Order Code RL30626
Report for Congress
Received through the CRS Web
Health Insurance Continuation Coverage
under COBRA
Updated December 17, 2002
Heidi G. Yacker
Information Research Specialist
Information Research Division
Congressional Research Service ˜ The Library of Congress

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Health Insurance Continuation Coverage
under COBRA
Summary
Most Americans with private group health insurance are covered through an
employer. That coverage is generally provided to active employees and their
families. A change in an individual’s work or family status can result in loss of
coverage. In 1985, Congress enacted legislation to provide temporary access to
health insurance for qualified individuals who lose coverage due to such changes.
Under Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985
(COBRA, P.L. 99-272), an employer with 20 or more employees must provide those
employees and their families the option of continuing their coverage under the
employer’s group health insurance plan in the case of certain events. The coverage
can last up to 36 months, depending on the nature of the triggering event. The
employer is not required to pay for this coverage; instead, the beneficiary can be
required to pay up to 102% of the premium. Employers who fail to provide the
continued health insurance option are subject to tax and other penalties.
In 1987, the Internal Revenue Service issued proposed regulations providing
guidance for employers on COBRA. The regulations were finalized in February
1999 and January 2001.

Some believe that COBRA went too far in requiring employers to provide
continuation coverage. They argue that it resulted in extra costs for employers (in the
form of increased premiums for employers’ group health insurance policies) as well
as added administrative burdens. In contrast, others believe that COBRA should be
expanded to include new eligibility categories and longer coverage periods, so that
more workers and their families have a source of group health insurance coverage
during periods of job or family transitions. They argue that the financial and
administrative burdens on employers have been exaggerated.
The Trade Act of 2002 provided a tax credit for the purchase of health insurance
(including COBRA coverage) for workers displaced by trade. A number of other
legislative proposals were introduced in the 107th Congress. Provisions in the House-
passed economic stimulus legislation would have allowed states to use block grant
funds to assist with the purchase of insurance coverage (including COBRA) for
workers displaced by the terrorist attacks of September 11, 2001. Other legislation
would have subsidized COBRA premiums for workers who lost health coverage as
a result of the terrorist attacks, extended COBRA benefits to retirees whose former
employer eliminates or substantially reduces their retiree health insurance, and
provided tax credits for individuals for the costs of COBRA premiums. These bills
were not enacted.
This report provides background information on COBRA, on the COBRA
population, and on legislation affecting COBRA. It will be updated as events
warrant.

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Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
COBRA Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
General Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Covered Employers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Qualified Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Qualifying Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Nature of COBRA Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Duration of Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notice Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Paying for COBRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Conversion Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Penalties for Noncompliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Coverage Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Employer Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Cost Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Federal Subsidies for COBRA Premiums . . . . . . . . . . . . . . . . . . . . . . 10
High-Deductible Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Legislation in the 107th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Displaced Worker Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Expanding COBRA Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Tax Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

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Health Insurance Continuation Coverage
under COBRA
Background
Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985
(COBRA, P.L. 99-272) requires employers who offer health insurance to continue
coverage for their employees under certain circumstances. Congress enacted the
legislation to expand access to coverage for at least those people who became
uninsured as a result of changes in their employment or family status. Although the
law allows employers to charge 102% of the group plan premium, this can be much
less expensive than coverage available in the individual insurance market. The law
affects private sector employer group health plans through amendments to the
Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code.
COBRA continuation coverage for employees of state and local governments is
required under amendments to the Public Health Service Act. Continuation coverage
similar to COBRA is provided to federal employees through the law authorizing the
Federal Employees Health Benefits program under Title V of the U. S. Code.
Before enactment of COBRA, if an employee’s job was terminated (voluntarily
or involuntarily), the insurance offered by the employer also ceased, usually within
30 to 60 days. Women were especially vulnerable to loss of insurance coverage if
they became unemployed, widowed, or divorced. Although some employers offered
the option of buying into the group plan, there was no certainty of that option. In
1985, 10 states had laws requiring insurance policies sold in their states to include
a continuation of coverage option for laid-off workers. However, self-insured
employers (employers that assume the risk of the health care costs of their employees
rather than using private insurers) were not regulated by these state-mandated benefit
laws; self-insured plans are regulated at the federal level under ERISA. Health
insurance coverage for these affected workers and their families was not consistently
available.
COBRA Coverage
General Requirements
Under COBRA, employers must offer the option of continued health insurance
coverage at group rates to qualified employees and their families who are faced with
loss of coverage due to certain events. Coverage generally lasts 18 months but,
depending on the circumstances, can last for longer periods. COBRA requirements
also apply to self-insured firms. An employer must comply with COBRA even if it

