How does COBRA interact with ICHRA?

As more organizations consider offering their employees an individual coverage health reimbursement arrangement (ICHRA), employers and HR managers need to know how ICHRA and the Consolidated Omnibus Budget Reconciliation Act (COBRA) interact.

Group health insurance plans are subject to COBRA. So, where does an ICHRA fall?

In this article, we'll explore whether an ICHRA falls under COBRA regulations. We’ll also identify which organizations must follow COBRA continuation coverage requirements.

In this blog post, you'll learn the following:

• How COBRA continuation coverage works.
• How to calculate COBRA premiums for an ICHRA.
• What activates COBRA eligibility for coverage.

What is ICHRA?

The individual coverage HRA (ICHRA) is a health benefit that allows employers to reimburse their employees for individual insurance premiums and eligible out-of-pocket medical care expenses. Employees must have qualifying individual health insurance plans with minimum essential coverage (MEC) to participate. Once they’re enrolled in qualified coverage, employees receive tax-free reimbursements for those premiums as well as other qualifying expenses.

An ICHRA allows organizations to offer quality health benefits without needing to enroll in a traditional group health plan. It’s also an excellent way for applicable large employers (ALEs) to satisfy the Affordable Care Act's (ACA) employer mandate. While it’s a great fit for larger organizations, it also enables even the smallest organizations to offer a health benefit.

An ICHRA is a great addition to your employee benefit plan because it empowers employees to choose the health plan that works best for them. It's also completely customizable, thanks to the ability to offer different benefits and allowances to a class of employees, such as salaried employees and full-time employees.

With an ICHRA, there are no maximum employer contribution limits for eligible expenses. Employers simply offer a monthly allowance that fits their budget. Employees request reimbursement for eligible expenses up to that amount.

What is COBRA?

COBRA is a federal law that allows certain employees, former employees, spouses, and dependent children to continue their employer-sponsored health benefits and coverage for a specific period of time after experiencing a qualifying event.

COBRA generally allows employees to continue receiving health coverage from their employer-sponsored health plans if they:

• Had a voluntary or involuntary job loss other than for gross misconduct
• Had a reduction in hours
• Are in a period of transition between jobs

Additionally, if you move an employee to a different employee class or if they move to a different class that isn't offered an ICHRA or group health insurance, it's considered a loss of coverage and will also trigger COBRA eligibility.

For spouses and dependent children, qualifying events that cause them to lose coverage and become eligible for OCOBRA include:

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

All employers with at least 20 employees (both full-time and part-time employees) who offer a group health plan, such as employer-funded accounts, are subject to this temporary extension of health benefits. If an employee opts for continuation of coverage under COBRA, they must pay the entire cost of their monthly premium or health benefit. This includes the portion that the employer used to cover and a 2% administrative fee.

Forty states have their own “mini-COBRA” laws. These state laws may require smaller organizations to provide COBRA benefits.

COBRA coverage generally lasts for up to 18 months. But, employees and their qualifying dependents can extend coverage under certain circumstances.

To learn more about COBRA, read our article.

Is ICHRA subject to COBRA?

Like all group health insurance plans, the ICHRA is subject to COBRA. IRS Notice 2002-45¹ outlines how HRAs interact with COBRA. According to the ICHRA Final Rules², HRAs are subject to COBRA under section 4980B and ERISA sections 601 - 608.

However, not all organizations offering an ICHRA are subject to COBRA requirements. Businesses with fewer than 20 employees, some federal employees, churches, and religious tax-exempt organizations may not be subject to federal and state COBRA. If these organizations offer an ICHRA, they may be able to do so without adhering to COBRA requirements.

All other organizations must provide all covered individuals with a chance to elect COBRA coverage if they become ineligible.

All employees and employee family members covered by the ICHRA are eligible for COBRA coverage when they experience a qualifying event. However, the loss of an individual insurance policy, which is required for ICHRA participation, does not qualify an employee for COBRA coverage. This is because the ICHRA itself is the health plan, and the employee would still retain access to the ICHRA even if their individual policy lapses.

To help explain how COBRA interacts with the ICHRA, organizations must give employees and their spouses (if covered by the benefit) a general notice describing their COBRA rights. You must send these notices to employees within the first 90 days of the ICHRA's start date. You can deliver it either as part of the ICHRA's summary plan description (SPD) or as a separate plan document.

Employees have 60 days from the date of their COBRA qualifying event (such as termination of employment) to elect continuous coverage.

How are COBRA premiums calculated for an ICHRA?

Eligible employees and their spouses who elect COBRA coverage must pay an insurance premium. COBRA defines this amount as the cost to the business of providing health insurance coverage to employees who have not experienced a life event that would qualify them for COBRA coverage.

The entire premium amount should reflect how much it costs the organization to provide the ICHRA to the employee.

Organizations have two options for calculating this amount:

• The past-cost method: The average usage of the HRA over the previous plan year
• The actuarial method: A reasonable estimate of HRA usage in the future

In either case, premiums depend on the actual HRA dollars employees use. Let's review each of these methods in more detail.

The past-cost method

The past-cost method uses utilization rates over the previous plan year to determine COBRA premiums. Organizations can also add 2% to the premium to account for administration fees.

For example, let's say you have an employee who receives $300 each month through their ICHRA, or $3,600 each year. During the previous plan year, they used $1,800, or 50% of the total benefit offered, for medical expenses.

After you terminated this employee, they elected COBRA coverage. To calculate their premium, you multiply the $300 ICHRA allowance by 12 and then by 50% (their utilization rate) for an annual premium of $1,800. You also charge a 2% fee for COBRA administration, for a total premium of $1,836, or $153 each month.

Employees who pay this premium have access to their ICHRA allowance and a continued $300 monthly allowance. This method isn't the best option for organizations with brand-new HRAs. It also isn't ideal for organizations with significant differences in HRA allowances from year to year.

The actuarial method

The actuarial method is another way organizations calculate COBRA premiums. It's also the only method available to those who can't use the past-cost method, such as those offering an ICHRA for the first time. You may also choose this method if employee coverage amounts differ significantly from year to year.

This method requires the business offering the ICHRA to make a reasonable estimate of the cost of providing the benefit to employees and, if eligible, their families. This estimate should reflect how much of the available ICHRA benefit the business expects similarly situated employees to use. Then, you add the 2% COBRA administration fee to this estimate.

Many organizations rely on third-party administrators or benefits software companies to make this determination.

ICHRA and COBRA considerations

While organizations subject to COBRA must offer continuation coverage to eligible individuals, employees may not want to opt into continuation coverage.

The ICHRA reimburses employees for medical expenses. It doesn’t directly provide insurance. So, employees won’t get many benefits from electing COBRA coverage. This is because they’ll be paying a premium for access to the ICHRA on top of their out-of-pocket expenses.

Eligible individuals must weigh the cost of continuing to use their ICHRA.

In either case, organizations must continue to allow individuals to submit expenses for reimbursement that they incurred while eligible for the ICHRA for a certain amount of time.

Conclusion

Knowing COBRA requirements is critical for offering an ICHRA in a compliant and successful manner. By offering a continuation of coverage to your employees when they leave, you won't leave them without coverage while they or their families transition to a new role.

For information on whether an ICHRA is a good fit for your organization's health benefit, schedule a call with one of PeopleKeep's HRA specialists.

This article is for informational purposes only. If you have specific questions about COBRA requirements for your organization, seek legal counsel to ensure compliance.

This blog article was originally published on August 20, 2019. It was last updated on January 2, 2025.

1. IRS Notice 2002-45
2. Federal Register Health Reimbursement Arrangements and Other Account-Based Group Health Plans