COBRA and HRAs

[Guest Nini]

We have a public sector employer that is considering the establishment of a health reimbursement arrangement. Under the terms of the Plan, each employee will receive $10.00 per month, with a carryover of a maximum of $240.00. One area of concern for the employer is the application of COBRA to HRAs.

It is our understanding that COBRA is applied to HRAs in the following manner –

For 2008, Employee A receives a $10.00 a month contribution and does not file any claims for reimbursements. In March 2009, Employee A has the $120.00 from 2008, plus an additional $30.00 for January, February and March of 2009. On March 22, 2009, a COBRA qualifying event occurs and Employee A and his spouse and two dependent children elect continuation coverage under COBRA.

It is our understanding that each qualified beneficiary will be entitled to $150.00 with such amount increasing each month by $10.00 during the continuation period for each qualified beneficiary (ie., Employee A = $150.00, Spouse = $150.00, Dependent 1 = $150.00 and Dependent 2 = $150.00). Of course, the total amount would be reduced by any reimbursed claims. By way of contrast, with a health FSA, each qualified beneficiary is entitled to a separate account that is equal to the amount in the account immediately prior to the qualifying event which is then reduced for expenses. The health FSA could be spent down during the COBRA period, whereas, the HRA continues to receive contributions until the end of the COBRA continuation period.

Please confirm that our understanding is correct. If this is not correct, please explain how COBRA for an HRA should be administered.

Assuming the above is correct, unlike a group health plan, the spouse or dependent of an employee participating in an HRA would not have to be “enrolled” in the plan – the eligible expenses of the spouse and dependents would be reimbursable from the HRA because these individuals are tax dependents of the employee. Is it possible that an HRA be structured to reimburse eligible expenses of the employee only?

Lastly, would the HRA premiums be the $10.00 plus up to 2% to be paid by each qualified beneficiary?

Any published guidance and/or citations would be appreciated. Thank you in advance for your assistance.

[leevena]

You are partially correct. HRA's are subject to COBRA, both the insurance plan and the side-fund. To determine the premium amount the employer must use either an actuarially determined formula or a "past-cost" formula. Since this is a new group, it does not have past experience to use so it must use an actuarially determined formula. The formula may lead to a less than $10 contribution.

As for the example you have outlined, are you saying that the account balance is $150, but since there is two spouses on the plan, the fund is then doubled, so that each has $150?

In a situation where a cobra event occured with a non-single contract (+spouse or family), there is no additional amount set aside for the other, such as an additional $150. Rather, the amount in the fund is for both of them. They continue to receive the employer contributions.

Expenses are reimbursed for participants only. So if you have a single employee only, that employee cannot use HRA funds for the non-covered dependent.

Good luck.