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does not contribute to the health plan; it need only maintain such a plan to come
under the statute’s continuation requirements.1
Covered Employers
COBRA covers all employers, with the following exceptions:
! Small employers. Employers with fewer than 20 employees are not
covered under COBRA. An employer is considered to meet the
small employer exception during a calendar year if on at least 50%
of its typical business days during the preceding calendar year it had
fewer than 20 employees.
! Church plans.
! Federal government. Although they are not covered under COBRA,
since 1990, federal employees have been entitled to continued
coverage under the Federal Employees Health Benefits Program.
Qualified Beneficiaries
In general, a qualified beneficiary is
! an employee covered under the group health plan who loses
coverage due to termination of employment2 or a reduction in hours;
! a retiree who loses retiree health insurance benefits due to the former
employer’s bankruptcy;
! a spouse or dependent child of the covered employee who, on the
day before the “qualifying event” (see below), was covered under the
employer’s group health plan; or
! any child born to or placed for adoption with a covered employee
during the period of COBRA coverage.
1 On Feb. 3, 1999, the Internal Revenue Service (IRS) published final rules (64 Federal
Register 5160-5188), effective on Jan. 1, 2000, defining COBRA coverage requirements.
Final rules addressing COBRA issues applying to business reorganizations, bankruptcy, and
COBRA’s interaction with the Family and Medical Leave Act were issued on Jan. 10, 2001
(66 Federal Register 1843-1859).
2 A termination of employment (for reasons other than the employee’s gross misconduct)
can be either voluntary or involuntary. Voluntary reasons include retirement, resignation,
and failure to return to work after a leave of absence. Involuntary reasons include layoffs,
firings and the employer’s bankruptcy under Chapter 11 of Title XI of the U.S. Code. Strikes
and walkouts might also trigger COBRA coverage if they result in a loss of health insurance
coverage.

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Qualifying Events
Circumstances that trigger COBRA coverage are known as “qualifying events.”
A qualifying event must cause an individual to lose health insurance coverage.
Losing coverage means ceasing to be covered under the same terms and conditions
as those available immediately before the event. For example, if an employee is laid
off or experiences a reduction in hours that results in a loss of health insurance
benefits, this is a qualifying event. Or, if an employer requires retiring individuals
to pay a higher premium for the same coverage they received immediately before
retiring, the retirement can be a qualifying event even though coverage is not lost or
benefits reduced. Events that trigger COBRA continuation coverage include:
! termination or reduction in hours of employment (for reasons other
than gross misconduct).
Spouses and dependent children can experience the following qualifying events
leading to their loss of health insurance coverage:
! the death of the covered employee,
! divorce or legal separation from the employee,
! the employee’s becoming eligible for Medicare, and
! the end of a child’s dependency under a parent’s health insurance
policy.
In addition, retirees and their covered dependents who lose coverage under their
former employer’s retiree health plan as a result of the employer’s declaring
bankruptcy under Chapter 11 are qualified for COBRA continuation coverage.
Nature of COBRA Coverage
The continuation coverage must be identical to that provided to “similarly
situated non-COBRA beneficiaries.” The term “similarly situated” is intended to
ensure that beneficiaries have access to the same options as those who have not
experienced a qualifying event. For example, if the employer offers an open season
for non-COBRA beneficiaries to change their health plan coverage, the COBRA
beneficiary must also be able to take advantage of the open season. By the same
token, COBRA continuation coverage can be terminated if an employer terminates
health insurance coverage for all employees.
Duration of Coverage
The duration of COBRA coverage can vary, depending on the qualifying event.
! In general, when a covered employee experiences a termination or
reduction in hours of employment, the continued coverage for the

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employee and the employee’s spouse and dependent children must
continue for 18 months.
! Retirees who lose retiree health insurance benefits due to the
bankruptcy (a reorganization under Chapter 11) of their former
employer may elect COBRA coverage that can continue until their
death. The spouse and dependent children of the retiree may
continue the coverage for an additional 36 months after the death of
the retiree.
! For all the other qualifying events listed above (death of employee,
divorce or legal separation from employee, employee’s becoming
eligible for Medicare, the end of a child’s dependent status under the
parents’ health policy), the coverage for the qualified beneficiaries
must be continued for 36 months.

