How does COBRA interact with ICHRA?

As more organizations consider offering their employees an individual coverage health reimbursement arrangement (ICHRA), employers and HR managers need to know how ICHRA and COBRA interact.

Group health insurance plans are subject to COBRA and must comply with their requirements. So, where does an ICHRA fall?

This article will explain if an ICHRA is subject to COBRA, which organizations are subject to COBRA, how to calculate COBRA premiums, and when employees become eligible for COBRA coverage.

Note: the information in this article is intended to be general in nature. If you have specific questions about COBRA requirements for your organization, consult with a trusted advisor. 

Ready to offer an ICHRA to your employees? Read our free guide to learn more.

What is ICHRA?

The individual coverage HRA (ICHRA) is a health reimbursement arrangement (HRA) that allows employers to reimburse their employees for their qualifying medical expenses. This includes individual health plan monthly premiums and out-of-pocket expenses. Employees receive tax-free reimbursements as long as employees have individual health insurance coverage with minimum essential coverage (MEC).

An ICHRA is an excellent way for applicable large employers (ALEs) to satisfy the Affordable Care Act’s (ACA) employer mandate. However, organizations of all sizes can offer one to their employees.

An ICHRA is a great addition to your employee benefit plan because it empowers employees to choose the health plan that works best for them. It’s also completely customizable thanks to the ability to offer different benefits and allowances to a class of employees, such as salaried employees.

With an ICHRA, there is no maximum reimbursement limit or employer contribution limits for eligible expenses.

What is COBRA?

The Consolidated Omnibus Budget Reconciliation Act (COBRA) provides certain employees, former employees, spouses, and dependent children to continue their employer-sponsored health benefits and coverage temporarily.

All employers with at least 20 employees (both full-time and part-time employees) that offer a group health plan, such as employer-funded accounts, are subject to COBRA. Employees pay the entire cost of their monthly premium or health benefit.

Forty states have their own “mini-COBRA” laws that require smaller organizations to provide COBRA benefits.

Is ICHRA subject to COBRA?

Like all group health insurance plans, the ICHRA is subject to COBRA. IRS Notice 2002-45¹ outlines how HRAs interact with COBRA.

However, not all organizations offering an ICHRA are subject to COBRA requirements. Businesses with fewer than 20 employees, some federal employees, churches, and religious tax-exempt organizations may not be subject to federal and state COBRA. If these organizations offer an ICHRA, they may be able to do so without adhering to COBRA requirements.

All other organizations must provide all covered individuals with a chance to elect COBRA coverage if they become ineligible.

How are COBRA premiums calculated for 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.

The premium amount should reflect how much it costs the organization to provide the ICHRA to the employee.

Organizations have two options for calculating this amount:

• The past-cost method: The average usage of the HRA over the previous plan year
• The actuarial method: A reasonable estimate of HRA usage in the future

In either case, premiums are based on how many HRA dollars employees actually use. Let’s review each of these methods in more detail.

The past-cost method

The past-cost method uses utilization rates over the previous plan year to determine COBRA premiums. Organizations can also add two percent to the premium to account for administration fees.

For example, let’s say you have an employee who receives $300 each month through their ICHRA for $3,600 each year. During the previous plan year, he used an average of $1,800, or 50% of the total benefit offered, for medical expenses.

After terminating this employee, they elected COBRA coverage. To calculate their premium, you multiply the $300 ICHRA allowance by 50% (their utilization rate) for an annual premium of $1,800. You also charge a two percent fee for COBRA administration, for a total premium of $1,836, or $153 each month.

Employees who pay this premium have access to their ICHRA allowance and a continued $300 monthly allowance.
This method isn’t the best option for organizations with brand-new HRAs. It also isn’t ideal for organizations with significant differences in HRA allowances from year to year.

The actuarial method

The actuarial method is another way organizations calculate COBRA premiums. It's also the only method available to those who 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. Then, you add the two percent COBRA administration fee to this estimate.

Many organizations 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.

COBRA generally allows employees to continue receiving coverage from their employer-sponsored health plans if they:

• Had a voluntary or involuntary job loss other than for gross misconduct
• Had a reduction in hours
• Are transitioning between jobs

With an ICHRA, employees must have an individual health insurance policy. If an employee loses their medical plan coverage, they aren’t eligible for COBRA coverage.

For spouses and dependent children, qualifying events that cause them to lose ICHRA coverage include:

• 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, organizations 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 (SPD) or as a separate plan document.

Employees have 60 days from the date of their qualifying event (such as termination of employment) to elect COBRA coverage.

Conclusion

Understanding COBRA requirements and being prepared to assist employees with their options is critical for offering an ICHRA in a compliant and successful manner. By offering a continuation of coverage to your employees when they leave, you won't leave them without coverage while they or their families transition to a new role.

If you have questions about ICHRA and COBRA requirements that are specific to your organization, it's best to consult with a trusted advisor. For information on whether an ICHRA is a good fit for your organization's health benefit, schedule a call with a PeopleKeep personalized benefits advisor. 

This blog article was originally published on August 20, 2019. It was last updated on December 29, 2022.

1. https://www.irs.gov/pub/irs-drop/n-02-45.pdf