Planning for Clients’ Health Care Expenses in Event of a Layoff

The COVID-19 pandemic has left 30 million Americans unemployed and many people are questioning what to do next when it comes to their finances.

Given the heightened health risk of the pandemic, continuing health care coverage plays a major role in these decisions. Here’s what advisers can do to educate their clients about their options and guide them to make the best choices as they transition into unemployment.

Ask About Health Care Needs

Employer sponsored health plans have defined rules that govern when health insurance coverage will end once employment ends. Sometimes coverage ends on the last day of employment, but for most clients, coverage will continue through the end of the month in which they were laid off. After that, they have decisions to make, and advisers can help them explore the right next move that weighs their health care needs against the cost for that coverage.

Those with fewer anticipated health care needs or those who have significant savings in a health savings account (HSA) may feel comfortable exploring the Patient Protection and Affordable Care Act (ACA) marketplace or other increasingly popular concierge or direct-care services. Others with chronic conditions that require frequent care or who need more comprehensive coverage will want to consider continuing their employer-sponsored coverage under COBRA [Consolidated Omnibus Budget Reconciliation Act].

The Benefits of COBRA

In normal times, only a small percentage of individuals eligible for COBRA actually enroll. This is typically due to confusion around enrollment and the high premium cost, which may feel too expensive for those now without a regular source of income.

Advisers should be prepared to point out the important COBRA benefits that potentially outweigh the premium cost. These include the following:

• Continuity of care. Those with chronic conditions or who otherwise receive frequent care may save money in the long run by continuing comprehensive employer-sponsored coverage under COBRA. Further, if they have a physician or hospital relationship that would change with new insurance coverage, COBRA allows them to maintain crucial and trusted care.
• Fast short-term protection. COBRA is the simplest and quickest option to ensure people have health care coverage, especially during a higher-risk time such as a pandemic. Researching and enrolling in a marketplace plan may not be worth the effort, especially if clients have reason to believe their coverage gap will last only 30 to 90 days before getting back to work.
• Additional assistance may come in multiple forms. There are a few instances where COBRA premiums may be subsidized. While they are not required to do so, some employers subsidize a portion of the premium cost for a period of time after a layoff. It is also possible that in the coming weeks or months, the government will announce subsidies for COBRA like those issued during the Great Recession. And lastly, consumers can use HSA funds to pay COBRA premiums tax-free.
• Special considerations come into play. For people who had a high-deductible health plan (HDHP) and already met most or all of their deductible for the year before being laid off, COBRA could be the best option because their out-of-pocket costs for qualified medical expenses for the rest of the year will be greatly reduced. In fact, under many plans, they may be $0. If an individual doesn’t elect COBRA, they may need to start over with a new plan and a new deductible.

What About Flexible Spending Accounts?

People with a flexible spending account (FSA) should consider enrolling in COBRA to protect the money they’ve contributed tax-free into the account. Without continuation of coverage, any unspent dollars in the account will be forfeited to the employer when the health insurance is canceled.

People usually have 60 days from the time they receive an election notice or when coverage ends to enroll in COBRA, but the IRS and Department of Labor (DOL) recently extended the enrollment period, given the extenuating circumstances of COVID-19. Additionally, people have 45 days from the date of their election to pay for the coverage. This means that an individual (who does not need immediate health care services) can take up to 105 days to decide.

Consider, however, that the special enrollment period for marketplace insurance through the ACA is only 60 days. Those who wait to make a decision based on the COBRA deadline could miss their opportunity for marketplace insurance altogether.

Every client will have drastically different needs and scenarios. Helping them understand their health care coverage options after a layoff will ensure they stay healthy while looking out for their overall financial health, too.

Author’s note:

Specific guidance or requirements are not explained in detail here and always require research and education. These explanations are not exhaustive in nature.

Editor’s note:

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.