Your COBRA premiums might be tax-deductible as a medical expense, depending on how much money you earn and how many medical expenses you had for the year. Medical expenses are deductible only if they amount to more than 10 percent of your annual gross, or pretax, income, or 7.5 percent if you were born before 1949. This IRS rule also covers medical expenses under private and employer-sponsored health plans.
How COBRA Works
The Consolidated Omnibus Budget Reconciliation Act, or COBRA, let's you and your family continue receiving health care benefits under your employer's plan for up to 18 months, or more when changes in your work situation leave you without medical coverage. COBRA benefits must be identical to the employer's plan. Although COBRA is group-rated coverage, premiums are going to be higher than those you paid as a full-time worker. That's because you and your employer shared premium costs. Under COBRA, you pay the entire cost, but less than you would for private insurance. COBRA affects employers with 20 or more workers, 50 percent of whom must be in the employer's health care plan. If you qualify for COBRA, your employer notifies you in writing that you can choose to continue coverage. You have 60 days after receiving the notice to accept or reject COBRA, and 45 days from the date you sign on to pay the first premium. Failure to pay automatically cancels your coverage. COBRA premiums can't be more than 102 percent of the cost of your previous coverage.
You, your spouse and dependent natural-born or adopted children qualify for COBRA under certain conditions. A change in your employment status, known as a "qualifying event," determines your eligibility. You're eligible if you left voluntarily, were laid off or fired, except for misconduct. You're also eligible if your employer cut back your hours. Your spouse is covered under the same conditions as well as if you become qualified for Medicare, legally divorced or separated, or if you die. Your children are eligible under some of these conditions, too.
Taking the Deduction
The IRS defines medical expenses as the cost of diagnosing, curing, treating, preventing and alleviating a disease affecting any body part or function. Payments must cover legal procedures by physicians, dentists, surgeons and other health care providers. The cost of supplies, equipment and diagnostic devices also are deductible. Medical expenses include your COBRA premiums and payments for long-term care, mental health treatment and transportation to and from health care facilities. You must take deductions for the year in which you paid for services, though you also can claim deductions for previous years in which you qualified for deductions you didn't take. Medical expenses also include payments you made for your spouse or dependent child's health care. Medical expenses are reported on Schedule A of the 1040 income tax form.
When COBRA Ends
If you qualify for another group health plan because you landed a new job or became eligible for Medicare, your COBRA coverage ends. You must notify -- in writing -- the plan administrator of your COBRA benefits that you're no longer eligible. The rule applies even if you don't enroll in another plan. If you continue receiving COBRA benefits while ineligible, the plan administrator charges you the full COBRA premium, rather than the discounted group price you've been paying. Also, the IRS charges you 110 percent of the COBRA premium for keeping and not reporting the coverage.
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