ICHRA and COBRA: We understand there's a lot of confusion around this! Luckily, we can explain how this works for . Let us help.
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.
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?
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 ICHRA, 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 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.
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 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.
- 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
About Take Command: your trusted ICHRA partner
ICHRA is a robust benefit that has the opportunity to help over 800,000 employers as estimated by the Departments. More complex than its predecessors, ICHRA has a lot of 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 that you know and trust is important. A good ICHRA administrator has their pulse on the regulations as updates are made.
Take Command is a recognized leader in QSEHRA administration and small business HRA tax strategy. We were at the forefront of the new ICHRA administration regulations and responded with our own comprehensive and exclusive research to the proposed regulations. In addition, we were the only HRA provider invited to Washington when the new regulations were passed. Our team is passionate about HRAs and the impact they can have on small business.
Chat with our team with any questions you may have about HRA tax-friendly benefits or check out our awesome ICHRA FAQ post or our new ICHRA Guide for more information on its background, requirements, and rules.
I wrote this blog because I love helping people decode confusing insurance jargon and understand the fine print. I'm a licensed health insurance professional and specialize in simplifying health insurance for individuals and small businesses. My QSEHRA articles have been featured regularly on Accounting Today, Accounting Web, HRWeb, and other industry publications. I'm also a member of Take Command Health's client success team and a full-time mom. Learn more about me and connect with me on our about us page. Thanks!