Dan Reiter, CFP®, CPA
Divorce can be a tumultuous period, and one of the many aspects that often require immediate attention is health insurance coverage. The loss of coverage can significantly impact financial stability and access to essential healthcare. This guide will delve into the various options available to individuals facing this transition, providing detailed information and considerations.
Understanding Your Options
1. COBRA Continuation:
COBRA stands for the Consolidated Omnibus Budget Reconciliation Act, a law passed to require group health plans to provide temporary continuation of group health coverage in situations where coverage might otherwise be terminated. Individuals who lose their employer-sponsored health insurance due to divorce may be eligible for COBRA coverage. Generally, COBRA coverage is required to be provided as an option to divorcing spouses where the offering employer is in the private-sector and has at least 20 employees.
In divorce situations, COBRA coverage can last for up to 36 months from the time your divorce is finalized. However, COBRA may be very expensive. COBRA premiums are typically higher than those paid during employment, as the individual is responsible for the full cost of the premium plus a small administrative fee. In other words, the employer may be required to maintain coverage but is not required to continue to pay the premium cost they were previously covering. As such, you should be sure to evaluate all your available options before opting for it.
2. Marketplace Coverage:
The Health Insurance Marketplace offers a variety of health insurance plans, many of which provide good coverage without requiring underwriting or pre-existing condition exclusions. Individuals can enroll in Marketplace plans during annual open enrollment periods or through special enrollment periods triggered by qualifying life events, such as divorce. Additionally, you may be eligible for a premium tax credit to help offset the cost of your premium.
A Key Planning Topic: Premium Tax Credits
A tax credit may be available to help subsidize (or in some cases, fully pay) health insurance premiums for policies purchased on the Healthcare Marketplace. These tax credits are available to individuals and families with incomes below certain thresholds. The amount of the credit depends on your income and household size. For example, in 2024, a single person may be eligible for a tax credit if their “modified adjusted gross income” is below roughly $60,000. For a household of three, the income limit may be up to about $100,000.
“Modified adjusted gross income” is defined as the adjusted gross income reported on a tax return, plus certain untaxed benefits such as foreign income or non-taxable Social Security benefits.[1] If you can strategically plan to keep such income below those threshholds, you may be able to maximize your premium tax credit. In fact, qualifying for healthcare premium tax credits was made easier for divorces entered after January 1, 2019, as alimony is no longer includable in the income of the receiving spouse! Note that child support payments received also do not apply toward these income limits.
In certain circumstances, it may not be unusual to be eligible to obtain fully or mostly subsidized health insurance.
You should work with a tax or financial professional that can help you determine, and possibly plan for, a strategy to qualify for and maximize such benefits.
3. Employer-Sponsored Coverage:
If COBRA is too expensive (or not available), and you do not qualify for any premium tax credits, one option that may be worth pursuing is obtaining health coverage through a new job or employer. Eligibility for coverage often depends on factors such as hours worked and employment status. Employer-sponsored plans typically offer much more affordable premiums compared to individual plans.
Other Important Considerations
Dependent Coverage: If you have children, you may be able to continue their coverage under your ex-spouse's health insurance plan or enroll them in a new plan.
State-Specific Regulations: Health insurance regulations can vary by state, so it's important to be aware of the specific rules in your jurisdiction.
Qualified Health Plans (QHPs): Marketplace plans must meet certain quality standards to be considered QHPs. This ensures that they provide essential health benefits and adhere to specific coverage requirements.
Financial Planning: Consider your financial situation and budget when evaluating different health insurance options. Factor in premiums, deductibles, copays, and out-of-pocket maximums.
Health Status and Expenses: If you have significant ongoing medical costs or have already incurred a sizeable amount of health costs the year your divorce will be finalized, it may be worth giving a second look to COBRA coverage even if the premium costs are higher. Changing health insurance mid-year may cause you to have to start over with new deductibles or out-of-pocket limits.
Conclusion
Losing your health insurance after a divorce can be a significant challenge, but there are several options available to help you maintain coverage. By understanding your options and carefully considering your needs, you can find a plan that suits your budget and provides the coverage you require.
[1] https://www.healthcare.gov/glossary/modified-adjusted-gross-income-magi/
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