Coping with Unemployment

Health Insurance and COBRA: Sometimes You Can Take It with You

If you’re like most Americans, you count on your employer for health insurance coverage. But what would happen to your health insurance if you suddenly stopped working or no longer qualified for benefits? No one can predict the future. It’s possible that your company could lay you off or reduce your hours to part-time, your spouse could die, or your marriage could end in divorce. If something unexpected happened, you could be left without health benefits. And remember, buying private health insurance on your own can be pretty costly, especially if you’re out of work.

Fortunately, there’s the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA). COBRA can prove to be a real lifesaver for you and your family when your health coverage is jeopardized. You may also benefit from the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which took some further steps toward health-care reform.

The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) may help you continue your health insurance coverage for a time

COBRA is a federal law designed to protect employees and their dependents from losing health insurance coverage as a result of job loss or divorce. If you and your dependents are covered by an employer-sponsored health insurance plan, a provision of COBRA entitles you to continue coverage when you’d normally lose it. Most larger employers (20+ employees) are required to offer COBRA coverage.

As an employee, you’re entitled to COBRA coverage only if your employment has been terminated for any reason other than gross misconduct or if your hours have been reduced. However, your spouse and dependent children may be eligible for COBRA benefits if they’re no longer entitled to employer-sponsored benefits because of divorce, death, or certain other events.

Unfortunately, you can’t continue your health insurance coverage forever. You can continue your health insurance for 18 months under COBRA if your employment has been terminated or if your work hours have been reduced. If you’re entitled to COBRA coverage for other qualifying reasons, you can continue your coverage for 36 months.

• Divorce: If your former spouse maintained family health coverage through work (and works for a company with at least 20 employees), you may continue this group coverage for up to 36 months after the divorce or legal separation. You’ll have to pay for this coverage, though. Your cost of continuing coverage cannot exceed 102 percent of the employer’s cost for the insurance. COBRA coverage will terminate sooner than 36 months if you remarry or obtain coverage under another group health plan.
• Company goes out of business: Unfortunately, you may be out of luck here. If your company goes out of business and no longer has a group health insurance policy in force, then COBRA coverage will not be available. (A possible exception involves union employees covered by a collective bargaining agreement.)

Keep in mind that, whatever your circumstances, your employer may require individuals who elect continuation coverage to pay the full cost of the coverage, plus a 2 percent administrative fee. However, if you’re eligible for COBRA coverage and don’t have any other health insurance, you should probably accept it. Even though you’ll pay a lot more for coverage than you did as an employee, it’s probably less than you’ll pay for individual coverage. You won’t be subject to any health screenings, tests, or other pre-existing medical condition requirements when converting to a COBRA contract. Your COBRA benefits and coverage will be identical to those provided to similarly enrolled individuals.

The Health Insurance Portability and Accountability Act of 1996 expanded COBRA

In 1996, HIPAA expanded certain COBRA provisions and created other health-care rights. In many ways, HIPAA took a significant step toward health-care reform in the United States. Some of its provisions may affect you. The major provisions of HIPAA:

• Allow workers to move from one employer to another without fear of losing group health insurance
• Require health insurance companies that serve small groups (2 to 50 employees) to accept every small employer that applies for coverage
• Increase the tax deductibility of medical insurance premiums for the self-employed
• Require health insurance plans to provide inpatient coverage for a mother and newborn infant for at least 48 hours after a normal birth or 96 hours after a cesarean section

For example, assume you’re pregnant and covered by a group health insurance plan at work. You decide to take a job at another firm. Under HIPAA, pregnancy cannot be considered a pre-existing condition for a woman who’s changing jobs if she was previously covered by a group health insurance plan. So if you had insurance at your old job, you can’t be denied health insurance coverage at your new job simply because you’re pregnant.

However, many companies require you to be employed for 30 days or more before you become eligible for coverage. If you are nearing the end of your pregnancy, and that requirement poses a problem for you, you may be eligible for coverage under COBRA through your former employer.

I can’t pay my bills. Should I declare bankruptcy?

Answer:

If you’re unable to meet your financial obligations, you should investigate a number of options before considering bankruptcy. If your income has been reduced (e.g., because of illness or unemployment), you might consider cutting down on your monthly expenses, taking advantage of unemployment and public assistance, and liquidating assets. Another option is to restructure your debts. Debt restructuring involves negotiating new repayment terms with creditors so you can meet your monthly expenses and pay off your debts within a reasonable amount of time.

