How the New COBRA Rules Affect Health Insurance Planning
At a time when health insurance coverage is of vital importance, what are the options for your newly unemployed clients? The answer to that question depends on a new regulatory change involving COBRA coverage.
In “normal” times, I counsel clients facing health insurance decisions when leaving employment at least a couple time during the year. But because the coronavirus pandemic has caused unemployment to balloon, I have some clients like “Jane.”
She is a salesperson in a niche specialty field and was laid off in May. The pandemic forced the company to drastically reduce operations and it is likely her job will not come back. The cost of COBRA would have been almost $600 per month. My firm is helping her evaluate her options, and if she does not find a job by the end of the year, we will assist her with income planning to obtain tax credits for insurance through the ACA and she will apply for insurance during the open enrollment period in November.
I expect an uptick in the number of clients like Jane. A study by the Robert Wood Johnson Foundation estimates more than 10 million people will lose employer-sponsored health insurance as a result of the pandemic.
Good health insurance decisions take into account the cost of coverage, client health status, income, and client preferences for health insurance. Additionally, changes in COBRA rules and coverage related to COVID-19 could be pertinent. In this article, I explain the COBRA rule changes and create a “decision tree” to help your clients make an informed choice regarding their health insurance should they become unemployed.
COBRA rule change
In response to the pandemic, the Department of Labor has extended the period of time a person has to elect their COBRA coverage in the event they lose their job or their hours are decreased, resulting in loss of employer-based coverage.
In the event of coverage loss, the employee previously had 60 days to elect their COBRA coverage once a qualifying event occurred. With the new rule, they now have 120 days until after the COVID pandemic is no longer considered a national emergency. Given that new case numbers are skyrocketing around most of the country, that declaration will not happen any time soon. The national emergency was declared March 1, so this would affect anyone eligible for COBRA coverage after that time.
What does this mean from a practical perspective?
If a person did not “opt out” of COBRA coverage, the clock is still ticking on their ability to obtain insurance. With the rule change, if they come down with any potentially expensive illness – such as COVID-19, a heart attack, or cancer – they can elect their COBRA coverage at the time they develop an illness and reinstitute their health insurance.
It is never a good idea to go without health insurance, but if someone doesn’t have the resources to pay for coverage, they may have no choice. But they must prepare in advance to make this work:
- They should fill out and sign their COBRA election paperwork but not turn it in to their employer. This can be submitted in the event they become seriously ill and lose the ability to sign and turn in their paperwork.
- A responsible party needs to know where the paperwork is located and how to get it to the appropriate human resources contact.
- All premiums from their date of work separation must be paid back. For example, if they lost coverage in April and turn in their paperwork in August, they would have to pay five months of premiums. This will be very expensive, but much cheaper than a hospitalization that may run more than $10,000/day in the intensive care unit.
- If needed, have a GoFundMe fundraiser to pay the back premiums. Hospitals may also consider assisting with the premium payments – they prefer to treat insured patients.
This tactic is a risky proposition, but dire times call for creative solutions to prevent potential financial ruin in the event of a serious health event.
Health insurance decision tree
Once employer-based coverage is lost, the first step is to look at all the options and understand the pros and cons of each.
COBRA coverage through the employer will be the easiest option as it is a “known entity” to the client, the deductible may have already been met, and the insurance will cover all essential benefits if the client becomes ill. As discussed above, the insurance decision can also be delayed if the client is willing to take the risk of not having insurance in place.
If COBRA is too expensive for the client, the next step is to evaluate other sources of insurance.
- Jump to a spouse’s employer-based coverage if that option is available. This must be done within 30 days of separation. It may also be expensive, as many employers do not subsidize coverage for a spouse.
- Apply for coverage through the Affordable Care Act (ACA).
- o If modified adjusted gross income for the year will be more than 400% poverty level, or $51,040 for a single person, they will not qualify for any tax credits to help pay for coverage. In this case, COBRA coverage is likely the better deal as group policies often are slightly less expensive and have lower deductibles than ACA-based plans.
