Yes. Section 105 "Pure" Defined Contribution Health Plans are subject to COBRA requirements (for employers with over 20 employees). This means employers must allow employees and/or dependents to continue their coverage after termination -- if the employee pays the cost themselves.
Why Does COBRA Apply?
Most "Pure" Defined Contribution Health Plans are created using a limited-purpose Section 105 medical reimbursement plan. Like other group health benefit plans, this type of arrangement is subject to the continuation requirements of COBRA.
What are the COBRA Requirements?
Employers must give terminated employees the option to continue coverage in their Defined Contribution Health Plan for a period after termination, and may charge the terminated employee up to 102% of the cost of this coverage.
How Does it Work When an Employee Elects COBRA?
For most purposes, terminated participants who have elected COBRA coverage are treated exactly like current, similarly situated employees. They should continue to receive their Defined Contribution allowances and have the ability to submit new claims for reimbursement just like a current employee. If the Defined Contribution Health Plan for current employees is changed or terminated, the change affects any current COBRA participants in the same way. The key difference between current and terminated employees is that the employer may charge the terminated participant and/or dependents for the cost of their coverage.
In general, an employer may charge a terminated employee and/or dependents monthly up to 102% of the cost of the coverage for a similarly situated individual in the plan. The IRS has not released specific guidelines for calculating the cost of a Section 105 medical reimbursement plan in order to determine COBRA premium, except that the determination may not depend on the participant’s current balance.
What questions do you have about how COBRA applies to Section 105 "Pure" Defined Contribution Health Plans? Leave a comment below.