As a public service, every once in a while I answer simple financial questions which I don’t find readily available on the internet. One of these that I was thinking about today is the insurance options when you lose your job.

First Cobra

You may think you pay a lot for health insurance if you have private coverage, but you don’t. Employers typically pay 80% of your coverage and 70% of the coverage for other family members. Both your premiums, out of pocket and employer subsidies have all been rising since 2003 and average about $23,000 total for family coverage.

Source: DB Research

When you get laid off, or even if you leave on your own accord, you are eligible to keep your same insurance for a period under the Consolidated Omnibus Budget Resolution Act or COBRA.

Get ready for some sticker shock though. First of all, you will likely have to pay all the premium yourself, no help from the employer. In the case above for an average family, this could end up being about $1,700 to $1,800 monthly.

Add to that the insult to injury of taxes. When you are employed, health insurance premiums can be paid pre-tax. Cobra payments are made post tax so not only are you paying something in the range of 7 times what you previously were for health insurance, if you received a severance it will now lose the tax shields you had of premium payments while you were working.

It’s important to note that you are eligible for cobra even if you quit your job or if you get divorced and in the process lose your health insurance. Take note of the costs above though, it can be quite pricey.

You can’t find out exactly what your company pays without asking them either. There is no resource where they are required to say how much they pay towards your premium. You only see the small portion of the premium that is taken out of your paycheck. It’s important that before you start paying, you ask Human resources or employee benefits the amount they contribute towards your premium in order to get a sense of the full amount you could end up paying.

Not that you would want to pay it for so long, but Cobra lasts for up to 36 months. After that period though, if you are not working, you will have to find alternatives.

Obamacare to the Rescue?

The other alternative is to go out and get your own healthcare through Obamacare. Quitting your job, being laid off or being fired is a qualifying event which opens up a special enrollment period. If you decide to get a marketplace plan, it will kick in the 1st of the month after you lose your insurance.

Whether you get a subsidy or not depends on the multiples of the Federal Poverty Level (FPL) that you fall into in terms of income. Above 400% FPL the subsidy disappears and you are liable for the full cost of the premiums and out of pocket.

Source: Nevada Health Link

Obamacare then sets different levels of coverage with out of pocket maximums. The way they differ in terms of coverage can be seen below.

Source: medicoverage.com

Your premium cost is higher as you move from left to right above. To get a sense though, Kaiser provides some averages for the US based on some info about you. For a non smoking 35 year old single parent. Rates may look something like this:

Average Premiums in the US for a Single Parent and Child

• Bronze Premium – $519 per month

• Silver Premium – $722 per month

Kaiser only seems to discuss the silver and gold plans assuming you want to save money on premiums. What is key to note if you are saving for a rainy healthcare day as well is the out of pocket maximum. This sets the maximum amount you will have to spend out of pocket before insurance fully covers everything.

Out of Pocket Maximums for 2020

• $8,150 for an individual

• $16,300 for a family

This means that in theory the worst it could get as a single parent with one child is to spend $722 x 12 = $8,664 plus the out of pocket max to get $24,964 on average being the maximum you may spend under a silver plan.

This is remarkably close to the same total average cost of healthcare mentioned above at $23,000. Given that Cobra may equal that just in the premium payments, Obamacare is looking like the much more reasonable option in this case, even if the cost has come up since it was initially implemented.

The HSA Lifeline

What this means essentially is that you want to have some money saved in case you have to get new health coverage and pay the premiums after you lose your job. Here the Health Savings Account (HSA), that is part of high deductible plans can play a key role. Your plan is high deductible if you pay out of pocket for most services before your insurance kicks in. The minimum deductible to be considered a high deductible plan in 2019 is $1,350 for an individual and $2,700 for a family.

Normally, you are not allowed to pay premiums with savings from an HSA unless:

1. You are receiving unemployment insurance
2. You are paying Cobra
3. You are using Medicare or other health coverage after 65
4. You are paying long term care insurance with the funds subject to IRS limits based on age.

For those with a high deductible plan, which is becoming increasingly popular under private employers, I strongly encourage you to build this up and not touch it if possible, in order to have funds for a situation like this.

My personal strategy is that if I can afford it, I pay any medical bills in after tax money and keep the money in the HSA for a rainy day, like getting laid off.

I prefer to have the money for a very simple reason which many people have taken advantage of: the HSA is triple tax deductible. This means that you can deduct the savings out of your check and it won’t be taxed, it will not be taxed while you hold it, and it will not be taxed on any capital gains. This is even better than a Roth IRA where capital gains are not taxed but the contributions must be post tax.

Many plans also allow you the opportunity to invest the funds in the market through ETFs or mutual funds. This is a powerful tax shield for those that realize its potential and a very valuable rainy day fund for a situation like taking care of insurance after losing your job.

The HSA restricts what you can spend the money on and you must show proof if you are ever audited that you used the funds for medical purposes or you could be fined and have to pay the taxes as well.

Keep in mind though that you can be reimbursed with HSA funds for any after tax medical expenses. You just should keep the receipts in case the IRS asks for proof. Since there is no timeline on when this needs to be done by, if you are good with records or able to keep your receipts scanned in cloud storage, in theory you could keep receipts for many years as a sort of IOU from the HSA. When you need to draw on the HSA later, as long as you have the receipts to back up your debits from the account, you can take the money and use it for what you like later.

Finally, if you never draw on the HSA, you can draw on it after 65 for any purpose and it will be taxed at a rate similar to your 401k.

Conclusion

Of course if you make much less, I have not even delved into Medicaid. The requirements vary by state but as a rule of thumb, if you make less than 100% to 200% of the FPL and are pregnant, elderly, disabled or the parent of a child, you will likely be eligible for Medicaid. Again, here are the FPL guidelines for 2019 and an overview of guidelines by state can be found here.

Source: Policy Genius

So let’s review the conclusions.

1. Cobra is your most expensive option if you were laid off and had private insurance subsidized by your company.
2. The next cheapest option is a state marketplace Obamacare plan but keep in mind you should have some money saved up to meet the premiums and out of pocket costs.
3. If you have an HSA, store as much as you can without touching it while you work because contributions reduce your taxes while you work and there are more options to use those funds if you are unemployed and seeking work.
4. If you can qualify based on the above, the cheapest option is Medicaid, then everything is free. No out of pockets no premiums, but the rules to qualify are very strict.

So I hope you liked my brief overview of a complicated topic and if you have questions, feel free to comment and I can try to address them.

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