COBRA eligibility – is it ironclad?

If you have ever considered striking out on your own, or worried about being laid off or anticipated more than one month between jobs, you’ve probably heard of (and counted on) the availability of COBRA health insurance. What you may not know is that you are not guaranteed coverage due to a few loopholes, despite what your employer may tell you.

The Consolidated Omnibus Budget Reconciliation Act (COBRA) gives workers the right to stay on their employers’ health plan for a limited period of time after a job loss, voluntary or involuntary. COBRA also allows workers to continue their coverage after a reduction in hours makes them ineligible and several other circumstances. COBRA is no bargain. The worker can be required to pay up to 102% of the employers’ cost. A worker might only be paying 10% of their premium right now, so once the employer is not picking up the other 90% the costs can skyrocket.

COBRA generally applies to companies with 20 or more employees. Many people count on COBRA to continue their coverage for a “gap period” between jobs or to give them affordable health coverage when they are leaving an employer and starting their own business. A COBRA plan may not be the most inexpensive plan, but the simple fact is that a big corporation can negotiate a better deal than a single individual can with a health-care insurer.

Fortune magazine had an interesting story involving COBRA . Cerberus Capital Management is a private investment firm, deeply connected throughout the business and political worlds (former Vice-President Dan Quayle is a spokesman; former Treasury Secretary John Snow is chairman). They own dozens of businesses. One of them is (was) Aegis Mortgage, a Houston-based mortgage lender. For the details of the acquisition and Cerberus’ (mis)management of the company, read the article, but the key point was this: when Cerberus decided to shut down the company, they notified the majority of the employees that they would be laid off within 60 days of August 6 ^th . Cerberus also notified the employees that health benefits would cease August 10 ^th . The layoffs then came August 13 ^th (much less than 60 days later) and the reason for the termination of health benefits before the termination of employment became brutally clear: you are only eligible for COBRA if your company has an active benefit plan . By terminating their plan before terminating the employees, Aegis – and Cerberus – avoided having to offer COBRA.

If the employee has to pay the full cost, why would Aegis/Cerberus care? Aegis would still have needed to pay some costs – administrative, for example. Aegis, despite being owned by one of the largest private investment firms in the world, claimed they didn’t have enough money to pay for any single tiny part of their former employees’ health care benefits. Hundreds of employees were suddenly and brutally cut off from even having expensive ‘gap coverage’ before they could find a new job.

If this behavior is not shocking to you, you should probably stop reading. A company may have a good reason not to offer benefits. The umbrella consulting firm I work for offers benefits but I pay a huge chunk (more than 50%) of the premiums. I don’t mind since otherwise they would simply take a larger cut out of my hourly rate, but as with many Americans I would count on my COBRA eligibility at first if I decided to go completely freelance. I never realized that there was a possibility I might not be able to count on COBRA.

Eligibility for COBRA is another one of the “emergency” financial planning items most employees take for granted. You assume that your company will not steal your 401(k) – but my sister-in-law is having trouble getting hers out after being laid off. You assume that you will be paid accumulated time-off when you leave a job – but I was once loopholed out of 2 weeks’ vacation time after a disagreement over which day of the month I officially gave notice.

The point is that if you work for a company experiencing financial difficulty, or you anticipate getting laid off, make sure you know your rights and your options regarding COBRA. This story made me go out and start pricing private insurance. One of my projects for 2008 is to try to find a high-deductible health plan and self-insure my family for the deductible; that health insurance would never be tied to a specific employer and I could simply opt-out. I know that is not a perfect choice but I think having portable health insurance would be preferable to the increasing shenanigans of corporations as they try to avoid paying health benefits. Terribly expensive, but less so than the cost of being uninsured.