COBRA, Marketplace Subsidies, and HSA Use After a Layoff
Priya, 58, was laid off in March from a job paying $140,000. Her employer offers COBRA for 18 months at $1,850 per month for her and her husband, age 60. Her husband has type 2 diabetes and takes medications that cost about $600 per month at retail. A marketplace bronze plan quotes $1,150 per month before any premium tax credit, with a $7,500 deductible; a silver plan is $1,450. Her projected household income for the year is $70,000 from severance paid over 12 months and part-time consulting. She has $90,000 in a money market account. Her former employer's HDHP had an HSA with a $12,000 balance. Priya is considering skipping coverage and paying cash until Medicare at 65.
1. Compare COBRA with the marketplace options, including the subsidy calculation and expected total cost.
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COBRA costs $22,200 per year and keeps the current network, formulary, and deductible. If Priya elects COBRA, she is covered by employer continuation coverage and cannot receive a premium tax credit for those months. If she declines COBRA, she can enroll in a marketplace plan during the special enrollment period and may qualify for a credit because her $70,000 household income for two people is roughly 330% of the federal poverty level, below the 400% eligibility ceiling.
The credit is based on the second-lowest-cost silver plan, not the bronze premium. With income of $70,000, her required contribution is capped at roughly 8.5% or less under the enhanced rules, or about $500 per month. If the benchmark silver premium is $1,600 per month, the credit could be about $1,100 per month, making the bronze plan nearly free and the silver plan about $350 per month. But the bronze deductible is $7,500, and her husband's $600 monthly drug cost may not all be covered pre-deductible.
Compare total expected annual cost: COBRA $22,200 plus modest cost sharing; bronze perhaps $0 to $2,000 premium plus $7,500 deductible and drug costs; silver higher premium but lower cost sharing. With $90,000 in reserves, COBRA is affordable and may be the better clinical choice for a diabetic husband, but she should verify doctors, drugs, and tiers before deciding.
2. Explain how the existing HSA can be used and whether Priya can contribute while on COBRA or a marketplace plan.
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The $12,000 HSA balance remains hers and can be used tax-free for qualified medical expenses, including deductibles, copays, and most prescription drugs, regardless of which coverage she chooses. She does not have to be HSA-eligible to spend the balance.
Contribution eligibility is separate. While covered by COBRA under an HDHP, an individual generally cannot make new HSA contributions; COBRA continuation coverage is not treated as HSA-qualifying coverage for contribution purposes. A marketplace plan is also not HSA-qualifying unless it is specifically an HSA-compatible HDHP, and even then she must have no disqualifying coverage. If she selects a non-HDHP silver or bronze plan, no contributions.
One planning point: HSA funds can pay COBRA premiums only in limited circumstances, generally while she is receiving unemployment compensation. If she is receiving unemployment, she should document it and use the HSA for COBRA premiums; otherwise, premiums are not qualified medical expenses and would be taxable plus a 20% penalty. She should keep receipts and not use the HSA for the husband's Medicare premiums until he enrolls.
3. Advise Priya on coverage through age 65, including Medicare enrollment and the risk of going uninsured.
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Going without coverage is the weakest option. A single hospitalization could exceed the $90,000 reserve, and her husband's diabetes creates ongoing costs. COBRA lasts only 18 months, and she cannot rely on it until Medicare.
A workable sequence is to elect COBRA for the first 18 months to preserve the husband's physicians and drug coverage, then move to a marketplace plan during open enrollment or a special enrollment period when COBRA ends. At 65 she must enroll in Medicare Part B and Part D during her initial enrollment period even if she still has other coverage; delaying Part B creates lifetime late-enrollment penalties. Her husband should enroll at his own age-65 window. IRMAA is based on modified adjusted gross income from two years earlier, so the severance year should be modeled, but $70,000 is well below the joint threshold.
She should confirm COBRA's drug formulary and network first, then compare the marketplace silver plan's total cost. She should not drop COBRA mid-year without a qualifying event, because a marketplace special enrollment period may not be available.