If you just quit your job, or were permanently laid off and decided that you'd start your own business, you need health insurance. Sometimes people feel that they want to take advantage of their old company's plan and use COBRA as self-employed health insurance or they have to because of insurability. There are some important facts you need to know before you do.
COBRA stands for The Consolidated Omnibus Budget Reconciliation Act of 1985. This federal law allows employees that leave a company to stay with the company plan for 18 to 36 months, depending on the qualifying event, at their own expense. If you're disabled you can get up to 29 months of coverage. Children in college have longer. For most people leaving a position COBRA coverage is for 18 months. The cost in the first 18 months can't be more than 102 percent of the true plan premium. For months 19 through 29 it can't be more than 150 percent of the premium.
Select the COBRA option and you have guaranteed insurance that covers all your preexisting conditions for 18 months. If you can't get coverage for specific illnesses that are preexisting, then COBRA is one method of coverage. One really good reason for carrying COBRA at least for 9 months is maternity coverage. If you plan to increase your family size in the next 18 months, Cobra plans pick up the charges and most self-employed plans don't.
Understand that often the plans through previous companies have all the bells and whistles, primarily because of its size. As noted, it includes pregnancy coverage, but also often eyeglass, prescription and dental. Many of the plans for the self employed are simple and basic insurance. The ease at using the 18 months of Cobra is one reason many new business owners chose their previous employers plan.
When you calculate the premium for COBRA coverage, you can't use the amount that you paid when you worked for the company and multiply it times 102 percent. Often the employer kicks in a substantial portion of the premium so the 102 percent cost is the actual premium before the employer contribution and usually a much higher amount.
Deduct the premium from Schedule A, your itemized deductions, not line 29 on form 1040. In order to deduct health insurance premiums from line 29 the policy has to be in the name of your business. The Cobra policy is in the name of your former employer. This means that if you don't have enough deductions to use Schedule A, you lose the deduction for health insurance.
- U.S. Department of Labor. "An Employer's Guide to Group Health Continuation Coverage Under COBRA." Pages 2, 4. Accessed Jan. 31, 2020.
- U.S. Department of Labor. "An Employee's Guide to Health Benefits Under Cobra." Page 6. Accessed Jan. 31, 2020
- "FAQs on COBRA Continuation Health Coverage." Pages 2-3. Accessed Jan. 31, 2020.