Different provisions apply to disabled individuals. If the Social Security
Administration (SSA) makes a determination that the date of an individual’s onset
of disability occurred during the first 60 days of COBRA coverage or earlier,3 the
employee and the employee’s spouse and dependents are eligible for an additional
11 months of continuation coverage. This is a total of 29 months from the date of the
qualifying event (which must have been a termination or reduction in hours of
employment). This provision was designed to provide a source of coverage while
individuals wait for Medicare coverage to begin. After a determination of disability,
there is a 5-month waiting period for Social Security disability cash benefits and
another 24-month waiting period for Medicare benefits. See “Paying for COBRA”
section below regarding the premium for this additional 11 months.
Under some conditions, COBRA coverage can end earlier than the full term.
Although coverage must begin on the date of the qualifying event, it can end on the
earliest of the following:

! the first day for which timely payment of the premium is not made
[Payment is timely if it is made within 30 days of the payment due
date. Payment cannot be required before 45 days after the date of
election (see below)];
! the date on which the employer ceases to maintain any group health
plan;4
3 In most cases, the SSA makes its disability determination later than within the first 60 days
of COBRA coverage. However, the date of the disability onset can be set retroactively to
a date within the first 60 days.
4 A bankruptcy under Chapter 7 of Title XI of the U.S. Code would be such an instance.
Chapter 7 bankruptcies (business liquidations) are distinct from Chapter 11 (reorganization)
bankruptcies. Under Chapter 7, the employer goes out of existence. COBRA is provided
through the employer; if there is no employer, there is no COBRA obligation. Under
Chapter 11, the employer remains in business and must therefore honor his COBRA
(continued...)

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! the first day after the qualified beneficiary becomes actually covered
(and not just eligible to be covered) under another employer’s group
health plan, unless the new plan excludes coverage for a preexisting
condition;5 or
! the date the qualified beneficiary is entitled to Medicare benefits.
If a COBRA-covered beneficiary receiving coverage through a region-specific
plan (such as a managed care organization) moves out of that area, the employer is
required to provide coverage in the new area if this can be done under one of the
employer’s existing plans. For example, this might be possible if the employer
maintains a self-insured plan, or if the employer’s plan is through an insurer licensed
in the new area to provide the same coverage available to the employer’s similarly-
situated non-COBRA employees. Further, if this same coverage would not be
available in the new area, but the employer maintains another plan for employees
who are not similarly-situated to the beneficiary (such as a plan offered to
management or another group within the firm) that would be available in the new
area, then that alternative coverage must be offered to the beneficiary. If, however,
the only coverage offered by the employer is not available in the new area, the
employer is not obliged to offer any other coverage to the relocating beneficiary.
Notice Requirements
Employers, employees, and the employer’s health plan administrators all have
to meet requirements for notifying each other regarding COBRA.
! At the time an employee first becomes covered under a health plan,
the plan administrator must provide written notification to the
employee and his or her spouse regarding COBRA rights if a
qualifying event should occur.
If a qualifying event occurs, other notices are required.
! The employer must notify the plan administrator of the event within
30 days of the death of the employee, a termination or reduction in
hours, the employee’s becoming entitled to Medicare, or the
beginning of bankruptcy proceedings.
4 (...continued)
obligations.
5 Under the Health Insurance Portability and Accountability Act (P.L. 104-191), the new
health plan cannot impose a pre-existing condition limitation or exclusion longer than 12
months after the enrollment date. The new group plan must reduce the pre-existing
condition limitation period by one month for every month the individual had creditable
coverage under the previous plan or COBRA. If the individual has not had 12 months of
such creditable coverage, the new plan can impose an appropriate limitation period. In this
case, the individual may maintain COBRA coverage under the former employer’s plan.

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! Within 14 days of receiving the employer’s notice, the plan
administrator must notify, in writing, each covered employee and his
or her spouse of their right to elect continued coverage.
! The employee must notify the employer or plan administrator within
60 days of a divorce or legal separation of a covered employee or a
dependent child’s ceasing to be a dependent of the covered employee
under the policy.
! COBRA beneficiaries who are determined by the SSA to have been
disabled within the first 60 days of COBRA coverage must notify
the plan administrator of this determination in order to be eligible for
the additional 11 months of coverage. They must provide this notice
within 60 days of receiving the SSA’s decision.
Elections
A qualified individual must choose whether or not to elect COBRA coverage
within an election period. This period is 60 days from the later of two dates: the date
coverage would be lost due to the qualifying event, or the date that the beneficiary
is sent notice of his right to elect COBRA coverage. The beneficiary must provide
the employer or plan administrator with a formal notice of election. Coverage is
retroactive to the date of the qualifying event. The employee or other affected person
may also waive COBRA coverage. If that waiver is then revoked within the election
period, COBRA coverage must still be provided. However, coverage begins on the
date of the revocation rather than the date of the qualifying event.
Paying for COBRA
Employers are not required to pay for the cost of COBRA coverage. They are
permitted to charge the covered beneficiary 100% of the premium (both the portion
paid by the employee and the portion paid by the employer, if any), plus an additional
2% administrative fee. For disabled individuals who qualify for an additional 11
months of COBRA coverage, the employer may charge 150% of the premium for
these months. The plan must allow a qualified beneficiary to pay for the coverage
in monthly installments, although alternative intervals may also be offered.
Conversion Option
Many states require insurers to offer group health plan beneficiaries the option
of converting their group coverage to individual coverage. Conversion enables
individuals to buy health insurance from the employer’s plan without being subject
to medical screening. Under the Health Insurance Portability and Accountability Act
(HIPAA, P.L. 104-191), a person moving from the group to individual insurance
market is guaranteed access to health insurance coverage either under federal
requirements or an acceptable alternative state mechanism. Although the policy must
be issued, the premium might be less appealing than the premium under a group plan.
The beneficiary must have exhausted all COBRA coverage before moving to the
individual market. While the premiums for an individual policy are higher, the

