perhaps even more expensive than buying outside coverage.

So before choosing COBRA, shop around for alternatives. Just don't let the COBRA option expire if you don't have something else in place by then. If you're in good health, you may be able to pick up a policy providing similar coverage for less money. Relatively inexpensive short-term health plans also can be an option if you know you'll soon be entering a new employer's plan. Or you may find an individual plan for a better price or better benefits.

Study any new employer's plan, especially for pre-existing condition exclusions. A serious pre-existing condition may suggest that you'll want to stay with the COBRA plan, even if you choose to also be covered under the new plan. If the new plan requires a waiting period, you also may want to continue COBRA coverage for that waiting period. Maintaining COBRA coverage also could protect your right to buy individual coverage later on with no pre-existing condition exclusion.

Zall, Bureaucratus columnist and a retired federal employee, is a freelance writer based in Silver Spring, Md. He specializes in taxes, investing, business and government workplace issues. He is a certified internal auditor and a registered investment adviser. He can be reached at miltzall@starpower.net.