COBRA for FSAs and HRAs

Is A Health Reimbursement Account Subject to COBRA?

You bet! Assuming the employer has more than  20 employees and is subject to COBRA, terminated employees must be offered the opportunity to continue coverage under the employer’s group health plan(s) whether the coverage is a fully insured or self-insured plan. Flexible Spending Accounts (FSAs) and Health Reimbursement Accounts (HRAs) are self-insured health plans.  If an employer sponsors a FSA or HRA (or both), it is important to know the differences in how COBRA applies to these plans.

	FSA	HRA
Period of  Continuation Coverage?	Until the end of the Plan Year only	Full COBRA continuation period (e.g., 18 months, 36 months, etc.)
What is the monthly COBRA Premium?	1/12   of annual election	See below
Offered to ALL Participants?	Generally only if there is a positive funding balance at termination	Yes

The rules for FSAs are fairly clear, so we will not address FSA plans any further in this bulletin.

COBRA and HRAs

Ever since the IRS issued HRA guidance in 2002,  there have been unanswered questions and confusion about COBRA for these plans.  The following information deals with how COBRA applies to HRA plans.  

What Level Of HRA Coverage Must Be Offered?

The maximum reimbursement amount that was in effect on the date of termination (usually the  “Balance To Claim”). Thus, the HRA benefit available to elect under COBRA might be different for each qualified beneficiary, depending on how much of the account they have already used.   Important note: If a former employee is participating in the HRA under COBRA, then that person’s account balance must be increased at the beginning of the next plan year by the same amount as a current participant’s account.

 Does Continuation For The Insured Health Plan Coverage Have To Be Elected In Order To Elect The HRA Coverage? 

If the HRA plan is linked to the health insurance plan (no one has the HRA without having the insurance coverage), then there would be no benefit to electing the HRA unless you retained the underlying health insurance coverage.   However, since the insurance coverage and  the HRA are actually two separate benefits, they can be offered separately or bundled with the insured health plan coverage.  An employer can design their COBRA policy so that HRA continuation can only be elected in conjunction with the major medical plan.  If the employer decides to “bundle” these two benefits, then the COBRA premium would be the total of the premium for the insurance plus the HRA premium.

 What is The Monthly COBRA Premium for an HRA? 

2002 IRS guidance provides the following safe harbor: “An HRA complies with COBRA requirements for calculating the applicable premium under Code Section 4980B if the applicable premium is the same for qualified beneficiaries with different total reimbursement amounts (i.e. account balances) available from the HRA.”  This suggests that the premiumshould be based on the annual maximum benefit, not on the balance to claim. The premium must be determined prior to each 12-month period of coverage (plan year). This guidance about setting the same premium regardless of the account balance seems pretty clear, but beyond that, the premium to charge for HRA continuation is extremely vague.

 The IRS has stated that employers are not permitted to just divide the annual maximum benefit by twelve to arrive at a monthly premium. Premiums for self-funded health plans, including  an HRA, must be actuarially determined, or must be calculated using a “past cost” method. For new HRA plans with no history, the actuarially determined premium may be the only option.   Employers should use caution and make a good faith effort to properly establish their policy. Employers may want to seek guidance from an actuary or underwriter to establish their policy of determining the premium.

Summing Up

The minimum steps an employer should take when a HRA participant terminates employment:

•  Make sure the terminated employee understands that medical expenses incurred after termination will not be reimbursable unless they elect COBRA for the remainder of the year. However, a former participant can submit claims for expenses incurred prior to the termination date up to the claim runout period allowed in the plan.
•  If the employer is subject to COBRA, all terminating HRA participants must be given notification of continuation rights following standard COBRA notification requirements.
•  Notify the HRA claim administrator as soon as possible when a participant terminates so the administrator does not pay a claim when they shouldn’t.  If NEO is the administrator of the HRA plan, we will provide the employer with the information they need to determine what level of coverage to offer the employee based on the balance in the plan on the termination date.

 

It is important to establish a COBRA policy for your HRA plan and determine the premium to charge prior to a COBRA event. Failure to provide a COBRA event notice in a timely manner can create a nuisance, or worse, a hefty monetary penalty. Share this information with anyone in your organization that has benefit administration duties and may be responsible for advising employees upon termination.  And call NEO whenever you have questions relating to compliance in your Section 105 plan.