Are COBRA insurance costs tax deductible?

This article was fact-checked by our editors and Jennifer Samuel, senior product specialist for Credit Karma. It has been updated for the 2020 and 2021 tax years.

When that happens, you could buy a medical plan from a private insurer or from the federal or state marketplaces established by the Affordable Care Act of 2010. But the premiums could be higher, especially if your employer covered a portion of the monthly premium costs — as many do. And the benefits might not match what you had through your employer’s plan.

Another option is to continue on your employer’s plan and shoulder the total costs yourself. The Consolidated Omnibus Budget Reconciliation Act of 1985, or COBRA, allows you to temporarily extend your coverage at your own expense under your employer’s group health plan for you and your family. Although this can be a less stressful and less time-consuming alternative to finding your own health coverage, it can be a costly option.

Typically, you’ll have to pay 100% of the premium costs — the portion you paid before losing your job and the portion your employer paid — plus an additional 2% for administrative costs. And if you receive an 11-month extension of coverage for a disability, your expense may be as much as 150% of the total cost of coverage.

Still, if you need to maintain the same level of benefits as you had while employed, COBRA can help you do that — at least temporarily. And you may be able to defray some of the expense by deducting qualified COBRA premiums on your federal income tax return.

Let’s look at how COBRA works, and how you might be able to deduct your COBRA premiums.

• How COBRA works
• Deducting COBRA insurance costs on tax returns
• Are COBRA costs considered a business expense if you’re self-employed?
• Alternatives to COBRA

How COBRA works

Not all plans are subject to COBRA, and you need to have a “qualifying event” — a life change that causes you and/or your family to lose health coverage — in order to be eligible to continue under your employer’s health plan.

Generally, employers must provide COBRA coverage if they …

• Are a private company with 20 or more employees, or a state or local government
• Have at least 20 employees for more than half the business days in a year
• Offer group health insurance plans to current workers

Any employee who was insured when experiencing a qualifying event can elect to continue coverage under the employer’s group health plan. Current or former spouses and children of the covered employee are also eligible when a qualifying event affects them.

For an employee, a qualifying event would include …

• Leaving or losing your job for any reason other than gross misconduct
• Having your work hours reduced, making you ineligible for health coverage

Your spouse and/or dependents covered under your former employer’s group health plan can buy COBRA coverage if …

• You become eligible for Medicare
• You divorce or legally separate from your spouse
• You die, leading to loss of health coverage for your family

In addition, your children can buy COBRA coverage until they turn 26 if they lose dependent child status and lose eligibility to remain covered under your plan.

Time frame for choosing COBRA coverage

When you leave your job or suffer certain qualifying events, your employer must notify the health plan administrator within 30 days. The plan administrator must then inform you about your rights and the process for making a COBRA election within 14 days of getting the notice.

Employees and their dependents have at least 60 days to elect COBRA coverage, and each person who qualifies can decide independently whether to elect coverage. So, for example, if you were insuring yourself and your spouse, you could continue coverage only for yourself, only for your spouse or for both of you.

In order to maintain your COBRA rights, you can be required to make your first insurance premium payment within 45 days from when you sign up for coverage, and then make subsequent payments in a timely manner.

If you have questions about the coverage, contact the COBRA administrator or your former employer’s human resources department.

The length of COBRA coverage period is limited

Typically, you can buy the health insurance coverage for 18 months after a qualifying event. But the coverage period could last up to 36 months in certain situations, such as when a second qualifying event occurs or when a covered person is disabled.

Deducting COBRA insurance costs on tax returns

Going without medical coverage is never a good idea. But if the high cost of COBRA is tempting you to forgo coverage altogether, keep in mind there may be a way to keep your coverage and defray the costs.

You can deduct your COBRA costs if you itemize deductions on your federal income tax return and if your total qualifying medical and dental expenses — including the COBRA premiums you paid in the tax year — amount to at least 7.5% of your adjusted gross income for the year.

Qualifying medical expenses include COBRA premiums as well as money paid for diagnosis, cure, mitigation, treatment, disease prevention, medical supplies and equipment, and other medical services. However, you can only deduct the premiums you paid for yourself and qualifying dependents, such as your spouse and children. If your employer subsidizes any portion of the COBRA premiums, you typically can’t deduct the subsidized amount.

There’s a slight hitch in being able to take this deduction, though.

The Tax Cuts and Jobs Act raised the amount of the standard deduction you can take to reduce your taxable income. So it may not make sense for you to itemize unless the total of your itemized deductions in 2020 exceed $24,800 if you file as married filing jointly, $18,650 if you file as head of household or $12,400 if your filing status is single or married filing separately.

What to do if you can’t deduct COBRA insurance costs

If it doesn’t make sense to itemize and your total medical and dental expenses don’t hit 7.5% of your AGI, you may have another option for getting a slight tax break on COBRA premiums. If you have a health savings account, you could pay COBRA premiums out of that tax-exempt account.

This special savings account allows you to set aside pretax dollars and then use the funds tax-free on qualifying medical expenses, thereby lowering your overall healthcare costs. In addition, you can deduct qualified contributions made to your HSA from your taxable income.

If you qualify, you may be able to open an HSA through a health insurer, through your employer if it offers such a facility, or at banks and other financial institutions. When you leave your job, your HSA remains yours and you can still use it to pay qualified medical expenses.

However, you can only make tax-deductible contributions, subject to annual caps, to an HSA if you have a qualifying high-deductible health plan. For 2020 and 2021, a qualifying high-deductible plan is a plan with a deductible of at least $1,400 for an individual and $2,800 for families.

Are COBRA costs considered a business expense if you’re self-employed?

Sometimes, people who quit their jobs or who are laid off may decide to start their own business or do contract work as a freelancer instead of looking for another employer.

As a small-business owner, you may be eligible for a self-employed health insurance deduction, which allows you to deduct premiums paid on medical, dental and qualified long-term care insurance policies for yourself, your spouse and your dependents. But usually, you can’t deduct COBRA premiums because the IRS requires the insurance plan be established under your business. Typically, your COBRA plan would be established under the business name of the employer providing the coverage — not under your business.

Alternatives to COBRA

COBRA can be a great option if you like your former employer’s plan, but the cost of maintaining that coverage can be a huge burden. This is especially true if you’re not able to qualify for a tax deduction for premiums.

Try to explore all your options — including buying a private health plan — if you leave your job or otherwise lose your health insurance coverage.

The qualifying events that entitle you to COBRA also give you the right under the Affordable Care Act to enroll in a plan in the federal or state marketplaces within 60 days.

Depending upon your income, you may be eligible to get tax credits on premiums if you buy a plan through the government-regulated ACA exchanges, so those insurance policies may end up being cheaper than your COBRA plan.

And low-income people may be able to qualify for Medicaid, the public health insurance program, depending on the state they live in and the size of their family and income.

Bottom line

Losing employer-sponsored health benefits if you quit your job, get laid off or go through a divorce means you must make important decisions about your health insurance while dealing with the stress of navigating life changes. But it doesn’t mean you have to give up your employer’s group health plan.

Explore all your options and see if paying the full premiums out of pocket on your employer’s plan through COBRA might be better than buying medical insurance from another source. If you decide to continue that coverage, you may be able to offset the COBRA insurance costs by itemizing your deductions and deducting the cost of premiums.

Jennifer Samuel, senior tax product specialist for Credit Karma, has more than a decade of experience in the tax preparation industry, including work as a tax analyst and tax preparation professional. She holds a bachelor’s degree in accounting from Saint Leo University. You can find her on LinkedIn.