How to Calculate COBRA Rates and Your Monthly Premium

The Consolidated Omnibus Budget Reconciliation Act (COBRA) offers a temporary extension of group health coverage for individuals who would otherwise lose their benefits due to specific qualifying events. This federal law helps bridge gaps in health insurance, allowing former employees and their families to maintain continuity of care. Understanding how COBRA rates are determined is important for anyone considering this option, as monthly premiums can differ significantly from what was paid during active employment. This knowledge helps individuals make informed decisions about their healthcare coverage.

Understanding COBRA Premium Components

A COBRA premium is composed of two main elements: the full cost of the group health plan and an administrative fee. The “full cost of the group health plan” represents 100% of the cost of coverage for active employees who are similarly situated in the plan. This figure includes both the employee’s previous payroll deductions and the employer’s contribution.

This 100% cost covers all aspects of the original employer-sponsored health plan, including medical, dental, vision, and prescription drug benefits. In addition to this full cost, COBRA regulations permit the plan administrator to charge an administrative fee of up to 2% of the total cost. This fee covers expenses associated with managing the continuation of health coverage.

Establishing the Baseline Cost for COBRA

The “full cost of the group health plan” (100% of the premium) is determined by the employer or plan administrator. This baseline cost is calculated based on providing coverage to similarly situated active employees. Employers use various methods to arrive at this figure, ensuring it reflects the actual expense of maintaining the group health plan.

One common approach involves using historical claims data from the health plan to project future costs. Alternatively, employers might engage actuarial experts to perform detailed analyses and provide projections for the cost of coverage. Some plans may also determine this baseline by simply averaging the actual premiums paid for active employees enrolled in the same group health plan. This 100% figure is provided in the COBRA election notice, serving as the starting point for premium calculation.

Performing Your COBRA Rate Calculation

Calculating your monthly COBRA premium involves using the baseline cost provided by your plan administrator. The first step is to obtain this 100% figure.

Once you have the baseline cost, calculate the administrative fee, which is up to 2% of the baseline cost. Multiply the baseline cost by 0.02 to determine this amount. Finally, add the calculated administrative fee to the baseline cost to arrive at your total monthly COBRA premium.

For example, if your plan administrator informs you that the full monthly cost of your group health plan is $600, calculate the administrative fee: $600 multiplied by 0.02 equals $12. Adding this fee to the baseline cost ($600 + $12) yields a total monthly COBRA premium of $612. This is the total you would pay for COBRA coverage.