ICHRA: COBRA and ERISA

Definitions
ICHRA – Individual Coverage Health Reimbursement Arrangement
ERISA – Employee Retirement Income Security Act
COBRA – Consolidated Omnibus Budget Reconciliation Act

Overview
ICHRA is considered a group health plan and is therefore subject to both ERISA and COBRA guidelines. Do not be caught unaware, read below to learn about each of the requirements and how ICHRA relates to each.

ERISA Requirements

If an employer sets up an ICHRA, they must follow ERISA guidelines in their plan document and notice to employees, per Section 402 of the regulations. This plan document must be made available to the employees and their families. Additionally, employee health plans must also include a summary plan document (SPD), which is a more simplified, easier to understand version of the plan document.

The ERISA legally requires certain items to be included in the health summary plan documents as well.

These must-haves are:

Named fiduciaries, plan administrators and their responsibilities

How the ICHRA is funded and how it makes payments

HIPAA privacy officers and rules for protected health information (PHI)

Information on federal mandates

The procedure for amending the plan

COBRA Requirements and Premiums

Per the Department of Labor, COBRA requires any employer with 20 or more employees in the prior year to offer employees and their families the opportunity for a temporary extension of health coverage in certain instances where coverage under the plan would otherwise end.

All employees and their family members covered by the ICHRA are eligible for COBRA when they go through a qualifying life event. Employers must give employees and their spouses (if covered) a general notice detailing their COBRA coverage rights. This is required to be delivered within the first 90 days of the ICHRA’s coverage, can be sent via the ICHRA’s summary plan description, or on its own.

COBRA is typically offered for 18 months after a qualifying life event, such as divorce or job loss, but can be extended up to 36 months.

Employees have 60 days from their qualifying event to elect COBRA coverage. When an ICHRA participant elects COBRA, the account continues to be funded at the full amount, but the participant must pay the employer a monthly premium first to continue to receive the benefit. However, the employee may decide that COBRA coverage is not the right choice for them. In that case, they can opt-out of the ICHRA and become eligible for the APTC instead.

You may be wondering: in the situation where COBRA is triggered for an employee as to how the premiums for continuation of coverage through an HRA handled? This is done the same way with an ICHRA as with a traditional HRA! Employers set the COBRA rate at the start of the plan year. The rate will need to be calculated for each individual class they have created under their ICHRA. The COBRA premium can include a 2% admin fee. There are two ways employers can choose to go about establishing the cost of the plan, the past-cost method, and the actuarial method.

For the first year of an ICHRA, the actuarial method must be used, because there is no past-cost data to use. This is determined by creating a reasonable estimate of the cost of providing coverage to other employees in the same class.

The past-cost method uses utilization rates over the previous plan year to figure out the COBRA premiums. Employers can take the average amount reimbursed per employee during the previous plan year, and add an inflation factor, as well as a 2% admin fee.

Examples:

Actuarial Method:

COBRA Premium= ICHRA monthly allowance + 2% administration fee

Ellie’s Market gives her Full-Time Class Employees $4,500 a year ICHRA allowance, equaling $375 per month. Sam, a Full-Time Employee, is let go and qualifies for COBRA.
Under the actuarial method, Sam will pay a COBRA premium of $382.50 to continue to receive their $375 monthly tax-free ICHRA reimbursement.

Under the actuarial method, Sam will pay a COBRA premium of $382.50 to continue to receive their $375 monthly tax-free ICHRA reimbursement

2% of $375.00 = $7.50
$382.50 = $375.00 + $7.50

Sam will spend an extra $7.50 ($382.50 – $375) each month they are on COBRA; $135 total if they stay on COBRA for the full 18 months.

Past-Cost Method:

COBRA Premium = Average amount reimbursed per employee per month during the previous plan year + inflation factor + 2% administration fee

Ellie’s Market has been offering ICHRAs as a benefit for over a year. Benefits for Full-Time Class Employees have increased to $5,100 a year ICHRA allowance, equaling $425 per month. In the past year, her employees claimed on average $4,500, or $375 per month.

With inflation of 2%, using the past-cost method, Sam must pay Ellie’s Market $391 to be able to receive the $425 monthly allowance.

Inflation Factor: 2% of $375 = $7.50
Administration Fee: 2% of $425 = $8.50
$391 = $375 + $7.50 + $8.50

In this scenario, Sam saves $34 ($425 – $391) per month if claiming the full ICHRA allowance during COBRA totaling $612 if on COBRA for the full 18 months.

Exemptions

Companies with less than 20 employees, plans sponsored by the federal government or by churches, and certain church-related organizations are not subject to COBRA or ERISA regulations. If your business falls into one of these categories and you offer an ICHRA, you can do so without following COBRA requirements.

For state-specific rules around COBRA, we recommend that you check your state’s requirements.

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