The COBRA requirements to know for ICHRA

ICHRA and COBRA: Is ICHRA subject to COBRA? How does ICHRA work with COBRA? We understand there's a lot of confusion around this! Luckily, we can explain how this works. Let us help.

• You can’t use both ICHRA and COBRA simultaneously.
• You must notify your employer or ICHRA administrator of your COBRA election and the reason for the qualifying event.
• COBRA coverage is temporary and may only last for a limited period of time, so be sure to explore individual health insurance policies.

What is COBRA?

COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) is a federal law that allows employees and their dependents to continue group health benefits after a qualifying event.

Typically, when an employer offers a group health plan the employer and employee split the cost of maintaining the plan each month. When an employee becomes COBRA eligible under these plans, the employee will pay the full price of the medical plan out of pocket (both the employer + employee portion) in order to maintain the coverage. More on COBRA FAQS can be found here.

However, what happens when the employer sponsored benefit is an HRA such as the Individual Coverage HRA (ICHRA)? ICHRA requires employees to secure their own health plan in order to participate and receive reimbursement through the HRA. Since that insurance plan is portable and owned by the employee, is COBRA required?  And how exactly will COBRA work under ICHRA? 

Here’s a quick breakdown of everything you need to know about COBRA basics. 

What must the employer offer covered employees and covered spouses/dependents:

• Continued coverage under “group health plan”
• Over a maximum period of time (18 months, 36 months)
• Paid entirely by the qualified beneficiary (can charge an admin fee of 2%)
• Triggered by specific events that cause a loss of their coverage
• Unless the covered employee was terminated due to gross misconduct
• The notice must be sent when first enrolled and when the COBRA event is triggered

ICHRA COBRA Requirements 

Yes, employers with 20 or more employees are required under COBRA to offer continuation of coverage to employees and their dependents when they lose coverage as a result of a qualifying event, such as an employee’s death, divorce, or job loss. COBRA is generally offered for 18 months but can be extended for an additional 18 months for subsequent qualifying events (for example, coverage could be extended for family members of a former employee who dies while covered by COBRA).

In general a few employers may be exempt from COBRA requirements: employers with less than 20 employees, churches, and state and local governments.

**Please check your state requirements for any state specific rules regarding COBRA.**

Since employees must have their own individual health plans under ICHRA, the employees’ health insurance will automatically continue even if they lose their job or experience another qualifying event.

With the COBRA option through an ICHRA plan, employees will have the opportunity to continue to receive reimbursements through the HRA after paying an additional monthly premium to the employer. Employees will have to determine if electing COBRA through ICHRA is a good move for them.

Helpful resource → Read how ARPA has affected COBRA and ICHRA here. 

How do ICHRA and COBRA work together?

If you have ICHRA through your employer but still need to use COBRA due to a qualifying event, such as job loss or reduction in work hours, there are some important things to remember. 

First, it is important to understand that you can’t use both ICHRA and COBRA simultaneously. If you elect COBRA, you will no longer be eligible for reimbursement through your ICHRA. 

Second, you must notify your employer or ICHRA administrator of your COBRA election and the reason for the qualifying event. This will allow them to terminate your ICHRA coverage and provide you with information on how to enroll in COBRA.

Finally, it is important to remember that COBRA coverage is temporary and may only last for a limited period of time. It is important to explore other health insurance options, such as individual health insurance policies, as soon as possible to ensure that you have continuous coverage.

How is the COBRA premium calculated for ICHRA?

Premiums for continuation of coverage through an HRA are handled the same way with ICHRA as with traditional HRAs. Employers will set the COBRA rate at the beginning of the plan year; A rate will need to be calculated for each separate class an employer has established under their ICHRA. The COBRA premium amount can include a 2% administration fee. There are two different methods for determining the cost to the plan, the past-cost method and the actuarial method.

Actuarial Method

The Actuarial Method is calculated by assuming a reasonable estimate of the cost of providing the coverage to other employees in the same class. This method must be used for the first year of an ICHRA because there is no past-cost data to use.

Cobra Premium=  ICHRA monthly allowance + 2% administration fee

Example: Betty's Cakes gives their employees $5,040 a year ICHRA allowance. Which equals $420/month. Betty's employee Charlotte, is terminated and qualifies for COBRA. Under the actuarial method Charlotte will pay Betty's Cakes $428.40 to participate in ICHRA and to continue to receive $420 each month in tax-free reimbursements. Charlotte loses $8.40 each month she is on COBRA, if she stays on COBRA for 18 months that equals $151.20. 

