Group health insurance and COBRA

Group health insurance and COBRA

How group health insurance works

Group health insurance covers many people under one master contract. The contract is issued to the policyholder -- usually an employer, or trustees of a fund the employer sets up -- and each covered employee receives a certificate of insurance describing the coverage, not a policy of their own. The employee is insured but is not a party to the contract.

Key features of group underwriting:

• The group is underwritten, not the individual. Eligible employees are usually covered without evidence of insurability when they enroll during the eligibility period. Someone who misses that window generally waits for the next open enrollment period or a special enrollment event; federal law does not let a group health plan base eligibility on a person's health status.
• The group must exist for a purpose other than buying insurance. This guards against adverse selection.
• Eligibility is set by class, using conditions of employment such as full-time status or job category -- never by the employer picking individuals.
• Contributory vs. noncontributory. In a noncontributory plan the employer pays the whole premium and 100% of eligible employees must be covered. In a contributory plan employees share the cost and insurers typically require a minimum participation level, commonly 75%.
• Experience rating. Premiums may be readjusted at renewal based on the group's own claims experience.
• Dependents. Spouses and children may be covered; a dependent child can stay on a parent's medical plan until age 26.

COBRA continuation coverage

When employment ends, group coverage would normally end too. The federal Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) lets people keep the same group coverage for a limited time, at their own expense.

Who must offer it: employers with 20 or more employees on a typical business day in the prior calendar year. Smaller employers are exempt from federal COBRA (many states have their own continuation laws for small groups).

Who can elect it: a qualified beneficiary -- the covered employee, and the spouse and dependent children who were covered on the day before the qualifying event. A child born to or placed for adoption with the employee during continuation also qualifies.

The coverage: it must be identical to the coverage similarly situated active employees have. If the plan changes for active employees, it changes for COBRA enrollees too.

Qualifying events and maximum durations

• 18 months -- the employee's termination of employment (for any reason except gross misconduct) or reduction in hours.
• 29 months -- the 18-month period extended by 11 months if a qualified beneficiary is disabled (as determined by Social Security) within the first 60 days of COBRA.
• 36 months -- for the spouse and dependents after the employee's death, divorce or legal separation, the employee's entitlement to Medicare, or a child's loss of dependent status.

Cost, deadlines and termination

• The person pays the premium: up to 102% of the plan's cost (the extra 2% covers administration), or up to 150% during the disability extension months.
• The employer notifies the plan administrator within 30 days of a qualifying event; the administrator then notifies beneficiaries within 14 days.
• The beneficiary has at least 60 days to elect coverage, and 45 days after electing to pay the first premium. Coverage, once elected, reaches back to the date coverage was lost.
• COBRA ends early if premiums are not paid on time, the employer stops offering any group health plan, or the person later becomes covered by another group plan or entitled to Medicare.

Exam tip: 20 employees, 102%, and 18 / 29 / 36 months are the numbers most often tested. Death and divorce always point to 36 months.