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conversion option may be attractive to a person who would otherwise have difficulty
obtaining health insurance because of a major illness or disability.
Penalties for Noncompliance
Private group health plans are subject to an IRS excise tax for each violation
involving a COBRA beneficiary. In general, the tax is $100 per day per beneficiary
for each day of the period of noncompliance. ERISA also contains civil penalties of
up to $100 per day for failure to provide the employee with the required COBRA
notifications. State and local plans covered under the Public Health Service Act are
not subject to the same financial penalties provided under the tax code or ERISA.
However, state and local employees do have the right to bring an “action for
appropriate equitable relief” if they are “aggrieved by the failure of a state, political
subdivision, or agency or instrumentality thereof” to provide continuation health
insurance coverage as required under the Act.
Issues
COBRA was enacted to provide access to group health insurance for people
who lose their employer-sponsored coverage, and thus to help reduce the number of
uninsured. However, the law has limitations in its effectiveness in covering persons
leaving the workforce and, from the point of view of both employees and employers,
has costs that can be burdensome.
Coverage Issues
In a report released in October 1999,6 the Kaiser Family Foundation provided
a picture of the COBRA population. Kaiser estimated that 4.7 million individuals
were enrolled in COBRA plans at any one time, representing approximately 7% of
unemployed workers and 3% of all insured workers. The numbers were fairly
equally divided among regions of the country and according to firm size. There
were, on average, 4.8 COBRA beneficiaries per firm, although this number varied
widely by industry, ranging from 2.6 beneficiaries per firm in the mining/construction
industry to 10.6 in the finance industry. The largest group of COBRA beneficiaries
(approximately 35%) was in service industries, probably reflecting the high turnover
rate in that industry. Estimates of the average length of time that beneficiaries keep
their COBRA coverage range from 4.8 months to 10.5 months (for 18-month
eligibles) or 22.0 months (for 36-month eligibles). Approximately 20% of COBRA-
eligible individuals actually elect coverage.
The universe of individuals covered by COBRA is limited in a number of ways.
First, the small employer exception exempts employers with fewer than 20
employees from offering COBRA coverage. In addition, COBRA coverage is not
extended to individuals who work for an employer, regardless of size, who does not
6 Kaiser Family Foundation and Health Research and Educational Trust. Employer Health
Benefits 1999 Annual Survey (Washington: Kaiser Family Foundation, 1999).

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offer group health insurance. Nor is it available to an employee who declines
coverage under an employer’s plan. Also, if the employer declares bankruptcy under
Chapter 7 or simply discontinues operation, COBRA is not an option for employees.
The Kaiser Family Foundation estimates that in 1999 only 57% of workers and their
adult dependents would have been eligible for COBRA if they had become
unemployed.7
Employer Size. Currently, COBRA provides an exception for employers with
fewer than 20 employees. Although 38 states require that continuation coverage be
offered to employees in smaller firms, the coverage is not always as extensive as
COBRA. According to figures from the Census Bureau’s Statistics of U.S. Business,
in 1998 approximately 20.3 million people, or 18.75% of employees covered in the
survey, worked in firms with fewer than 20 employees.
One method proposed for increasing the number of those eligible for COBRA
coverage would involve lowering the number of employees in the small employer
exemption. According to the Census data, there were approximately 8 million people
working in firms with 10 to 19 employees. If the definition of “small employer” was
changed to “those having fewer than 10 employees,” the employers of these 8 million
workers would no longer be exempted from COBRA. However, such a proposal
would likely be opposed by the small business community because it would result in
potentially higher premium costs and added administrative burdens. Additionally,
because the employee pool is small in these firms, the cost of covering COBRA
individuals who use a lot of health care could result in raised premium costs for
active employees in the long run.
Retirees. The Census Bureau estimates8 that, in 2000, approximately 13.7%
of people aged 55-64, many of whom are retirees, were uninsured. Many retirees
obtain health insurance coverage through retiree plans offered by their former
employers. However, the 2001 Kaiser annual employer survey reported that the
percentage of employers who have 200 or more employees and who offer retiree
health benefits has dropped from 66% in 1988 to 34% in 2001. Although 73% of
those employers still offering coverage report that they are very unlikely to eliminate
retiree health benefits, 48% report that they are very or somewhat likely to increase
the retiree share of contributions for premiums.
Under current law, an employee’s act of retirement is a COBRA qualifying
event. Although this might be an attractive option for those without access to a
retiree health plan, the coverage is limited in its duration to the maximum applicable
number of months (18, 29, or 36). Under the following circumstances, a covered
employer must offer a retiring employee access to COBRA or to a retiree plan that
satisfies COBRA’s requirements for benefits, duration, and premium.
7 Kaiser Commission on Medicaid and the Uninsured. COBRA Coverage for Low-Income
Unemployed Workers (Washington: Kaiser Commission, 2001).
8 U.S. Bureau of the Census. Health Insurance Coverage: 2000.
[http://www.census.gov/hhes/www/hlthin00.html]

