Question: How do the COBRA rules apply to infertility HRAs or other specialty HRAs?
Short Answer: All HRAs are group health plans subject to COBRA, and the standard COBRA requirements apply to an infertility HRA or other form of specialty HRA.
General Rule: HRAs are Subject to COBRA
HRAs are employer-sponsored group health plans subject to COBRA. This includes a “specialty HRA” designed to cover a specific type of medical expense that is typically not adequately covered by the major medical plan. Common examples include specialty HRAs for infertility, gender dysphoria, mental health, or autism.
Upon experiencing a qualifying event, specialty HRA participants must receive a COBRA election notice that includes the option to continue coverage under specialty HRA.
For more information on specialty HRAs, see our previous posts:
Determining the Specialty HRA COBRA Premium
The most difficult aspect of applying the standard COBRA rules to an HRA is determining the applicable premium. The COBRA rules do not naturally lend themselves to an account-based plan such as an HRA.
The limited IRS guidance available in this area states that the standard COBRA rules apply for determining the specialty HRA premium. Those rules permit the employer to charge up to 102% of a reasonable estimate of the cost for providing the HRA to a participant. (Keep in mind that although the specialty HRA is exclusively paid by the employer for an active participant, COBRA will shift that cost of coverage to the qualified beneficiary.)
We find that most employers are comfortable setting that reasonable estimate at 60% to 80% of the amount made available annually under the specialty HRA. This is based on the general rule of thumb that HRA participants tend to take reimbursement of roughly 60% – 80% full HRA balance made available each year.
For example, assume the specialty HRA has a $10,000 annual limit. The employer might set the COBRA premium at 75% of that amount, plus the 2% administrative fee. That would result in a monthly COBRA premium of $637.50 ($10,000/12 *.75 = $625 x 1.02) for any qualified beneficiary enrolled in the specialty HRA through COBRA.
Key Point: The COBRA rate is not tied to the employee’s balance remaining in the HRA at the time of the qualifying event, but rather to the amount made available under the HRA. That contribution amount would have continued to be credited to the HRA during the COBRA period. So even if the employee had taken reimbursement of $2,500 of the HRA’s $10,000 annual limit at the time of the qualifying event, the COBRA rate would still be based on the $10,000 amount made annually available—at a monthly premium of $637.50 based on the example above. This means that all COBRA qualified beneficiaries will have the same COBRA premium regardless of their remaining specialty HRA balance.
Determining the Specialty HRA Balance During COBRA
COBRA qualified beneficiaries will continue to have access to the full amount made available under the HRA, reduced by all claims reimbursed while active and through COBRA.
Most specialty HRAs are designed with an annual limit. In that case, the COBRA qualified beneficiary is entitled to the full new annual limit each year for the duration of the COBRA maximum coverage period in the same manner as an active employee.
Determining Which Employees Have COBRA Rights Under the Specialty HRA
Only those employees participating in the HRA have COBRA rights to continue coverage though the HRA upon experiencing a qualifying event. Employers take different approaches to determining who is a participant in the HRA upon experiencing a COBRA triggering event (e.g., termination of employment).
The default approach would be that all employees eligible for the specialty HRA (and who have not affirmatively opted-out of such coverage) are participants who would receive COBRA rights for the specialty HRA upon experiencing a qualifying event. This is the most conservative approach.
Some employers choose to limit that field by requiring employees to “enroll” in the specialty HRA to determine whether they are participants. Enrollment is a nebulous concept for an HRA because (by definition) it has no employee contributions, but requiring an enrollment can serve this COBRA purpose as well as other administrative purposes.
A somewhat more aggressive approach is to treat only those employees who received a reimbursement from the specialty HRA as a participant for purposes of determining whether COBRA rights apply. While this technically is not correct under the COBRA rules—because employees are covered by a group health plan regardless of whether they submit claims—it is likely a low-risk approach given the fixed limits and specific coverage-type nature of a specialty HRA.
The Specialty HRA COBRA Maximum Coverage Period
Employees who experience a qualifying event are entitled to the full maximum coverage period through COBRA. The most common qualifying events (loss of coverage caused by termination of employment or reduction of hours) provide for a 18-month COBRA maximum coverage period.
Note that the special health FSA rule that shortens the COBRA maximum coverage period to only the remainder of the current plan year does not apply to HRAs. Also note that state mini-COBRA laws (e.g., Cal-COBRA) do not apply to an HRA because the HRA is a self-insured group health plan.
Who Would Elect COBRA for a Specialty HRA?
It is very rare for employees to elect COBRA for a specialty HRA. In the vast majority of situations, the employee will have no interest in paying the required COBRA premium to maintain the specialty HRA continuation coverage.
There may be a situation where an employee experiences a qualifying event and expects to imminently incur expenses covered by the HRA. For example, there could be an employee who terminates employment and expects to undergo IVF treatment in the upcoming months. In that situation, it would generally make sense for an employee to continue coverage under an infertility HRA through COBRA. However, these situations are not likely to occur very often.
IRS Notice 2002-45:
VII. COBRA Continuation Coverage
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 COBRA 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 COBRA 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).
IRS Information Letter 2017-0027:
We issued guidance that provides:
- HRAs are subject to COBRA
- the COBRA applicable premium under an HRA may not be based on a qualified beneficiary’s reimbursement amounts available from the HRA
- the COBRA premium for an HRA is determined under existing rules in Section 4980B. See Notice 2002-45 (enclosed).
COBRA permits the plan administrator to choose between one of two methods for determining COBRA premiums for a self-funded plan. The applicable premium can be calculated either on:
- an actuarial basis, or
- on the basis of past cost. See Section 4980B(f)(4)(B).
The IRS has not issued specific guidance on how to determine the applicable premium under either method. Based on the information provided in your constituent’s case, we can’t determine whether his former employer’s charge for HRA premiums exceeds the amount determined under either method or whether his employer is not operating in good faith compliance with a reasonable interpretation of the statute.
(B) Special rule for self-insured plans. To the extent that a plan is a self-insured plan—
(i) In general. Except as provided in clause (ii), the applicable premium for any period of continuation coverage of qualified beneficiaries shall be equal to a reasonable estimate of the cost of providing coverage for such period for similarly situated beneficiaries which—
(I) is determined on an actuarial basis, and
(II) takes into account such factors as the Secretary may prescribe in regulations.
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