You should consider hiring a professional credit counselor to assist you in restructuring your debts. Professional credit counselors will contact your creditors and attempt to negotiate affordable repayment terms for you. If you can’t afford to hire a credit counselor, you may find help at your local Consumer Credit Counseling Service (CCCS) office or other nonprofit credit counseling service. These nonprofit companies provide basically the same services as a professional credit counselor but at little or no cost to you. Hiring a credit counselor now will help you even if you decide to declare bankruptcy later, because you may need to submit a certificate to the bankruptcy court that states you’ve received a briefing from an approved credit counselor in the six-month period prior to filing.

If you decide that bankruptcy is your only option, you may file for personal bankruptcy under Chapter 7 or Chapter 13. Chapter 7 bankruptcy can remove obligations to repay certain outstanding debts but requires you to liquidate certain assets and use the proceeds to pay creditors. You can only file under Chapter 7 if you pass an income eligibility test. Otherwise, you must file under Chapter 13 for relief, which institutes a payment plan to repay creditors over a three- or five-year period. A bankruptcy attorney can help you sort out your options.

I am behind on my mortgage payments. Will my lender begin foreclosure proceedings? 

Answer:

When you buy a home using a mortgage loan, your home becomes collateral for the loan. If you do not repay the mortgage loan as agreed, your lender has the right to take your property and sell it to satisfy the debt, also known as foreclosure.

Whether or not your lender will begin foreclosure proceedings depends on exactly how far behind you are on your mortgage payments. If you are only a month or two behind on payments, your lender will not likely begin foreclosure proceedings. Typically, a lender will not file for foreclosure unless the lender is absolutely certain that the borrower is defaulting on the loan.

It is important to remember, however, that late mortgage payments can damage your credit rating. If you are more than 30 days late on a mortgage payment, it will appear on your credit report and can remain there for up to seven years. In addition, most lenders will charge a late fee if you miss the due date for your mortgage payment.

If you are in a situation that will impact your ability to make timely payments (e.g., you or your spouse has become disabled), you should seek advice on how to deal with your creditors rather than wait until you are at risk of losing your home.

How can I reduce my spending? 

Answer:

To reduce your spending, you first need to know where your money goes. Start out by keeping track of all of your expenses for a month. None are too small or insignificant: the daily newspaper, coffee on the way to work, an extra gallon of milk, that burger at the fast-food outlet. Next, categorize the expenses so you can see what you spend and where you spend it. Be sure to factor into your monthly expenses a prorated portion of the annual cost of your irregular expenses (e.g., clothes, gifts, car maintenance, insurance premiums).

Expenses generally fall into two categories. Essential expenses are ones you can’t avoid (e.g., rent, utilities, groceries, car insurance). Discretionary expenses are ones you choose to incur (e.g., eating out, entertainment, gifts, cigarettes, videos). Discretionary expenses are the ones over which you will have the most control. Do you buy a lot of books? Try the library instead. Take coffee or lunch to work rather than buy it once you get there. Limit eating out to once a week rather than twice. Quit smoking, or at least begin to cut back on the number of packs you smoke each week.

Although essential expenses are fixed, there may be ways to reduce them. Make sure you shut off the lights and TV when you leave the room. E-mail your distant friends and relatives rather than call them long-distance. Change the oil in your car on a regular basis to avoid more costly repairs due to neglect. Review your insurance policies: Can you save on your premiums by taking a nonsmoker discount or increasing your deductibles? Clip the grocery store coupons, always shop from a list, and avoid the impulse items at the end of the aisles.

Pick a realistic goal for your monthly spending reduction and try not to make too many changes all at once. To see how big a difference this can make, do the math. If you start by committing to reduce your spending by $2 a day, that’s $730 a year! Set the saved money aside, perhaps in a savings account for your planned vacation, or use it for a specific purpose, such as reducing debt faster.

I need money: can I take funds from my IRA?

Answer:

Yes, but the taxable portion of your distribution may be subject to a 10 percent penalty for early withdrawal if you’re not yet age 59½. If you are 59½ or older and take money from your traditional IRA, you will not be assessed a penalty, though you may still have to pay income tax on all or part of the distribution. The purpose of this premature distribution tax is to discourage you from exhausting your IRA savings too soon. However, the penalty can be a significant drawback if you need money to meet unexpected expenses.