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! If a covered employer offers no retiree health plan, the retiring
employee must be offered COBRA coverage.
! If the employer does offer a retiree health plan but it is different
from the coverage the employee had immediately before retirement
(for example, if the plan is only offered for 6 months, or if the
premium is higher than it was for the employee immediately before
the retirement), the employer must offer the option of COBRA
coverage in addition to the offer of the alternative retiree plan. If the
retiring employee opts for the alternative coverage and declines
COBRA coverage, then she or he is no longer a qualified beneficiary
under COBRA, and the employer is not required to offer COBRA
coverage upon termination of the retiree plan.
! If the employer’s retiree health plan satisfies COBRA’s requirements
for benefits, premium, and duration, the employer is not required to
offer a COBRA option upon the employee’s retiring (because
coverage under the plan was not lost), and the coverage provided by
the retiree plan can be counted against the maximum COBRA
coverage period that applies to the retiree, spouse, and dependent
children. If the employer terminates the plan before the retiree’s or
the retiree’s spouse or dependent children’s maximum coverage
period has expired, COBRA coverage must be offered for the
remainder of the period.
! The only other access a retiree has to COBRA coverage is in the
event that a former employer terminates the retiree health plan under
a bankruptcy reorganization under Chapter 11. In this case, the
coverage can continue until the death of the retiree. The retiree’s
spouse and dependent children may purchase COBRA coverage
from the former employer for 36 months after the retiree’s death.
Cost Issues
Employees are concerned about the cost of COBRA coverage. A recent Kaiser
study9 provided figures for the average premiums for employer-sponsored health
insurance coverage in 2001. The cost for single coverage was $2,650 and for family
coverage, $7,053. On average, employers cover approximately 74% of the premium
for a family plan, leaving the employee’s share at about $1830. Under COBRA, the
employee must pay 102% of the premium, or almost $7200. This can be a hardship
for newly-unemployed individuals.
Employers also express concerns about costs. Charles D. Spencer & Associates,
employee benefits analysts, produce an annual COBRA survey of employers who
subscribe to their service. In their 2000 survey, they found that the claims costs of
COBRA continuation coverage for the plan year 1999 were on average 54% higher
9 Kaiser Family Foundation and Health Research and Educational Trust. Employer Health
Benefits 2001 Annual Survey (Washington: Kaiser Family Foundation, 2001).

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than the claims costs of insurance coverage for active employees. While the average
annual health insurance costs per active employee was $3,936, the COBRA cost was
$6,051. The Spencer Associates analysts contend that this indicates that the COBRA
population is sicker than active covered employees, and that the 2% administrative
fee allowed in the law is insufficient to offset the difference in claims costs.
However, because this survey does not represent a random sample of employers, it
is not known whether its findings are representative of all employers in the United
States.
Federal Subsidies for COBRA Premiums. Even before the terrorist
attacks of September 11, 2001, the U.S. economy was undergoing a marked
slowdown. The attacks led to a greater increase in the number of unemployed
workers. The Bureau of Labor Statistics’ October 2001 Employment Situation
indicated that nonfarm payroll employment dropped by 415,000, resulting in an
unemployment rate of 5.4%, which was the highest monthly rate since December
1996. Concern has risen for workers who will not only lose their jobs but will also
lose their employer-sponsored health care insurance.
Some policymakers and analysts suggest providing federal subsidies for
COBRA premiums as a possible means of lowering the number of uninsured. These
subsidies could be in the form of direct payments to employees or employers, or as
tax credits to either party.
In recent years, several studies have been conducted regarding the benefits and
costs of these subsidies. A January 1998 report from the Congressional Budget
Office (CBO)10 constructed prototypes for 6-month subsidy programs that restricted
eligibility to those who, among other criteria, were receiving unemployment
compensation and whose income was below 240% of the poverty line. The subsidy
would be 100% for those with incomes below the poverty line and would decrease
linearly as the beneficiary’s income rose, phasing out when income reached 240% of
poverty. Assuming unemployment rates of 4.7% and 5.8%, CBO estimated that
between 1.4 million and 1.7 million workers would take advantage of the program,
at a cost of $1.7 billion to $2.1 billion to the federal government. The number of
uninsured would have been reduced by about 350,000 to 425,000 (out of 40 million)
in a typical month; slightly over 1 million people would get at least one month of
coverage they would not otherwise have had. CBO determined that if there were no
new federal subsidy program, about half of the individuals in the prototype would
have had coverage either through a program subsidized by their former employer or
through their own purchases of COBRA or individual health insurance. They
concluded that although the prototype would provide continuity of coverage for some
eligible individuals, the program would not make large changes in the numbers of
uninsured and would not affect the chronically uninsured.
Other studies present varying options for federal subsidies for COBRA
premiums. Thomas Rice of the University of California at Los Angeles School of
10 U.S. Congressional Budget Office. Proposals to Subsidize Health Insurance for the
Unemployed (Washington: Congressional Budget Office, 1998). Two of the options are
discussed here, but several additional variations are provided in the report.

