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5 Alternatives to COBRA for Retirees

cobra rules for retirees
cobra rules for retirees

If you’re soon to be retired and aren’t yet eligible for Medicare, you may be in the market for a new health insurance plan and thinking about taking a look at getting health insurance with COBRA. Due to its high costs, it won’t be for everyone, but if you are going to retire and are considering getting your health insurance through COBRA, here is what you will want to know. You can also work with a financial advisor to plan your finances and retirement budget to help you pay for COBRA or help find an alternative option.

What Is COBRA?

The way people discuss COBRA, you would be forgiven for thinking that it is a health insurance company. It is not. COBRA is a federal law and a health insurance program. COBRA stands for the Consolidated Omnibus Budget Reconciliation Act. COBRA, passed by Congress and signed into law by President Ronald Reagan in 1985, was designed to protect employees leaving a company from being terminated and losing their access to health insurance. Keep it mind, though, that it only applies to companies with 20 or more employees.

If you’re receiving health insurance with the help of COBRA, that means you’re remaining on your employer’s, or soon-to-be ex-employers, health insurance plan. That may be an appealing option for some retirees who aren’t yet eligible for Medicare. A retired employee can get up to 18 months of health insurance coverage with COBRA.

How COBRA Works for Retirees

COBRA works for retirees in the same way it does for any employee. Whether an employee is terminated or is quitting voluntarily or is retiring, the employee will likely be required by the employer to pay the full cost of their health insurance coverage, plus a 2% administrative charge. Because employers usually pay for part or most of the employees’ coverage, an employee may be astonished when they learn how much they have to spend for their health insurance.

You could say that COBRA is aptly named because this is an expensive way to pay for health insurance and your finances and budget may feel squeezed. But for a retiree who has less than 18 months before being eligible for Medicare, it may be a reasonable option to ensure that they have health insurance. It also might work as a temporary stop-gap to keep health insurance coverage going while looking for cheaper alternatives.

There is another scenario in which you might want to use COBRA. If you are retiring and you are entitled to Medicare, but you have family members who will not be covered by your health plans, such as a spouse or son or daughter, they will be allowed to continue on your employer’s group health plan for up to 36 months. You, meanwhile, would use Medicare. You aren’t allowed to use Medicare and your employer’s health insurance simultaneously.

Alternatives to COBRA for Retirees

cobra rules for retirees
cobra rules for retirees

According to the Kaiser Family Foundation (KFF), in 2021, annual premiums for employer-sponsored family health coverage were $22,221, with employees paying on average $5,969. If your health insurance premiums were to quadruple, you may feel that COBRA is cost-prohibitive. For many retirees, not to mention any employee leaving a job without health insurance, COBRA will be the last resort and not the first option. Instead, if you are retiring and are not eligible for Medicare, you may want to try:

  • Have your spouse add you to their plan: You can join a spouse’s employer’s health insurance if that’s feasible.

  • Purchasing a plan on a marketplace: Created by the 2010 Affordable Care Act, is available at HealthCare.gov, the marketplace can help you find the right plan. You don’t have to purchase a health insurance plan on your own; you may want to work with an insurance broker. If there is an affordable healthcare plan, an insurance broker would be able to steer you to it.

  • Purchase a plan directly: You will probably find less expensive prices with the insurance marketplace, however. But that’s why insurance brokers can be helpful to work with. They can guide and advise you as you try to determine how much you can afford to pay for healthcare.

  • Look into health-sharing plans: These are health plans offered by organizations, in which you “share” medical costs. Your monthly payment could be less than $500 a month but this is generally only used as catastrophic healthcare coverage – and only if you’re in good health. It is an option but probably not a realistic one for most retirees.

  • You might be able to get Medicaid: If your income is low enough. In general, you’ll need to possess $2,000 or less in cash assets.

In fact, because COBRA can be so pricey, you also may want to consider holding off on retiring until you are eligible for Medicare. If your current job isn’t feasible, perhaps, until you can get Medicare, you could find a part-time job that offers a healthcare plan. Retiring early can be doable, but you might have to think outside the box for health coverage.

The Bottom Line

cobra rules for retirees
cobra rules for retirees

COBRA is an imperfect solution for any retiree or an unemployed person looking for health insurance. That said, it was never meant to really replace a permanent health insurance plan. It should be thought of as a safety net. But if you are a retiree, COBRA can be beneficial. If it’s something you are considering getting your health insurance through, you should talk to your human resources department or whoever handles employee benefits so they can help you get set up with your health insurance through COBRA.

Tips for Retirement Planning

  • Healthcare during retirement is one of many things you need to have a plan for. Getting your finances in order by investing in the right assets now is the best way to help you afford the right insurance and lifestyle later. A financial advisor can help you do just that by creating a plan that meets your needs. If you don’t have a financial advisor, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • As you’re planning out what health care is going to cost you as a retiree, it’s also a good time to make sure you have the right budget plan in place so that you can afford your chosen lifestyle. You can use SmartAsset’s free budget calculator to help you do just that.

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