As part of a severance or buy-out agreement, employers often pay for all or part of a terminated employee’s COBRA premium, for a defined period of time. This practice may cause terminated employees to miss opportunities to enroll in other coverage, at a potentially lower cost, when the employer subsidy ends. Therefore, employers may want to either coordinate the length of COBRA subsidies with these opportunities, or instead provide a taxable lump sum amount so that terminated employees may purchase any available coverage.
The terminated employee and any covered family members have the following enrollment opportunities when the employer group plan is lost:
- When re-employed, enroll in the new employer’s group health plan, if available. Employer plans may have a waiting period before coverage begins and will have an enrollment deadline.
- Remain on the employer’s plan by electing COBRA, for up to 18 months. Once elected, COBRA provides coverage retroactive to the loss of coverage date. COBRA can be elected until other coverage is in-force.
- Enroll in the spouse’s employer’s plan, if available, within 30 days from the date of loss of coverage (HIPAA special enrollment right). The effective date of coverage should be confirmed with the spouse’s employer.
- If under age 65, purchase individual coverage through the new Health Insurance Marketplace or direct from an insurance carrier. Individual coverage must be purchased within 60 days from the date of loss of group plan coverage or when the COBRA maximum period of coverage expires (Marketplace special enrollment periods), or during the annual enrollment period for coverage effective January 1. Individual coverage is prospective from the application date, so there may be a gap in coverage if someone waits until the group plan is lost to apply. If enrolled through the Marketplace, federal subsidies may be available towards the cost of coverage.
- If age 65+, enroll in Medicare, if not already enrolled. Medicare will act as the primary payer and needs to be in force at termination of employment if there is no other group coverage in force due to the employee’s or spouse’s current employment. From the date enrolled in Part B, there is a 6 month Medigap enrollment period. From the date that the employer’s plan with creditable drug coverage is lost, there is a 2 month Part D prescription drug plan enrollment period.
Example 1: Bill is single, age 40, and has no other employment at the time of his termination of employment from Acme on May 30th. Acme provides Bill with 3 months of paid COBRA from June 1 to August 31 under a severance agreement. Still unemployed, Bill waits until August 15th to look for other coverage, but he has lost his opportunity to purchase individual coverage. To remain insured, Bill has to continue on COBRA, at his cost, until the 18-month COBRA period expires, the next Marketplace open enrollment period, or he gains access to new employer coverage.
Example 2: Sally is single, age 67, and takes a buy-out from Symco. She plans to retire, and enrolls in Medicare by her termination date. Symco provides 2 months of paid COBRA to Sally. Her Medicare coverage pays primary, while the COBRA coverage pays secondary. Sally purchases a Medigap plan and a Part D plan to be effective in 2 months from her date of termination. She does not continue COBRA beyond the 2 month period paid by Symco because she has her primary coverage, Medicare, and all of her supplemental coverage in place.