HRA’s and COBRA Continuation Coverage
Below is a farily dry explanation of how HRA's are dealt with under COBRA's regulations. Unfortunately, the most common question is "how to I come up with a premium for an HRA?" Long story short, neither the IRS nor the Department of Labor has provided much in the way of specific guidance. Plans should use the past cost method (if the plan has been in place long enough to have a past-cost), or the premiums should be determined actuarially. That means hiring an actuary. Not a realistic prospect for most plans.
An HRA is a group health plan generally subject to the COBRA continuation coverage requirements. If an individual elects COBRA continuation coverage, an HRA complies with these COBRA requirements by providing for the continuation of the maximum reimbursement amount for an individual at the time of the COBRA qualifying event and by increasing that maximum amount at the same time and by the same increment that it is increased for similarly situated non-COBRA beneficiaries (and by decreasing it for claims reimbursed). 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). For example, if the annual additional reimbursement amount credited under an HRA is $1,000 and the maximum reimbursement amount remaining for two similarly situated qualified beneficiaries at the time of their qualifying events is $500 and $5,000, the applicable premium is the same for each individual.
The plan rules of an HRA may provide for continued reimbursements after a qualifying event regardless of whether a qualified beneficiary elects continuation coverage. For example, an HRA might allow reimbursements up to the unused maximum reimbursement amount following termination of employment. In such a situation, an HRA subject to COBRA must still comply with the continuation coverage requirements. If a qualified beneficiary elects COBRA continuation coverage in addition to the continued reimbursement amount already available, an HRA complies with the COBRA requirements by increasing the maximum reimbursement amount at the same time and by the same increment that it is increased for similarly situated non- COBRA beneficiaries (and by decreasing it for claims reimbursed).
Level of coverage available to COBRA beneficiaries
>Determined at the time of the qualifying event.
>Includes the previously unreimbursed amount of any carried over balances from participant’s previous years’ coverage under the HRA as well as remaining current year HRA balance.
a. IRS informally believes current year HRA balance for qualified beneficiary should be determined based on year to date reimbursements for that qualified beneficiary.
b. Without further formal guidance from the IRS, employers could reduce current year HRA balances by reimbursements made for any qualified beneficiary of the participant’s account.
C. Future Annual Accruals
1. Qualified Beneficiaries who elect to participate in COBRA are entitled to increases to their HRA accounts just as if they were employees.
a. They must receive the same amount of increases
b. The increases must be available at the same time they are available to employees.
2. COBRA Participants must be able to spend the accruals in the same manner as employees.
a. If employees can use accruals to pay for previous year expenses, so can COBRA participants.
b. COBRA participants can use the accounts to pay for whatever employees can be reimbursed for.
D. Applicable Premiums
No substantial IRS guidelines in calculating proper amount.
--. COBRA premium should be the same for qualified beneficiaries regardless of account balance at the time of the qualifying event.
--. COBRA premium can be different for qualified beneficiaries with different current coverages (i.e., different annual HRA limits based on deductible elected).
2. Premium should reflect the cost to provide coverage offered under the plan.
a. Actuarial determinations would be best
i. Data regarding HRA utilization is insufficient at this time to make accurate calculations
ii. Actuarial determinations will be cost prohibitive to small employers.
b. Other methods of determining appropriate amount.
i. For the first year, base premiums on quotes provided by insurance carriers.
ii. For subsequent years, base premiums on client’s HRA claims experience.
iii. Further I.R.S. guidance and industry figures should be available in future years.
E. Benefits of Bundling HRA with Major Medical Coverage with regards to COBRA.
1. HRAs bundled to a major medical plan can also be tied to those plans for COBRA purposes.
2. Qualified Beneficiaries who want to retain access to HRA balances must also pay the COBRA premiums for the health insurance.
3. This increased cost deters Qualified Beneficiaries from electing COBRA simply to retain access to small HRA balances.