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Public Health11 proposed a baseline policy for federal subsidies which would be
made on behalf of COBRA-eligible employees (and their families) whose incomes
did not exceed 300% of the poverty line and who had worked for their employer for
at least the last 6 months. The maximum subsidy, available to people at or below
200% of poverty, would be 90% and would be reduced on a sliding scale, reaching
0% at 300% of poverty. The plan would target those who most need assistance with
paying for COBRA coverage, but would add the administrative burden of
determining income levels of COBRA-eligibles. Rice proposed alternative options
which would eliminate income restrictions or limit coverage to employees receiving
unemployment compensation.
Jonathan Gruber of the Massachusetts Institute of Technology12 proposed the
establishment of a “COBRA-LOAN” program, creating a new federal agency to
provide loans for the full cost of the premium to any qualified COBRA-eligible
individual. The employer would pay the COBRA premium on behalf of the
employee and be reimbursed by the new government entity. The employer’s payment
would be in the form of a tax credit equal to the amount of the premium and the 2%
administrative fee. Beneficiaries would repay the government entity beginning one
year after their participation in COBRA ended. Loan forgiveness would be extended
to low-income individuals.
Another suggested form of government subsidy under consideration is a tax
credit that could be applied to the cost of COBRA premiums. Under current law, for
individuals whose uncompensated medical expenses exceed 7.5% of their adjusted
gross income, COBRA premiums are a deductible medical expense. The deduction
is taken when calculating taxable income—before determining what is owed in taxes.
The deduction reduces the income level that is used to calculate the tax owed.
However, this benefit is only available to those whose medical expenses are high and
who itemize their tax returns, and the value of the deduction varies with an
individual’s tax rate. A tax credit, on the other hand, is applied after the tax amount
has been determined and it reduces, by the full value of the credit, the amount of the
tax that is owed. It is not dependent upon whether the taxpayer itemizes their return,
and it does not vary according to an individual’s tax rate. A tax credit could be
designed in various ways, depending on the target population. It could be a dollar
amount (for example, a $1,000 tax credit for the purchase of health insurance) or a
percentage (such as a credit equal to 50% or 75% of a premium). Or it could be a
combination of both, such as a percentage with a dollar amount as a cap.
A tax credit is a method of encouraging those who might not otherwise buy
health insurance to do so. However, this might not be attractive to individuals with
small tax liabilities. For instance, if there was a $1,000 tax credit, but the taxpayer
owed only $500 in tax, the taxpayer would not benefit from the full credit. Some
proposals are designed to make the credit “refundable,” i.e., the taxpayer would
receive a refund for the balance of the credit. In some instances, individuals do not
11 Thomas Rice. Subsidizing COBRA: An Option for Expanding Health Insurance Coverage
(Washington: Kaiser Family Foundation, 1999).
12 Jonathan Gruber, Transitional Subsidies for Health Insurance Coverage (New York:
Commonwealth Fund, 2000).

