HRAs Are Subject to ‘COBRA Continuation’

Posted on Thursday, May 30, 2019

One way employers have attempted to counter the rising costs of health care is to offer what are commonly called "consumer-directed" health care plans. 

An HRA Primer

    With an HRA, the employer determines the annual contribution and whether the amount is available immediately or on a  graduated scale throughout the year. 
    An HRA can be offered on a stand-alone basis or in conjunction with a medical plan. Consumer-directed designs frequently involve a catastrophic insurance product with the substantial deductibles, co-payments, and coinsurance amounts being paid from the HRA.
    The employer finances an HRA, unlike a flexible spending accounts (FSAs), which is funded with employee pre-tax contributions.
    And unlike an FSA, employees can carry over unused HRA amounts. Leftover funds accumulate and are available in years when the employee's health care expenses may be significant.
    Sponsors of HRAs hope that the carryover will encourage employees to carefully consider health care spending just as they would other purchases they make with their own money.
    Note: HRA funds can only be used for health care expenses and unused amounts cannot be taken in cash.

Although there are many types of these plans, one typical element is a health reimbursement arrangement (HRA), where an employer sets up an account which is used to reimburse employees and their dependents for medical expenses.

The IRS issued guidance which specifies an HRA is considered a group health plan and is subject to continuation of coverage requirements under the Consolidated Omnibus Budget Reconciliation Act also called COBRA. (IRS Notice 2002-45 and IRS Revenue Ruling 2002-41)

When it comes to continued coverage under an HRA after employment ends, the IRS states:

1.  Premiums for continuation coverage are determined in accordance with existing COBRA rules. In the case of an HRA, the annual COBRA premium would be the "cost" of the plan (or the amount of the annual employer contribution), plus the allowable two percent administrative cost. 

If an HRA has been "zeroed out" prior to the COBRA qualifying event, (in other words, an employee used up the account for medical expenses), the individual would have little reason to elect COBRA, since the amount of coverage being bought by continued participation would not exceed the required premium payments. 

A qualified COBRA beneficiary would, however, have reason to elect continuation coverage in order to access unclaimed funds accumulated in the account. Note: The uniform coverage rule of health care flexible spending accounts (FSAs) does not apply to HRAs.

2.  IRS guidance states the premium is the same for any similarly situated COBRA beneficiary, regardless of the amount an individual has remaining in the plan. For example, let's say the annual amount an employer credits to the HRA is $1,200. One employee (who is unmarried) has $500 remaining in his account at the time of his COBRA qualifying event and another employee (who also is single) has $1,000 remaining at the time of her qualifying event, the COBRA premium would be the same for both individuals. 

Premiums can be different for those with single and family coverage.

3. Plan rules may allow for continued reimbursements after a COBRA qualifying event regardless of whether continuation coverage is elected. For example, a plan may allow former employees who have been terminated or who retire to use up amounts remaining in the HRA until these funds have been exhausted.

Posted in Tax Topics For Individuals

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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