The need for the COBRA safety net is expected to shrink dramatically next year when the health care reform law will enable many COBRA beneficiaries to buy federally subsidized health coverage through public insurance exchanges.

Enacted in 1986, COBRA has helped millions of group health plan participants retain, almost always at their own expense, employment-based coverage after layoffs, marital separation, divorce or death.

Under provisions of the Patient Protection and Affordable Care Act that go into effect in January 2014, and clarified by recent Internal Revenue Service proposed regulations, lower and middle-income employees who quit or are laid off, or employees' widowed or divorced spouses who are eligible for COBRA but do not enroll, will be entitled to premium subsidies to buy health insurance in public exchanges that begin operating next year.

The subsidies will be so generous “that COBRA will kind of wither on the vine,'' said Steve Wojcik, vice president of public policy at the National Business Group on Health in Washington.

The premium subsidies will be available to former employees with household incomes up to 400% of the federal poverty level, which is $45,960 for an individual and $94,200 for a family of four this year. The final subsidy would be based on the individual's income that year.

In addition, subsidies will be available to employees who lose group coverage due to a reduction in their work hours. Under recently proposed IRS rules, those employees would have to both satisfy the 400% federal poverty level test and have a COBRA single-coverage premium that exceeds 9.5% of their income to receive the federal subsidy.

In the case of employees' widowed or divorced spouses, the COBRA premium also would have to fail the 9.5% affordability test for those individuals to be eligible for federal premium subsidies to purchase coverage in an exchange.

The premium subsidies would make exchange-purchased health coverage much cheaper than COBRA, in which beneficiaries pay the full premium or as much as 102% of the group rate for coverage that employers provide to active employees.

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In fact, lower-income COBRA beneficiaries who receive the federal subsidy could buy in some cases a year of health insurance through an exchange at a price that would be about the same as they would have to pay for one or two months of COBRA coverage, said Rich Stover, a principal with Buck Consultants L.L.C. in Secaucus, N.J.

“This will allow COBRA beneficiaries to obtain coverage far more within their financial needs. This is one of the high points of the health care reform law,” said Gretchen Young, senior vice president of health policy with the ERISA Industry Committee in Washington.

While the savings of rejecting COBRA coverage in favor of federally subsidized exchange policies could amount to thousands of dollars a year for many COBRA beneficiaries, they have gotten little public attention.

“They have not been spotlighted very much,” said Amy Bergner, managing director of human resources with Pricewaterhouse-Coopers L.L.P. in Washington.

Even those aware of the subsidy provisions often have not assessed the positive financial implications, Mr. Stover said.

“This is a win-win situation for both employers and COBRA beneficiaries,” Mr. Wojcik said.

Employers also will save money if a significant percentage of beneficiaries reject COBRA in favor of subsidized exchange coverage. That is due to the adverse selection inherent in COBRA. Because COBRA is so expensive, those opting for coverage are those most likely to use health care services. Benefits experts have said, for every $1 employers collect in COBRA premiums, they typically pay out $1.50 in claims.

While it is not known how many beneficiaries will reject COBRA in favor of subsidized exchange coverage, evidence from a 2009 economic stimulus law suggests federal premium subsidies could significantly affect coverage takeup rates.

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Under the stimulus law, the government temporarily paid 65% of the COBRA premium for laid-off employees. Just prior to passage of that law, an average of 19% of laid-off employees opted for COBRA coverage, according to an Aon Hewitt survey. However, after the 65% federal premium subsidy took effect, the COBRA takeup rate for involuntarily terminated employees doubled to 38%, according to the Aon Hewitt analysis of COBRA enrollments among 200 large employers.

Even with the apparent financial advantages, employers still will have to mount a concerted communications effort to overcome beneficiaries' inertia toward COBRA enrollment.

“The process for enrolling in COBRA is simple. Enrolling in exchanges will be a brand new experience and may be more complex,” said Michael Thompson, a PwC principal in New York.

Employers should provide real, side-by-side examples comparing what COBRA beneficiaries eligible for premium subsidies would pay for exchange coverage and for COBRA coverage, said Ben Lupin, senior vice president of compliance with Corporate Synergies Group L.L.C. in Mount Laurel, N.J.

“You want to help educate” the COBRA beneficiary, Mr. Lupin said.