As more businesses consider offering an individual coverage HRA (ICHRA) in 2020, new questions are being asked about the benefit’s compliance requirements. One of the most frequently asked questions is whether businesses offering the ICHRA will be subject to COBRA.
The ICHRA, like most other health reimbursement arrangements, is a group health plan. That means that all businesses subject to COBRA must comply with those requirements and give eligible employees a chance to elect COBRA coverage.
In this post, we’ll cover which businesses are subject to COBRA, how to calculate COBRA premiums with the benefit, and when employees become eligible for COBRA coverage.
Let’s get started.
Are all businesses offering the ICHRA subject to COBRA?
Like all group health insurance plans, the ICHRA is subject to COBRA. In fact, the federal regulations that created the ICHRA explicitly state that IRS Notice 2002-45—which outlines how HRAs interact with COBRA—applies in the case of the ICHRA.
However, not all businesses offering the ICHRA are subject to COBRA requirements. Generally, all private-sector businesses that employed at least 20 people (including both full-time and part-time workers) on more than half of the previous year’s business days are subject to COBRA.
Businesses with fewer than 20 employees, some federal employees, churches, and church-related tax-exempt organizations are not subject to COBRA. If they offer an ICHRA, they can do so without adhering to COBRA requirements.
All other businesses are subject to COBRA and must provide all covered individuals a chance to elect COBRA coverage if they become eligible.
How are COBRA premiums calculated with an ICHRA?
Eligible employees and their spouses who elect COBRA coverage must pay a premium. COBRA defines this amount as the cost to the business of providing coverage to similarly situated participants who have not experienced an event that would qualify them for COBRA coverage.
Put more simply, the amount of the premium should reflect how much it costs the business to provide the ICHRA to the employee.
Businesses have the option of two methods for calculating this amount:
- The past-cost method, which is based on average usage of the HRA over the previous plan year.
- The actuarial method, which is based on a reasonable estimate of HRA usage in the future.
In either case, premiums are based on how many HRA dollars employees actually use.
Now, let’s explore these two methods further.
The past-cost method
The past-cost method uses utilization rates over the previous plan year to determine COBRA premiums. Businesses can also add two percent to the premium to account for administrative fees.
Let’s look at a practical example. While he was employed at Bailey Consultants, Jonathan received $300 a month through his ICHRA, for a total of $3,600 a year. During the previous plan year, he used an average $1,800, or 50 percent of the total benefit he was offered.
Jonathan was terminated and has decided to use COBRA coverage. To calculate his premium, Bailey Consultants multiplies $3,600 (Jonathan’s total benefit allowance) by 50 percent (his total usage), for an annual premium of $1,800. Bailey Consultants also charges Jonathan 2 percent in COBRA administration fees, for a total annual premium of $1,836 ($153 a month).
By paying his monthly $153 premium, Jonathan has continued access to his ICHRA balance as well as a continued $300 allowance from Bailey Consultants.
Obviously, the past-cost method cannot be used for brand-new HRAs. It also cannot be used if there is a significant difference in HRA coverage from one year to the next, or if HRAs allow for annual rollover (which would produce a significant difference in coverage year to year).
The actuarial method is another way for businesses to calculate COBRA premiums. It’s also the only method available to businesses that can’t use the past-cost method, such as those offering an ICHRA for the first time or those whose employee coverage amounts differ significantly from year to year.
This method requires the business offering the ICHRA to make a reasonable estimate of the cost of providing the benefit to employees and, if eligible, their families. This estimate should reflect how much of the available ICHRA benefit the business expects similarly situated employees to use.
COBRA rules don’t require businesses to hire an actual actuary to determine this amount. In fact, many businesses rely on third-party administrators or benefits software companies to make this determination.
How is COBRA eligibility activated?
All employees and employee family members covered by the ICHRA are eligible for COBRA coverage when they experience a qualifying event.
For covered employees, the following are qualifying events if they cause the employee to lose ICHRA coverage:
- The employee is terminated for any reason other than gross misconduct
- The employee’s hours of employment are reduced
For spouses and dependent children, qualifying events that cause them to lose ICHRA coverage are:
- The covered employee is terminated for any reason other than gross misconduct
- The covered employee's hours of employment are reduced
- The covered employee becomes eligible for Medicare
- The covered employee dies
- The spouse divorces or legally separates from the covered employee
- A dependent child turns 26
To help explain how COBRA interacts with the ICHRA, businesses are required to give employees and their spouses (if covered by the benefit) a general notice describing their COBRA rights. This notice must be delivered within the first 90 days of the ICHRA’s coverage, and can be delivered either as part of the ICHRA’s summary plan description or as a separate document.
This notice should help ease the transition of employees from the ICHRA and on to COBRA.
All except the smallest businesses will be subject to COBRA while offering the ICHRA. Understanding those requirements and being prepared to assist employees with their COBRA options is critical for offering the benefit in a compliant and successful way.
Regardless of how your business chooses to deliver the COBRA notice requirement or calculate COBRA premiums, it’s extremely helpful to partner with a third-party administrator or software company.
An administrative partner can automate and deliver COBRA communications to employees, calculate appropriate COBRA premiums, and assist employees in transitioning from the ICHRA to COBRA coverage.
Have questions? Let us know in the comments below.