Health insurance can be a big challenge in a career transition

Understanding your options under COBRA may help.

One of the biggest challenges in a career transition is maintaining decent health insurance. This is especially true of career changers over 40—because they're more likely to have risk factors that would make an individual policy prohibitively expensive. President Obama's call for major health-care reform might provide a solution within the next few years, but what can you do in the meantime if you fall into the pre-Medicare health insurance gap? Your options aren’t great, but there are solutions worth exploring.

COBRA

The acronym is short for The Consolidated Omnibus Budget Reconciliation Act of 1985—a law requiring most employers with group health plans to let employees continue participating for up to 18 months (36 months for employees eligible for Medicare and certain other categories) after losing a job through layoff, termination or some other event. As a COBRA participant, you pay 100 percent of the premium, but at least you get the benefit of your employer’s group insurance rates and benefits. And under COBRA, you can't be rejected for pre-existing conditions. The problem is, most corporate plans are comprehensive and expensive; a study by nonprofit advocacy group Families USA finds that COBRA premiums average $388 per month for individuals and $1,069 for family coverage. 

Here's the good news: Under the recently passed federal economic recovery act, some laid-off workers can qualify for a major subsidy of COBRA premiums. The new federal subsidy will cover 65 percent of premiums for nine months. Here are some other key features:

Eligibility. The subsidy applies to workers who lose their jobs between Sept. 1, 2008, and Dec. 31, 2009.

Filing deadlines. Generally, you need to file for COBRA coverage within 60 days of leaving your job. But under the economic stimulus provision, if you lost your job in that time frame but didn’t elect COBRA, you will have 60 days to make an election and get the subsidy after you receive notification from your old employer that you are again eligible.

How it works. If you’re eligible, you’ll pay premiums equal to 35 percent of the total to your former employer’s plan; the plan will receive the difference through reduced payroll taxes paid to the federal government or through a refund. The subsidy is limited to nine months of coverage.

Income caps. The subsidy is only available to individuals with adjusted gross income up to $125,000, or $250,000 for married couples filing jointly.

Small business and other exemptions. COBRA generally is not available to people laid off from very small companies, since the federal law exempts businesses with fewer than 20 employees from participating. It’s also not available if your former employer never offered health insurance, terminates its plan or is liquidated.

Flexibility. What if the cost of your former employer's coverage is too high for your budget? According to The Wall Street Journal, the new legislation contains a provision allowing laid-off workers to choose less expensive health-care plans under COBRA, if their former employer offers one. They can make such a choice without waiting for an open enrollment period.

What if you’re not eligible for the COBRA subsidy?

If you aren’t eligible for the new subsidy, there could be another path to COBRA coverage. If you lost your job due to competition from exports or overseas outsourcing, the government will pay up to 80 percent of COBRA premiums through the Trade Adjustment Assistance Reform Act. Under this law, you can receive monthly payments or a year-end tax credit to offset COBRA premiums. The subsidy already was available before the stimulus bill passed, but the new law boosts the subsidy rate from 65 percent to 80 percent. Families USA—which offers a comprehensive, free guide to getting coverage when you lose your job—offers the following information on how to file for the subsidy:

The first step to getting help is to file for Trade Adjustment Assistance or Alternative Trade Adjustment Assistance. Information is available through the U.S. Department of Labor and through your state or local employment department or one-stop career center. After you are certified, you should receive a kit in the mail to register for the Health Coverage Tax Credit (HCTC). You have a choice of either registering to receive monthly help paying your premiums or receiving a tax credit at the end of the year. For more information, search for "HCTC" on the IRS website.

If you’re not eligible for any COBRA subsidies, look into other coverage alternatives. Can you get on a spouse’s employer-based health plan? Can your insurance department or health department tell you about any state or local programs to provide affordable health coverage? Veteran’s benefits may also be an option for you.

If none of these avenues work and you cannot afford COBRA, shop for an individual policy. If you are in good health and live in a state where the insurance marketplace has strong competition, you may be able to find lower premiums than you would under COBRA. These policies tend to be more expensive for older people, since individual policies are age-priced. And, the coverage may be less extensive than under your former employer’s plan. One way to keep premiums down is to consider a plan with a higher deductible—but be sure you have enough money saved to pay health expenses until you meet the deductible.

It’s also important to pay close attention to the specific insurance offered to you, says Cheryl Fish-Parcham, deputy director of health policy at Families USA. “The advertised price may not be the price for you depending on your age or pre-existing conditions. You could be offered an insurance contract that says explicitly that the insurer isn’t going to cover a certain pre-existing condition, or it may have general language on pre-existing conditions.” She urges consumers to contact their state insurance departments for details and guidance.

Finally, be aware that your options vary tremendously from state to state. Several reputable online resources are available to help you compare plans and learn about the options available where you live:

Foundation for Health Coverage Education offers a Health Options Matrix that lets you review a list of insurance options in each state and use an online health-insurance eligibility quiz to guide your shopping. The foundation is a nonprofit group funded by health insurance companies and foundations.

eHealthinsurance.com is a commercial service that lets you shop for plans online.

National Association of State Comprehensive Health Insurance Programs. Some states offer insurance to high-risk individuals who are unemployed and don’t have access to coverage under COBRA. Premiums are lower than COBRA rates, but the programs have limited funding and there may be a long waiting list. You can find a list of states that offer insurance programs at the NASCHIP website.

If you’re a veteran, you can access a wide range of health care services through the Department of Veterans Affairs. But you’ll have to receive treatment at a VA facility, and coverage for family members is very limited. More information is available at the VA website.

–The U.S. Department of Labor has been posting information on its website about the COBRA subsidy. Perhaps more important, DOL’s benefit advisors are now prepared to answer questions (no charge). Call the hotline at 866.487.2365. The department also has published a useful guide to health and retirement benefits for people who have been laid off. The booklet deals with issues such as eligibility for continued health insurance coverage, COBRA benefits, private individual health policies and protecting your retirement assets.