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have funds to pay their health insurance premiums on a monthly basis. They would
not be helped by a tax credit that was not available until the end-of-the-year tax
filing. Some tax analysts have suggested an “advanceable” tax credit, that is, one that
would be available before a person files their tax return. Such a credit was enacted
by the Trade Act of 2002 (see below under “Legislation.”)
Jeff Lemieux of the Progressive Policy Institute advocates refundable tax credit
for COBRA coverage, which would be available to former employees who are
receiving unemployment compensation.13 The credit would be means-tested, that is,
the full credit (either some determined dollar amount or a percentage of the premium)
would be available to people at some established income level and would decrease
as the income level rose. The credit would be available immediately, rather than later
when employees pay their taxes. This would be accomplished by the employer’s
reducing the employee’s COBRA premium payment by the applicable tax credit
amount. The employer would then deduct that amount from its regular tax payments
to the government.
There are advantages to subsidizing COBRA benefits, especially with means-
tested assistance such as mentioned above. For example, vulnerable populations
would be provided with the means to purchase insurance coverage. Additionally,
because more people would opt for COBRA coverage, the numbers of uninsured
would be reduced. Further, people would be able to move more freely between jobs
without losing health care coverage.
On the other hand, a relatively small part of the uninsured population is affected.
Many work for small employers who are exempted from providing COBRA
coverage. Others are offered insurance on the job, but cannot afford to purchase it.
Further, subsidizing COBRA can be expensive. Because employees are guaranteed
the same coverage they had immediately before the qualifying event, the policy might
be a generous one with a high premium. In addition, government subsidies might be
paid on behalf of people who would otherwise have purchased other insurance
independently. Finally, subsidizing COBRA can provide disincentives to individuals
seeking new employment, resulting in increased expenditures on unemployment
compensation payments.
High-Deductible Plans. A different approach toward lowering premiums
was included in S. 24, 107th Congress. It would have created two new high-
deductible COBRA plans. These could have been selected by individuals who
wanted coverage for catastrophic costs only. Beneficiaries would have been able to
select among plans with either a $1,000 or $3,000 deductible or traditional COBRA
coverage. The intent was to provide COBRA coverage options with lower
premiums. Higher deductibles could have the effect of lowering the premium for the
plan, thus encouraging more participation. This bill did not become law.
13 Jeff Lemieux, Transitional Health Coverage: A Tax Credit for COBRA (Washington:
Progressive Policy Institute, 2001).

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CRS-13
Legislation in the 107th Congress
The Trade Act of 2002 (P.L. 107-210) included a provision establishing a
refundable, advanceable tax credit (see discussion above) for the purchase of
qualified health insurance, including COBRA coverage. The credit, equal to 65% of
the amount paid in premiums, is available to workers (and their spouses and
dependents) who have been certified as being adversely affected by foreign trade. To
be covered, individuals must be eligible for a trade adjustment allowance (TAA) or
be age 55 or over and receiving a pension through the Pension Benefit Guaranty
Corporation (PBGC). The Act also provided for an additional election period for
TAA-eligible individuals who did not elect COBRA initially at the time they lost
coverage due to a TAA-related event. Such individuals may elect COBRA in a
special 60-day period beginning on the first day of the month in which they become
eligible for TAA, but only if the election is made within 6 months of the date of the
original loss of coverage. Coverage itself begins on the first day of the special 60-day
election period. In addition, the law states that the period between the date of the
TAA-related loss of coverage and the first day of the special election period cannot
be considered for purposes of preexisting conditions exclusions. (For a more
complete discussion of this legislation, see CRS Issue Brief IB98037: Tax Benefits
for Health Insurance: Current Legislation, by Bob Lyke.)
A number of bills were introduced in the 107th Congress to address some of the
issues discussed above. Other legislation would have provided assistance with
COBRA premiums for workers and their families who lost coverage due to events
springing from the terrorist attacks of September 11, 2001. None of these bills was
enacted before the end of the Congress.
Displaced Worker Legislation
! Title V of H.R. 3090, the Economic Security and Recovery Act of
2001, contained health care assistance for the unemployed through
the Social Service Block Grant program (Title XX of the Social
Security Act). It provided an additional $3 billion for FY2002 for
states to assist unemployed individuals who were not eligible for
any federal health insurance programs with the purchase of health
insurance. Among other options open to them, states would have
had the option to decide to use these funds to assist people with their
COBRA premium payments. H.R. 3090 was passed by the House
on October 24, 2001. The version of the bill that became public law
(P.L. 107-147) did not contain the health care assistance provisions.
! The Senate’s Economic Recovery and Assistance for American
Workers Act of 2001, an amendment in the nature of a substitute to
H.R. 3090, provided a 75% premium subsidy for COBRA-eligible
people who lost their coverage due to the events of September 11.
The subsidies could have lasted up to 12 months and would have
been paid by the Department of the Treasury directly to group health
plans, employers, or state unemployment insurance offices. The
program would have expired December 31, 2002. The package was

