Compliance FYI: HRAs and COBRA
Senior Compliance Attorney
Health Reimbursement Arrangements (HRAs) are account-based health plans funded by an employer that reimburse qualified medical expenses of an employee, their spouse, and their dependents. Most HRAs are “group health plans” subject to the Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage requirements. The interaction between HRAs and COBRA presents some unique issues compared to administering COBRA for major medical, dental, or vision coverage.
Most HRAS are Subject to COBRA
Typically, when individuals cease to be covered by an HRA due to a COBRA qualifying event, those individuals must be offered the choice to continue coverage under the HRA through COBRA.
The requirement to offer COBRA continuation coverage applies to Individual Coverage Health Reimbursement Accounts (ICHRAs) and Excepted Benefit Health Reimbursement Accounts (EBHRAs) as well. Qualified Small Employer Health Reimbursement Accounts (QSEHRAs) are not considered group health plans and therefore are not subject to COBRA.
COBRA must be offered even if an HRA has a spend-down provision which allows access to the funds in the HRA following the termination of active coverage.
HRA Balance During COBRA Coverage
At the start of COBRA coverage, the initial HRA balance is the employee’s HRA balance at the time of the COBRA qualifying event. As claims are reimbursed, the HRA balance decreases. COBRA HRA participants must have their HRA balances increased by the same amount and at the same time as non-COBRA HRA participants.
Determining the Applicable COBRA Premium
There are two methods for determining the COBRA premium for an HRA: the actuarial method and the past cost method. The COBRA premium must be set prior to the start of the 12-month “determination period” which often aligns with the plan year.
The past cost method sets the applicable premium by looking at the cost of the HRA during the past determination period and adjusting that amount by the implicit price deflator of the “gross national product” (GNP). The past cost method cannot be used if there is a significant difference in coverage from the past year to the current year.
The past cost method can be difficult to use when setting the COBRA premium for an HRA as the coverage under an HRA is often significantly different from year to year due to the carryover of HRA dollars impacting the coverage limit under the HRA. New HRAs also cannot use the past cost method as they have no prior data to analyze.
The actuarial method sets the applicable COBRA premium by determining a reasonable estimate of the cost of providing the HRA. For a new HRA, an employer may decide that looking to the cost of other first year HRAs is a reasonable estimate of the cost of providing an HRA. An existing HRA may decide that a reasonable estimate of the cost can be determined if they look at the experience of other HRAs along with their own experience over the past years. Employers may be well served to discuss the process for setting the COBRA premium with the third-party administrator assisting with their HRA.
Key Takeaways:
HRAs, as group health plans, are subject to the COBRA continuation coverage requirements. Employers who sponsor HRAs may want to review their COBRA procedures to ensure that they are offering COBRA for their HRAs when necessary.
The information provided is a summary of laws and regulations relating to employee benefit plan compliance. This information should not be construed as legal advice. In all cases, employers should consult with their own legal counsel.
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