HRA and COBRA: Does it apply to Health Reimbursement Accounts?

Saturday, November 9, 2024 13:50 Posted by Admin

As alternative health benefits like Health Reimbursement Accounts (HRAs) gain popularity, understanding how they interact with existing laws like the Consolidated Omnibus Budget Reconciliation Act (COBRA) is crucial. Many employees and employers wonder: Does COBRA apply to HRAs, and how can they work together?

Here’s a straightforward guide from Taylor Benefits Insurance to explain COBRA and how it relates to various types of HRAs.

Health Reimbursement Arrangements (HRAs)

Health Reimbursement Arrangements (HRAs) are employer-funded accounts that reimburse employees for qualified medical expenses, offering a tax-advantaged method to manage healthcare costs. The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law that allows employees and their dependents to continue group health coverage under certain circumstances, such as job loss or reduction in work hours. Understanding how HRA and COBRA interact is essential for both employers and employees to ensure compliance and make informed decisions about healthcare benefits.

HRAs and Their Role

HRAs are employer-established accounts that reimburse employees for out-of-pocket medical expenses and, in some cases, insurance premiums. These accounts are solely funded by employers and are not considered taxable income for employees. HRAs can be designed with various features, such as allowing unused funds to roll over to subsequent years or limiting reimbursements to specific types of medical expenses.

What is COBRA?

COBRA is a federal law that allows employees, former employees, and their families to continue their employer-sponsored health coverage after specific events like job loss or reduced work hours. The law applies to private-sector companies with 20 or more full-time employees, though some states extend similar benefits to smaller employers.

Typically, when employees choose to continue their health coverage under COBRA, they pay the total premium cost, including any portion the employer previously covered. Common qualifying events for COBRA include:

• Job loss (except for cases of gross misconduct)
• Reduction in work hours
• Retirement
• Transition to a new job
• Employee’s death, which may enable dependents to elect COBRA coverage
• Divorce or dependent aging out of the plan

Do COBRA Rules Apply to HRAs?

 

In short, yes, COBRA rules can apply to certain HRAs, as many HRAs are considered group health plans under ERISA (the Employee Retirement Income Security Act). Since COBRA is designed to extend group health plan benefits after a qualifying event, employers generally must offer COBRA for applicable HRAs.

However, not all HRAs fall under COBRA requirements. Let’s break down different types of HRAs and how COBRA applies to each:

Qualified Small Employer HRA (QSEHRA) and COBRA

The Qualified Small Employer HRA (QSEHRA), or small business HRA, allows small businesses with fewer than 50 employees to offer tax-free reimbursements for individual health insurance and medical expenses. Here’s the key part: the QSEHRA isn’t technically a group health plan, so it’s exempt from COBRA requirements.

However, even though COBRA doesn’t apply to QSEHRAs, employees who lose QSEHRA eligibility can still request reimbursements for eligible expenses incurred before their eligibility ended. They have a 90-day window to submit these claims.

Individual Coverage HRA (ICHRA) and COBRA

The Individual Coverage HRA (ICHRA) enables employers of all sizes to offer personalized health benefits by reimbursing employees for individual health insurance premiums and medical expenses. Since the ICHRA falls under ERISA and is considered a group plan, it is subject to COBRA requirements.

In practice, here’s how COBRA works with an ICHRA:

1. If an employee loses eligibility for the ICHRA, they have the option to continue accessing their HRA funds under COBRA for up to 18 months.
2. The employee must maintain qualifying individual health coverage and pay a premium to access the ICHRA benefit under COBRA.
3. Employers can charge a 2% administrative fee on top of the premium to cover additional costs.

Calculating COBRA Premiums for an ICHRA

Employers have two ways to calculate COBRA premiums for an ICHRA:

• Actuarial Method: Estimate the cost of HRA utilization plus a 2% administrative fee.
• Past-Cost Method: Use the average HRA benefit reimbursement from the previous year, adjust for inflation, and add a 2% administrative fee.

Integrated HRA (GCHRA) and COBRA

The Group Coverage HRA (GCHRA), or integrated HRA, is designed to supplement traditional group health plans, typically by covering out-of-pocket medical expenses. Since it’s tied to a group health plan, the GCHRA falls under COBRA when the main group plan is covered by COBRA.

In this case, employees can continue both their traditional group health coverage and the integrated HRA under COBRA. However, to access the HRA benefit, employees must elect COBRA for the primary health plan as well. If an employee doesn’t choose COBRA for the primary plan, they won’t be able to continue the GCHRA benefits either. Similar to QSEHRAs, employees have 90 days after losing eligibility to request reimbursement for expenses incurred before they became ineligible.

Can Employers Reimburse COBRA Premiums Through an HRA?

Yes, but only with a QSEHRA. The IRS allows employers to reimburse COBRA premiums through QSEHRAs, provided the plan design allows it. Employees with COBRA coverage can use their QSEHRA funds for this purpose, but they should confirm with their plan administrator.

For other HRAs:

• ICHRA: Employees cannot participate in an ICHRA if they have COBRA coverage from a prior employer, as ICHRAs require individual health insurance, not group health continuation.
• GCHRA: Since GCHRAs don’t cover insurance premiums, they cannot be used to reimburse COBRA premiums.

Considerations for Employers

• Plan Design: The structure of the HRA, such as whether it is funded or unfunded, and whether unused funds roll over, can impact the calculation of COBRA premiums and the administration of continuation coverage.
• Administrative Costs: Employers are allowed to charge up to a 2% administrative fee on top of the COBRA premium to cover the costs associated with administering continuation coverage.
• Communication: Clear communication with employees about their rights and obligations under COBRA, including the availability and cost of continuing HRA coverage, is crucial to ensure compliance and assist employees in making informed decisions.

Considerations for Employees

• Cost of Continuation: While COBRA allows for the continuation of HRA benefits, employees should be aware that they will be responsible for the full cost of the premium, which may be higher than the amount they were paying while employed.
• Duration of Coverage: COBRA coverage for HRAs typically lasts for 18 months but can extend up to 36 months in certain situations. Employees should plan accordingly for their healthcare needs during this period.
• Alternative Options: Depending on individual circumstances, alternative health coverage options, such as plans through the Health Insurance Marketplace, may be more cost-effective than COBRA continuation coverage. Employees should compare options to determine the best fit for their needs.

Final Thoughts from Taylor Benefits Insurance

Health Reimbursement Accounts and COBRA offer flexible, valuable options for managing healthcare costs during transitions. While some HRAs are subject to COBRA, others are not. As more companies explore HRAs as a health benefits solution, understanding these distinctions ensures compliance with federal and state laws and maximizes the value of health benefits for employees.

By coordinating your organization’s HRA offerings with COBRA requirements, you’ll be providing employees with an option for extended healthcare coverage and a sense of security during life transitions.