Like other group health benefit plans, HRAs are subject to COBRA, which requires that employers with 20 or more employees provide terminated employees with the option to access HRA benefits for a fee (usually 102 percent of the cost of the benefits). Zane Benefits does not provide COBRA administration services, but does provide employers with guidelines on how to determine the cost of the HRA for COBRA.

If the participant participated in both the HRA and a group health insurance plan while employed, the employer may require that the terminated participant elect COBRA coverage for the group plan in order to elect COBRA for the HRA. In other words, the employer may give the terminated participant the options of electing (a) no COBRA, (b) COBRA coverage only for the group health insurance, or (c) COBRA coverage for both the group health insurance and the HRA, but need not give the participant the option of electing COBRA only for the HRA.

For most purposes, terminated participants who have elected COBRA coverage are treated exactly like current, similarly situated employees. They should continue to receive HRA allowances and have the ability to submit new claims just like a current employee. If the HRA plan for current employees is changed or terminated, the change affects any current COBRA participants in the same way. They key difference is that the employer may charge the terminated participant and/or dependants for the cost of their coverage.

In general an employer may charge a terminated employee and/or dependents monthly up to 102% of the cost of the coverage for a similarly situated individual in the plan. The IRS has not released specific guidelines for calculating the cost of an HRA plan in order to determine COBRA premium, except that the determination may not depend on the participant’s current HRA balance.

After the HRA plan has been in place, unchanged, for more than a year, an employer should use the HRA plan’s historical utilization to calculate the HRA cost for COBRA. For example, for a class of employees receiving $200/month , where the class as a whole used 70% of their allowances the previous year, the COBRA premium could be calculated as the allowance multiplied by historical utilization, adjusted for inflation (e.g. 4%), plus the HRA administration fee, and finally multiplied by 102% -- for a monthly COBRA premium of [($200 x 0.70 x 1.04) + $12 ] * 1.02 = $160.75.

When the HRA is too new to allow a historical calculation, the administrator (employer) is responsible for making a reasonable actuarial calculation. For these HRAs, the most conservative assumption, from an employer’s point of view, is to assume 100% utilization and simply charge 102% of the HRA allowance plus the HRA administration fee. For example if a new HRA gives a $100/month allowance, the maximum COBRA premium may be ($100 + $12) * 1.02*1.04 = $118.81 per month. If the HRA is offered with a group health insurance policy, the HRA COBRA premium would be added to the insurance COBRA premium. However, this estimate is the most costly for the employee. Thus, an employer may wish to use a utilization estimate less than 100% if the employer believes future utilization is unlikely to be 100%.

COBRA includes notification requirements. In general, the HRA administrator (employer) must notify the employee and affected dependents in writing of their eligibility for COBRA following termination (or another qualifying event) within 14 days of the event. COBRA may apply after events other than employee termination, such as employee death, divorce or legal separation, a dependent child ceasing to be considered a dependent, a change in child custody, etc. Further rules apply to employees receiving disability benefits.

In general, if a COBRA event such as a divorce results in more than one beneficiary having claim to HRA benefits, the HRA participant’s HRA account will be split into multiple accounts and the present balance will be made available to each party electing COBRA coverage.

A company who uses ZaneHRA does have a COBRA obligation. Although the individual policy is portable, the HRA contribution, whether or not it was used to reimburse individual premiums, is part of the ERISA plan and is subject to COBRA.

Read more about COBRA and Health Reimbursement Arrangements (HRAs)

This document has been prepared solely for the purpose of providing information based on legal and tax advice provided to Zane Benefits, Inc. However, it is not meant to provide legal or tax advice for entities other than Zane Benefits. No representation is made as to the completeness or accuracy of the information herein. As such, it should not be used as a substitute for consultation with professional employment law specialists, tax accountants, attorneys, or other advisors. To comply with U.S. Treasury Regulations, we inform you that, unless expressly stated otherwise, any tax information contained in this communication is not intended to be used and cannot be used by any taxpayer to avoid penalties under the Internal Revenue Code.