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COBRA Premium for Uninsured Fully Self-Funded Benefits

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An employer offers a couple of medical benefits (medical travel, infertility) to the extent not otherwise covered by insurance and which are completely self-funded, i.e. paid entirely out of general funds and not backed up by stop-loss. There is no employee pay portion and there is no enrollment, all employees are covered by virtue of being an employee.

COBRA seems to apply - the fundamental question is, what is the COBRA premium, if any, and can the employer require the employee to make an affirmative election for continuation coverage in the absence of any "premium" per se or would the employer have to offer it to all separated employees since there is no premium?

The medical travel benefit is entirely new, so there's no experiential cost to the employer as of yet, but the infertility benefit has been in place for a number of years, so could you hack up the claims experience of that benefit to arrive at a "premium?"

Since the employer can charge "up to" 102% of the premium cost, if it's too difficult to arrive at what the premium would be, could the employer simply decide that it will charge zero, but the employee must still make an affirmative election to continue coverage?

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If these benefits aren't incorporated into a self-insured major medical plan, this would really need to be an HRA to work properly.  I typically refer to those as "specialty HRAs."  

Of course the employer could choose not charge any amount (i.e., fully subsidize) the COBRA premium for the HRA.  The COBRA rules permit you to charge up to 102% of the cost of coverage--but any amount below that is always fine.

Assuming they want to charge for the coverage, the IRS doesn't have great guidance on how to address the COBRA rate for HRAs, but here are my thoughts:


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.


Here's a slide summary:

2023 Newfront Fringe Benefits for Employers Guide



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If the employer’s cost for a health benefit can’t be fairly estimated from the employer’s experience alone, could one extrapolate from other employers’ experiences with similar benefits?

And would a firm of actuaries have enough information to do that study?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania



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