Reminder: HRAs and COBRA
Health reimbursement arrangements (HRAs) are top of mind for many reasons, not the least of which is changes made by the Affordable Care Act (ACA). In addition, the move toward a more consumer-centric health care payment model has bolstered the role of HRAs. Because of the increased focus on these types of plans, it is appropriate to take a moment to review the COBRA obligations applicable to these types of plans.
An HRA generally is a health plan subject to COBRA. This means that individuals who experience a COBRA-qualifying event of any kind are entitled to elect continued participation in the HRA. Unfortunately, there is much ambiguity in how a plan sponsor must satisfy its COBRA obligation. And further adding to the confusion is that there are more questions than answers. In a nutshell, plan sponsors are directed to use a good faith effort to ensure compliance with the intent of the law.
Calculation of COBRA Premium
Generally, a HRA is a self-funded health plan. Thus far, the COBRA law provides two ways to calculate the COBRA premium for self-funded plans: a past-cost method and an actuarial method. No regulations to date have been issued on how either of these methods should be implemented.
HRA guidance issued in IRS Notice 2002-45 states that:
“…an HRA must provide for the continuation of the maximum reimbursement amount… (decreasing it for claims reimbursed)… for an individual at the time of the COBRA qualifying event…”
“Premiums are determined under the existing rules in §4980B. An HRA complies with the COBRA requirements for calculating the applicable premium under §4980B if the applicable premium is the same for qualified beneficiaries with different total reimbursement amounts available from the HRA (and otherwise also satisfies the requirements of §4980B)”.
It is also important to remember that a COBRA continuee is entitled to periodic, such as annual, accruals in the same manner and same amount as active participants.
This guidance provides a safe-harbor of sorts that suggests a plan can look at the total expenses paid out in the prior year, divided by the number of participants, and add 2% administrative fee to achieve a COBRA premium. Probably the best bet for employers is to seek assistance from their third party administrators who likely have more accurate access to claims information to come up with a COBRA rate for the HRA.
The ACA requires in 2014 and beyond that HRAs be integrated with a health plan to the extent that the integration is with the employer’s own health plan. From a COBRA perspective, the benefit of this arrangement is that the employer can design its comprehensive health plan and HRA into one plan compelling one COBRA election. In other words, a COBRA continuee would not be able to elect continuation coverage solely for the HRA.
As noted above, a COBRA qualified beneficiary is entitled to the same account balance of an HRA (less reimbursements made to the affected individual) as a similarly situated active individual. This could create significant burden on the employer, particularly in the case of divorce or a dependent child losing status under the plan in that it might necessitate a so-called ‘mushrooming’ of the account balances. Both the active employee and the COBRA continuee would have their own right to the full HRA account balance. This might be more of an esoteric problem than a real one in that the COBRA continuee would have to pay the COBRA premium plus the 2% administrative fee for a benefit that does not significantly exceed the cost.
Again, at this point, the best that a plan sponsor can do is to use a good faith effort to comply with the intent of the laws as it relates to HRA and COBRA obligations.