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A Service of OnQue Technologies, Inc. |
| HRAs: Are
They Subject to COBRA? |
January 3, 2005
By Bud Martin, CEO
OnQue Technologies, Inc.
Santa Rosa,
CA |
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A Health
Reimbursement Arrangement (HRA) is an employer funded health plan that
typically reimburses participants for certain expenses not otherwise covered
beneath the deductible of another health plan. These plans generally include a
specified annual dollar benefit and the unused balance rolls over into the
following plan year. For example, if the annual benefit amount is $1,000 and
the employee has $200 in claims paid by the plan during the year, the remaining
$800 will be added to the following year's benefit amount. In this example, the
unused $800 benefit is added to the next year's $1,000 benefit amount, for a
total benefit of $1,800. If the HRA meets the safe harbor requirements
established by the IRS in its 2002 guidelines, the money in the account rolls
over on a tax-free basis.
HRAs and COBRA
Premiums
Because an HRA is an employer sponsored health
plan, it is subject to COBRA. COBRA premiums must be based on the cost to the
plan of providing coverage to similarly situated beneficiaries who have not
experienced a COBRA qualifying event. That premium must be determined for a 12
month period in advance.
Employers are not permitted to simply divide the
maximum benefit by 12 months as the monthly premium due for COBRA. When health
plans are self-funded by the employer, the premium must be actuarially
determined, or alternatively, it must be calculated using a "past-cost" method.
In addition to the applicable COBRA premium, the plan is also allowed to charge
an administrative fee of up to 102% (150% during disability extension). For new
HRA plans with no past claims experience, the actuarially determined premium
will probably be the only option available.
Although the account balance
available in the HRA may differ for each participant based on their length of
time on the plan and claims incurred, employers cannot charge beneficiaries
different COBRA premiums for the HRA according to the remaining benefit
available. The IRS gives some guidance in this area and provides plans with a
safe harbor as long as the COBRA applicable premium is the same for all HRA
qualified beneficiaries in similar categories and individual account balances
are not taken into consideration. The IRS has provided no additional guidance
as to how HRA premiums should be calculated.
HRA Account
Accruals
According to the IRS safe harbor guidelines, an HRA
complies with COBRA "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)." So, if
an HRA allocated $1,000 to a single employee's account at the beginning of each
year, a COBRA qualified beneficiary electing coverage is entitled to the same
benefit.
Allocating HRA Account
Balances
The unique nature of the HRA plan design creates
some interesting COBRA issues, especially when a spouse or dependent child is
enrolled.
When only a single employee is enrolled, it is
clear how to allocate the remaining HRA account balance. If the employee has
been on the plan for two years and $1,000 is placed into the account at the
beginning of each year, the account balance will be $2,000 minus any claims
paid. The employee will accumulate an additional $1,000 in each subsequent
year.
If the employee enrolls with a spouse and the HRA
allocates $2,000 each year for families, after two years their account balance
would be $4,000 minus any claims paid. If the couple were to divorce, how much
would be in each individuals HRA account?
Using the HRA example of $1,000
allocated to single employees and $2,000 allocated to employees with family
coverage, either of the following options could be used in determining the
account balance after a divorce (or after a child loses eligibility and elects
continuation coverage under COBRA). Although either method is a reasonable
method of calculation, it is worth noting that Option 2 is the informal
interpretation that the IRS has adopted.
OPTION 1 — Unused
account balances are undivided and allocated evenly between parties following a
COBRA election. For example, if the HRA allocated $4,000 to the family over the
past two years and the total benefit used from the account was $1,800 ($500 in
year one and $1,300 in year two) the account balance would be $2,200. In the
event of a divorce, each person would maintain an undivided balance remaining
in the account of $2,200, and each would be entitled to an additional $1,000
per year. The result is that the employer is responsible for providing an HRA
benefit of $4,400 to the family ($2,200 to the employee and $2,200 to the
former spouse), which is double the account balance prior to the
divorce.
OPTION 2 — Unused account balances are
allocated based on the remaining funds in the account minus claims incurred by
each party in the plan year COBRA begins. For example, if $4,000 had been
allocated to the account over the past two years and $500 in claims had been
paid in year one, then the family's account balance at the beginning of year
two would be $3,500. During the second year, the employee and spouse divorce.
Assume the claims paid from the account for the employee during year two (prior
to the divorce) totaled $300, while claims paid for the spouse during the same
period came to $1,000. Thus, the amount to be allocated to the employee is
$3,200 ($3,500 - $300) and the amount to be allocated to the former spouse is
$2,500 ($3,500 - $1,000). The result is that the employer is responsible for
allocating a total of $5,700 between them, which is more than double the
account balance prior to the divorce.
Conclusion
As a general rule,
employers subject to COBRA must offer continuation coverage to qualified
beneficiaries for any health plan that is considered employer sponsored.
Thankfully, the DOL quickly resolved the issue for Health Savings Accounts,
determining that they are not employer sponsored health plans subject to COBRA,
as long as participation is voluntary. HRAs, on the other hand, are considered
employer sponsored health plans and are therefore subject to all federal
regulations that apply to ERISA plans, including COBRA.
More guidance from the IRS is
expected on HRAs regarding the calculation of COBRA premiums, as well as
allocating account balances. Until that time employers should use caution in
their approach to administrating COBRA for HRA health plans.
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This information is provided by
OnQue Technologies, Inc. for educational purposes only and does not constitute
legal advice. If legal advice or other professional assistance is required, the
services of a competent professional should be sought.
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