COBRA to ACA: How to Avoid a Health Insurance Gap Before Medicare

Retiring before age 65 can come with a lot of freedom, but it also raises one pretty important question: What will you do for health insurance until Medicare begins?

For many early retirees, COBRA provides a temporary solution by allowing them to stay on their former employer’s health plan. That continuity can be helpful, especially if you already know the plan, like your doctors and don’t want to make another big change right after leaving work. But COBRA doesn’t last forever. At some point, you may need to transition to another form of coverage, and for some retirees, that means moving from COBRA to an Affordable Care Act (ACA) Marketplace plan.

The transition itself isn’t necessarily complicated, but the timing can be. Understanding how COBRA and ACA coverage fit together before you retire can help you avoid an unexpected gap in insurance and give you a better idea of what health care may cost during the years before Medicare.

What happens to health insurance if you retire before 65?

Medicare eligibility generally begins at age 65, so if you retire earlier, you’ll need to determine how you’ll stay insured in the meantime. Depending on your situation, that might mean joining a spouse’s employer plan, continuing your former employer coverage through COBRA or purchasing insurance through the ACA Marketplace.

COBRA is often an appealing first step because it allows eligible individuals to temporarily continue the employer-sponsored coverage they already have. The key word, though, is temporarily. If COBRA is going to be your bridge after leaving work, it’s important to know exactly when that coverage ends and what you plan to do next. Someone retiring at 64 may only need to bridge a relatively short period before Medicare, while someone retiring at 58 could be looking at several years of health insurance decisions. That difference can have a meaningful impact on the overall retirement budget.

Moving from COBRA to an ACA plan

When COBRA coverage is coming to an end, you may qualify for a Special Enrollment Period that allows you to enroll in an ACA Marketplace plan outside of the normal annual open enrollment period. The Special Enrollment Period associated with the end of COBRA coverage generally runs from 60 days before the coverage ends through 60 days afterward.

That window is important because you don’t necessarily have to wait until your COBRA coverage is gone before figuring out what comes next. In fact, waiting can make the transition harder than it needs to be, particularly if your COBRA coverage ends in the middle of a month.

It is possible for COBRA to end mid-month, while ACA Marketplace coverage generally begins on the first day of a month. If your COBRA coverage ends on the 14th, for example, waiting until that date to start thinking about new insurance could potentially leave you with a gap. Looking at the dates ahead of time gives you an opportunity to coordinate the transition and understand exactly when one form of coverage stops and the next begins.

Should you cancel COBRA early?

This is one area where it pays to be careful. COBRA naturally coming to an end and voluntarily choosing to cancel COBRA are not necessarily treated the same way when it comes to qualifying for an ACA Special Enrollment Period.

If you’re thinking about dropping COBRA before it expires because you’ve found an ACA plan you prefer, make sure you understand your enrollment options before canceling your existing coverage. Outside of the annual ACA open enrollment period, voluntarily ending COBRA may not create the same enrollment opportunity as reaching the end of your COBRA eligibility. Confirming your options first can help you avoid inadvertently creating the very coverage gap you were trying to prevent.

COBRA or ACA: What makes sense for you?

There isn’t a universal answer. COBRA may be more expensive in some situations, but keeping your existing coverage, provider network and benefits may be worth it. An ACA plan could offer another option, particularly if you need coverage for a longer period before Medicare. The monthly premium is important, but it shouldn’t be the only number you consider.

Think about your doctors, prescriptions, deductibles and potential out-of-pocket costs as well as the amount of time you need the coverage. Health insurance should also be considered alongside the rest of your retirement finances. If you’re leaving work several years before Medicare, those premiums and potential medical expenses become another cost your retirement income needs to support.

That’s why we think this conversation belongs in retirement planning before you leave work, not after. Knowing how you’ll cover health care between your last paycheck and Medicare can give you a much clearer picture of what retiring early will actually cost.

Health insurance is part of the retirement plan

When people think about whether they’re ready to retire, they tend to focus on their investments, Social Security and how much income their savings can provide. Health insurance can easily become an afterthought, especially after spending decades receiving coverage through an employer. But for anyone hoping to retire before 65, it can be a significant part of the decision.

COBRA may provide the first bridge. An ACA Marketplace plan may provide another. Eventually, Medicare enters the picture. Rather than looking at each of those decisions separately, it can be helpful to map out the entire health insurance timeline and consider the costs alongside the rest of your retirement plan.

At Wealth Effects, we believe retirement planning should look at the whole picture. If you’re thinking about retiring before 65, understanding how you’ll cover health insurance along with your income, investments and taxes can help you make that decision with fewer unknowns.