As an employer, it can be difficult to build an appealing benefits package to attract talent. The options on the market today are endless, and many employers are confused about the right, and most cost-effective, approach to healthcare. But what about when an employee experiences a life event, such as divorce, a death in the family, or the employment is terminated, resulting in a change of benefits?

According to the Consolidated Omnibus Budget Reconciliation Act (COBRA), employers with 20 or more employees must provide continuous coverage for the employee and their family in the event of a qualifying event. Examples of qualifying events include when an employee:

  • Quits, is laid off, retires or is fired (not for gross misconduct)
  • Has their hours reduced and no longer qualifies for the group healthcare plan
  • Is separated or divorced
  • Has a child that no longer qualifies as a dependent
  • Becomes disabled
  • Dies
  • Becomes eligible for Medicare

COBRA is mandated by law, and employers must learn the regulations that apply to their business. But first, let’s look at the definitions of ICHRA and COBRA.

ICHRA and COBRA Defined

An Individual Coverage Health Reimbursement Arrangement (ICHRA) benefits both employers and employees. Unlike traditional health plans, ICHRA gives employees the ability to select their own health insurance coverage and get tax-free reimbursements for insurance premiums from their employer.

COBRA, also known as Federal COBRA, kicks in once an employee loses their health benefits due to a qualifying event. This temporary extension of health benefits covers both the employee and their family, and applies to employers with 20 or more employees. COBRA continuation coverage typically lasts for 18 months, but in some cases it can last for 29-36 months.

Exclusions to this COBRA regulation include businesses with fewer than 20 employees, certain federal employees, churches, and religious tax-exempt organizations. As a result, if such entities offer ICHRA, they may do so without adhering to COBRA provisions.

COBRA Regulations and the Impact on ICHRA

Health flexible spending accounts (FSAs) and some health reimbursement arrangements (HRAs) are subject to COBRA regulations, according to IRS Notice 2002-45. The law stipulates that all group health plans maintained by private-sector employers with 20 or more employees must offer COBRA. But, you may ask, what about smaller employers with less than 20 employees?

Forty states have enacted “mini-COBRA” laws that require smaller organizations to provide COBRA benefits. And just like federal COBRA, mini-COBRA laws require employers to offer continuing health coverage to employees who lose coverage after a qualifying event. Coverage varies by state but can last anywhere from two months to indefinitely if the employee meets certain conditions.

Small employers in these 40 states will need to understand these mini-COBRA laws and learn how to calculate COBRA premiums.

ICHRA and COBRA Calculations

Once an employee opts for COBRA coverage, that employee must pay a premium, which is calculated by COBRA regulations. There are two methods for calculating COBRA premiums for ICHRA:

  • Actuarial Method: Calculated as a reasonable estimate of HRA usage plus a two-percent administrative fee to receive their former employer’s reimbursement. This method, mostly used in the premium only ICHRA Plan, offers COBRA in a Premium Reimbursement ICHRA scenario, a compliance-only component in the continuation of benefits.
  • Past Cost Method: Calculated as the average amount an employer reimbursed each employee during the previous plan year, plus adjustments for inflation and the two-percent administrative fee. If the employer offers an HRA component to the ICHRA plan, the employer has added in additional money to the premium reimbursement, and this is where the employee may elect COBRA.

Sound Confusing?

Most employers would respond with a resounding, “yes!” However, it’s in your best interest to understand not only the laws surrounding health benefits, but also the implications of not complying. Federal COBRA and mini-COBRA must be followed or employers will face big fines.

If you have neither the time nor the ability to delve into the intricacies of healthcare coverage, contact the experts at Flyte for an analysis of your current benefits package or to build a new one.