If you are experiencing a cash crunch, it’s usually better to draw on other investments before dipping into your IRA. However, if your IRA is your only sizable asset, you may have no choice. If that’s the case, be aware that there are a number of exceptions to the premature distribution rule.

If you are disabled, you are exempt from the penalty, as long as you meet the IRS definition of disability. If an IRA owner dies before reaching age 59½, and you are a beneficiary of the account, distributions that you receive are exempt. If you need supplementary income, you can take IRA distributions as a series of “substantially equal payments” over your life expectancy or the joint life expectancy of you and your beneficiary. These distributions may avoid the penalty as long as you don’t modify the payments within certain time frames.

Subject to limits and conditions, the penalty tax generally will not apply to IRA distributions taken to pay qualifying medical expenses, health insurance premiums while you’re unemployed, higher education costs, and qualified first-time home-buyer expenses (up to $10,000 lifetime from all your IRAs). It also does not apply to amounts rolled over from one IRA to another (assuming you follow the rules for rollovers), to conversions of traditional IRAs to Roth IRAs, to amounts that the IRS levies from your IRA to cover your tax bill, or to qualified reservist distributions. Other exceptions may also apply.

Qualified distributions from your Roth IRAs are federal income tax–and penalty tax–free. Distributions are qualified if you satisfy a five-year holding period, and you are (a) age 59½, (b) disabled, (c) deceased, or (d) you have qualified first time home-buyer expenses. The taxable portion of nonqualified distributions from your Roth IRAs is subject to the same 10 percent penalty rules that apply to traditional IRAs. (Special rules may apply if you take a nonqualified distribution from your Roth IRA within five years of a conversion.)

Finally, education IRAs may be subject to special rules of their own.

There are a number of ways you can smooth the transition to your next job. You’ll want to plan on your job search taking at least a few months and budget accordingly. Your budget should reflect the money you’ll need to use while looking for your new position.

Because you’re being laid off, you may be eligible for unemployment benefits from your state as well as severance pay from your employer. If you have an emergency reserve set up, you can count on that, as well. Otherwise, you might have to dip into your savings or take a part-time job to supplement your income.

Review your budget to identify where you can lower or perhaps cut out expenses for entertainment, dining out, and vacations, for example. You can also reduce expenses in small ways that add up: cancel subscriptions, eliminate extra phone services, and stop your cable service. Negotiate with your creditors to lower interest rates or receive temporary deferments, and review your auto insurance policies to see if increasing your deductibles or dropping certain coverages makes financial sense.

If you have time to prepare for unemployment, you can take some steps immediately to help yourself. You can reduce or stop contributions to retirement or education funds and put the extra money into your emergency fund. You might also consider increasing your withholding allowances to reduce the amount taken from your paycheck.

I’m transitioning out of the military. How do I search for a job?

Answer:

The transition from the military to a civilian job can be difficult. Fortunately, you can follow a few key steps to make the process as smooth as possible and help find a job that’s financially and professionally rewarding.

At the beginning of your search, you’ll want to reach out to your local Transition Assistance Office to locate resources that can help you with your job search, which includes a mandatory five-day workshop tailored to assist you with every step of the job search, from writing resumes to understanding veterans’ benefits. For more information, visit the U.S. Department of Labor website at www.dol.gov/vets.

Next, consider whether you will need additional education and training. For instance, will you apply for jobs that require a two- or four-year degree? Do you need a license or certification to work in a particular field? When you choose which path you’ll take, be sure to investigate whether there are veterans’ benefits available to help pay for further education. If you’d rather match the skills you gained from your time in the military to a civilian job, get started with an online search. One example of a website that caters directly to military members looking for civilian employment is USAJobs (www.usajobs.gov).

You’ll also want to make sure that your finances are in good shape during the transition process. This means creating or building an emergency fund you can tap into in case the job search takes longer than anticipated. In the meantime, you might consider temporary employment to provide a source of income. Think carefully about the pay and benefits associated with a job before you accept an offer. That way, you will know whether it suits the needs of both you and your family.

Along the way, make sure to protect your personal information. Because members of the military are major targets for identity theft, avoid any job sites that seem questionable. Looking for civilian employment is stressful enough without having to worry about financial fraud.