- o If income for the year is less than 400% poverty level, the client may qualify for significant tax credits that may reduce the cost of the insurance. Advisors can help with income planning to improve the tax benefits.
- In states that expanded Medicaid, if income is below 138% of the poverty level going forward (about $1,437 per month,) Medicaid coverage is an option. If the client does not have health issues, this may suffice. However, if they have significant health issues, they may not be comfortable with the limited network and benefits Medicaid provides.
- Short--term health care plans and Christian cost-sharing plans are an alternative. The premiums are less expensive but these plans do not provide essential benefits and may not cover pre-existing conditions. If a serious illness occurs, needed services are often not covered. This is an expensive lesson to learn after an illness occurs and the bills start showing up in the mailbox. I do not recommend these options.
The next step is to understand the client’s need for health insurance coverage irrespective of the pandemic. If they have chronic conditions that require continuing care or expensive medication, a traditional plan through COBRA, a spouse’s group coverage, or an ACA plan is a must. Essential benefits such as pharmaceutical coverage and unlimited lifetime benefits are guaranteed only under these plans.
If they do not have the financial resources to afford COBRA or a spouse’s plan, determine whether Medicaid is an alternative or if they will qualify for ACA tax credits. Medicaid has not been expanded in 13 states, including Florida or Texas, so it will not be an option for citizens of those states.
Some people would prefer having a more robust ACA plan as opposed to a limited Medicaid network; however, there is an odd quirk with income eligibility. Medicaid eligibility is immediate if income going forward is less than $1,437 per month. It does not take into account the prior income for the year. This is not the case with the tax credits for the ACA.
The ACA tax credit is calculated based on income for the entire year. For example, if your single client lost their job in July and modified adjusted gross income for the year is already over $51,040, they will not get a tax credit, even if income is zero for the rest of the year. Likewise, if a person obtains insurance using a tax credit but then goes on to get a job pushing income over the threshold, they will be required to pay back the tax credit they already used. This could be substantial as tax credit are often as high as $10,000 or more per year.
Because of the “sticker shock” of the tax credit loss once income goes over the 400% poverty level threshold cliff, there are proposals in the pipeline to gradually phase out the credit over much higher income levels. These changes would pass only if Joe Biden is elected to succeed President Trump, but any changes would not help your clients in the 2020 tax year unless they are made retroactive.
Because of these convoluted issues, my recommendation for your clients in regards to health insurance is the following:
- If they can afford it, and especially if they have health conditions, go on COBRA or spousal coverage when it is immediately available so there is no worry about turning in paperwork later.
- If they cannot afford COBRA coverage, and income is too high for Medicaid or ACA tax credits, look at spousal insurance coverage first, as that may be less expensive than COBRA options.
- If they cannot afford COBRA or spousal coverage, and income is too high for Medicaid or ACA-based tax credits, have the COBRA paperwork ready to turn in if an insurance need arises.
- If income is below the Medicaid threshold going forward in states that expanded Medicaid, sign up for Medicaid at least until the end of 2020.
- If income is above the threshold for Medicaid but below 400% poverty level, apply for a health plan through the ACA on www.healthcare.gov. Make sure to manage income throughout the year so there is no surprise negating the tax credit.
- If long-term unemployment is likely, start income planning for 2021 to qualify the client for ACA tax credits and go on an ACA-based plan starting January, 2021.
Our health insurance system is a mess. The Trump administration is supporting court cases to invalidate the ACA and it has no backup plan ready to take its place. Biden’s health plan is to fix the problems with the ACA, including fixing the tax credit cliff and offering a low-cost public option. What happens will depend not only on who wins the presidency but also heavily on House and Senate control.
Until we have clarity about the best road for health care going forward, we must continue to do our best to assist our clients with their health insurance choices. It is complicated, but a little forethought and understanding of the rules will help your clients through this very tough time.
Carolyn McClanahan is founder and director of financial planning at Life Planning Partners. She is a member of the National Association of Personal Financial Advisors (NAPFA), the Financial Planning Association and the American Academy of Family Physicians.