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reported by the Senate Finance Committee on November 9, 2001,
but was withdrawn from the Senate floor by unanimous consent on
November 14.
! S. 1454, H.R. 2946, and H.R. 2955 would have required the
Secretary of Labor to provide for government payment of COBRA
premiums for those who had become totally or partially separated,
as a result of the September 11 attacks, from employment with an air
carrier, at a facility at an airport, with a provider of transportation to
or from an airport, or with an “upstream producer or supplier for an
air carrier.”14 H.R. 3045 would have provided the same payment of
COBRA premiums, limited to the aircraft manufacturing industry.
(For a complete discussion of these bills, see CRS Report RS21047,
Unemployment Related to Terrorist Attacks: Proposals to Assist
Affected Workers in the Airlines and Related Industries, by Paul
Graney.)
! On October 4, 2001, President Bush unveiled his Back to Work
Relief Package. Part of the package was directed at National
Emergency Grants (NEGs), which are grants made by the
Department of Labor to states experiencing plant closings or mass
layoffs. An additional $3 billion would have been provided for these
grants to assist dislocated workers. Under the President’s plan, the
governor of a state would certify that closures, layoffs, or
dislocations in the state were closely linked to the terrorist attacks of
September 11. States could use the grant money for, among other
purposes, paying up to 75% of COBRA premiums for up to 10
months for these workers.
! A bill unrelated to terrorism but aimed at displaced workers was
S. 1209, which would have established a 50% tax credit for COBRA
premiums paid by workers who lost their jobs due to the negative
impact of foreign trade and were eligible for trade adjustment
assistance.
Expanding COBRA Eligibility
Other bills would have expanded COBRA eligibility to include certain defined
groups:
! A number of legislative proposals would have extended coverage to
a small but potentially growing population—retirees whose former
employer terminates or significantly reduces benefits provided under
its retiree health insurance plan. H.R. 803, H.R. 1255, and S. 623
would have established a new qualifying event: loss of or a
14 The bill defines upstream producer as a firm that performs additional, value-added,
production processes, including firms that perform final assembly, finishing, or packaging
of articles for another firm.

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CRS-15
substantial reduction in coverage under a retiree health plan.
“Substantial reduction” was defined as a 50% reduction in the total
average actuarial value of the plan through a reduction or
elimination of benefits or an increase in premiums. The new
COBRA beneficiaries would have been offered the coverage option
most commonly used by other COBRA beneficiaries in the group
plan, or other coverage which might be offered and elected by the
retiree. Employers would have been permitted to charge 125% of
the premium. Coverage would have lasted until the retiree and
his/her spouse became entitled to Medicare.
! H.R. 1078 contained similar provisions to those mentioned above,
except they would have applied only when a retiree health plan was
terminated. The bill would have allowed the employer to charge
110% of the cost of the coverage.
Other bills would have expanded the duration of COBRA coverage:
! H.R. 2005 would have allowed individuals aged 55-64 whose
COBRA benefits would expire under current law to extend their
COBRA coverage until they became entitled to Medicare.
! Two bills, H.R. 2005 and H.R. 1663, would have lengthened the
duration of COBRA coverage from 18 or 36 months to 5 years.
S. 24 would have lengthened the duration from 18 to 24 months. It
would not have affected those situations where duration was 36
months.
Tax Provisions
Under the eligibility expansion bills discussed above, the administrative fee for
retirees would have been raised to between 10% and 25%. The 2001 Kaiser study
estimated that the average annual premium for active employees in employer-
sponsored plans in 2001 was $2,650 (individual) and $7,053 (family). Assuming a
125% premium, these amounts would be $3,312 and $8,816, respectively. Such
amounts could be prohibitively expensive for all but higher income retirees and those
retirees for whom the coverage is critical because they have a preexisting medical
condition.
Several bills would have provided tax breaks to address this problem. Under
current law, for individuals whose uncompensated medical expenses exceed 7.5% of
their adjusted gross income, COBRA premiums are a deductible medical expense.
Although the deduction reduces the income that is used to calculate the tax owed, it
is only available to those whose medical expenses are high and who itemize their tax
returns. The bills listed below would have provided tax credits for COBRA
premiums. A tax credit, not dependent upon itemization, is applied against the
taxpayer’s tax liability, reducing, dollar for dollar, the amount of tax owed.

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! H.R. 803, H.R. 1255, and S. 623 would have allowed a tax credit of
50% on premiums paid for COBRA coverage by those retirees
established as qualified beneficiaries under their provisions.
! H.R. 2005 would have allowed a 50% tax credit for all COBRA
premiums.
! S. 590 would have allowed a tax credit for premiums paid for health
insurance coverage, including COBRA coverage. It would have
provided a $1,000 annual credit for a person with income up to
$35,000 to purchase individual coverage and a $2,500 credit for a
taxpayer with income up to $55,000 to purchase family coverage.

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