Past Cost Method

Employers can calculate the COBRA premium with the past-cost method by using the following formula:

COBRA Premium = Average amount reimbursed per employee during the previous plan year + inflation factor + 2% admin fee

Continuing same example from above: Betty's Cakes is still giving employees $5,040 a year ICHRA allowance, equal to $420/month. During the past year Betty's employees claimed on average $4,000, which equals $333.33/month). Using the past cost method, Charlotte will have to pay Betty's Cake $346.79/month (assuming a 2% inflation factor) to be eligible for her $420 monthly allowance. In this scenario Charlotte gains $73.21/month if she is able to claim her full allowance during Cobra.

Employees have 60 days from their qualifying event to elect COBRA coverage. When an ICHRA participant elects COBRA, the HRA will continue to be funded at the full-amount. Meaning if the employee’s ICHRA allowance was $400/month the employee will continue to receive that monthly HRA under COBRA, but they will have to pay the employer a monthly premium first to unlock the benefit. 

Will termination of employment or a reduction in hours qualify for COBRA?

Yes, both termination of employment and reduction in hours are COBRA qualifying events. For example, when an employee is covered by an individual coverage HRA, and then is moved to a class of employees not eligible to participate in ICHRA due to a reduction in hours, that employee would have a right to COBRA coverage through the HRA. 

Example: Tom’s Plumbing offers employees a $400/mo ICHRA to all employees. David is an employee and is terminated. David qualifies for COBRA.

David elects COBRA and Tom’s Plumbing continues to make HRA contributions; David pays his employer the predetermined COBRA amount and continues to receive $400/mo through ICHRA. David will remain eligible for COBRA coverage for 18 months unless he enrolls in coverage under another group health plan.

Employees who lose coverage under their ICHRA for these reasons will qualify for a Special Enrollment Period (SEP) to change their individual health insurance policy. 

What happens if the employee loses their individual health insurance?

Under the individual coverage health reimbursement arrangement, the employee is required to secure their own individual health insurance policy to participate and receive reimbursements. If the employee fails to maintain their health insurance policy, for example, by failing to pay their premiums, they will not be eligible to receive COBRA coverage (in this case continuing to participate in the HRA).

What about termination of employment?

If you terminate an employee, you are no longer required to offer them ICHRA benefits. This means you don’t have to continue contributing funds to their ICHRA account. However, any funds that have already been contributed to their account and are available for reimbursement of health care expenses can still be used by the employee. 

It's important to note that employees must be notified of any changes to their ICHRA benefits, including termination of coverage, in a timely manner. Additionally, employers must comply with all applicable regulations and guidelines regarding ICHRA and should consult with their ICHRA administrator or legal counsel to ensure that they are in compliance with all requirements.

We want to highlight that we’ve never seen a situation where an employee elected COBRA over their ICHRA coverage while still remaining an employee.

Which employees are subject to COBRA?

• 20 or more employees during the prior calendar year (regardless of renewal date)
• Less than 20 employees and level funded: neither COBRA nor State Continuation would apply
• If COBRA doesn’t apply, state continuation might be for fully-insured plans
• COBRA applies to corporations, partnerships, tax-exempt entities, for-profits, non-profits (by way of ERISA), state and local governments (by way of the PHSA)
• Only church plans are exempt from COBRA (even if over 20 employees)

When is COBRA triggered?

• Covered EE’s death
• Covered EE’s divorce or legal separation
• Bankruptcy of employer
• Covered EE elects Medicare
• Covered EE’s dependent child loses eligibility for coverage (e.g., turns 26)
• Change in EE’s employment status: termination of employment or reduction in hours
• EE fails to return to work after exhaustion of FMLA leave (NOT when they go out on FMLA)

What are COBRA qualifying events?

Any employees and family members covered by ICHRA the day before the qualifying event are eligible for COBRA coverage. If the employee was not enrolled in ICHRA, the spouse and dependents will not qualify for COBRA. 

For employees:

• The employee is terminated for any reason other than gross misconduct
• The employee’s hours of employment are reduced

Spouses and dependents:

• The employee is terminated for any reason other than gross misconduct
• The employee's hours of employment are reduced
• The  employee becomes eligible for Medicare
• The employee dies
• The spouse divorces or legally separates from the covered employee
• A dependent child turns 26

Take Command is your trusted ICHRA partner

ICHRA is a robust benefit that has the opportunity to help over 800,000 employers, with many nuances that are easy to blunder when it comes to calculating affordability, managing ERISA and COBRA requirements, and ensuring employees have a qualified plan to participate. That’s why finding an ICHRA administrator you know and trust is important. A good ICHRA administrator has their pulse on the regulations as updates are made. 

Extra Credit Reading

• ICHRA plan 101
• The COBRA requirements to know for ICHRA 
• What is ICHRA? | Everything to know about Individual Coverage HRAs
• 10 ICHRA rules to remember in 2023