ICHRA and COBRA: Everything you need to know about how they work together
If you’re navigating the complex landscape of health insurance, you may have heard of ICHRA (Individual Coverage Health Reimbursement Arrangement) and COBRA (Consolidated Omnibus Budget Reconciliation Act). Both of these programs can provide valuable healthcare benefits to employees and their families. You probably have some questions, like how do they work together? Is ICHRA subject to COBRA? How does ICHRA work with COBRA?
If you have an ICHRA through your employer but still need to use COBRA due to a qualifying event, such as job loss, it's important to understand the details of how these programs work in conjunction with each other. In this guide, we’ll explore everything you need to know about ICHRA and COBRA and how they interact to provide you with comprehensive healthcare coverage during times of transition and uncertainty.
We’ll cover the basics of each program, the eligibility requirements, and the rules for using each. Whether you’re an employee or an employer, you’ll find the information you need to make informed decisions about your healthcare coverage options.
What is ICHRA?
Individual Coverage Health Reimbursement Arrangement (ICHRA) is a type of health reimbursement arrangement that allows employers to reimburse employees for the cost of individual health insurance policies. It was created in 2019 as a new healthcare option under federal law.
With ICHRA, employers can set aside a specific amount of money to reimburse their employees for the cost of individual health insurance policies purchased on the open market. This means that employees have more flexibility in choosing the health insurance plan that works best for their needs, and employers can provide a valuable benefit to their employees without having to manage a traditional group health insurance plan.
ICHRA is available to all employees, regardless of their employment status, and can be used to cover a wide range of healthcare expenses. However, it is important to note that employers must follow some eligibility requirements and rules to offer ICHRA to their employees.
Learn about ICHRA Rules
ICHRA basics at a glance
Here’s a quick breakdown of everything you need to know about ICHRA.
How does ICHRA work?
ICHRA allows employers to reimburse employees for the cost of individual health insurance policies purchased on the open market. Here's how it works:
- The employer sets aside a specific amount of money to be used for employee health care expenses.
- Employees can then use this money to purchase individual health insurance policies that meet the employer's guidelines. These guidelines may include things like coverage levels, deductibles, and copays.
- Employees purchase the individual health insurance policy of their choice and submit proof of coverage and expenses to the employer or ICHRA administrator.
- The employer reimburses the employee for the cost of the insurance premium and other eligible healthcare expenses up to the amount set aside for that employee.
- Employees can use reimbursement funds to cover healthcare expenses, including deductibles, copays, and prescription medications.
What are the benefits of ICHRA for employees?
- More flexibility. With ICHRA, employees can choose their health insurance plans and pick the one that works best for their individual and family needs, rather than being limited to the options the employer selects.
- More control. Employees have more control over their healthcare expenses and can use ICHRA reimbursement funds to cover various costs, including premiums, medications, copays, and more.
- More affordability. Since employees can purchase their own individual or family health insurance plans, they may be able to find better plans at lower costs.
- More transparency. ICHRA gives employees greater transparency in their healthcare expenses. They can see exactly how much their employer contributes to their healthcare expenses and how much they’re responsible for payout out of pocket.
What are the benefits of ICHRA for employers?
- Cost savings. Rather than offering a traditional group health insurance plan, employers can save money on healthcare costs with ICHRA. Group plans are expensive to administer and maintain, not to mention complicated with unpredictable costs. With ICHRA, employers can set aside a specific amount of money for healthcare expenses.
- More flexibility. Employers can design their healthcare benefits with an ICHRA and decide the contribution and reimbursement amount rather than a one size fits all group plan.
- More control. Employers can set the contribution amount for each employee, and employees are responsible for purchasing their own health insurance policies and managing their own healthcare expenses. This gets employers out of the health insurance game and lets them provide benefits in a more controlled way.
- More competitiveness. ICHRA can help employers stay competitive in the job market by offering valuable healthcare benefits to employees without having to manage a traditional group insurance plan.
- More simplicity. ICHRA is easier to administer than traditional group insurance plans because employers don’t have to manage the complexities of plan design, underwriting, claims to process, and other time-consuming, tedious tasks. Your Take Command HRA administration software does that for you!
What is COBRA?
Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law in the United States that was enacted in 1986. It gives employees and their families the option to continue their employer-sponsored health insurance coverage for a limited period of time after certain qualifying events, such as job loss, reduction in work hours, divorce, or death of the employee.
The law applies to employers with 20 or more employees, and it provides important protections and benefits for workers and their families during times of transition.
COBRA basis at a glance
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
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)
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.
ICHRA and COBRA basics at a glance
Here’s a quick breakdown of everything you need to know about ICHRA and COBRA basics.
- ICHRA allows employers to reimburse employees for costs associated with individual insurance policies.
- COBRA allows employees to continue their employer-sponsored health insurance coverage for a limited period of time after certain qualifying events.
- If an employee has ICHRA coverage but becomes eligible for COBRA, they can elect COBRA coverage instead.
- The employee must notify the employer or ICHRA administrator of their COBRA election and the reason for the qualifying event.
- The employer will terminate the employee’s ICHRA coverage to avoid duplication of benefits and provide the employee with information on enrolling in COBRA.
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.
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.
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