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April 20, 2020

How to Calculate COBRA Premiums for Health Reimbursement Arrangements

Ameriflex is often asked how to calculate COBRA premiums for Health Reimbursement Arrangements (HRA). The section that immediately follows details a common method for calculating COBRA premiums for HRAs with little to no previous claims experience, while this alone may be satisfactory to many plan administrators; we strongly suggest reading the entire document for a more comprehensive understanding of the overall HRA/COBRA issue.

Calculating Your HRA COBRA Premium (Unofficial Method for new HRAs)

Traditional HRA:

In an apparent acknowledgment of the headaches and confusion faced by employers with HRAs and COBRA, at least one IRS official has verbally endorsed a “rule-of-thumb” percentage for new HRAs with little to no previous claims experience: a 75% – 80% range. In other words, if an HRA offers a $100.00 per month benefit (or $1,200 a year), then a reasonable COBRA premium for that HRA might be $75.00 to $80.00 per month. Based on current IRS guidance, a Plan Administrator cannot charge the level of the benefit itself (in this example, $100 per month).

The following is an example of how this “rule-of-thumb” might be applied:

A company offers an HRA with three levels of coverage: employee-only coverage ($1,000 of coverage for the year), employee-plus-spouse coverage ($2,000 of coverage for the year) and “family” coverage ($3,000 of coverage for the year). The HRA is new with little to no previous claims experience. The company decides to apply the rule-of-thumb percentage. This is done simply by multiplying the coverage limit by, say, 75% and then dividing that amount by twelve (for the number of months in a year). Using this formula, the HRA COBRA premiums might be
determined as follows:

Employee only: (($1,000 x 75%)/12) = $62.50+ 2% administration fee

Employee-plus-spouse: (($2,000 x 75%)/12) = $125.00 + 2% administration fee

Family: (($3,000 x 75%)/12) = $187.50 + 2% administration fee

Individual Coverage HRA (ICHRA) and Excepted Benefits HRA (EBHRA):

The Actuarial Method is calculated using the benefit amount for each class by assuming a reasonable estimate of the cost of providing the coverage. This method would be used for the first year of the ICHRA because there is no available past cost data.

Cobra Premium= ICHRA/EBHRA monthly allowance + 2% administration fee

The Past Cost Method is used to calculate the COBRA premium with the following formula:

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

HRAs in Conjunction with High-Deductible Health Plans or Other Bundled Arrangements

A common question from plan administrators is whether an HRA must be offered for COBRA as a stand-alone plan or bundled with another plan. The central issue is how the HRA was offered to regular employees. COBRA coverage must be identical to the coverage provided to similarly situated employees under the plan. Under the IRS interpretation of this requirement, COBRA coverage will ordinarily be “the same coverage that the qualified beneficiary had on the day before the qualifying event” and must not differ “in any way from the coverage made available to similarly situated non-COBRA beneficiaries.”

Many employers have a packaged HDHC+HRA arrangement, whereby the HRA coverage is made available only to employees who participate in the employer’s major medical plan with high-deductible health coverage (HDHC). If the employer has such an arrangement, it should design its COBRA practices so that a qualified beneficiary who chooses to elect COBRA continuation coverage may only elect the HRA in conjunction with the major medical plan. If the employer has such a plan design, the COBRA premium for an HDHC+HRA arrangement would be the total of the premium for the HDHC component and the HRA component. If Ameriflex is the COBRA administrator, the plan administrator could call this plan “HDHC+HRA” (or something similar) in our COBRA plan section of the new client application. When prompted for rates, add the HDHC and HRA premiums together for a total “bundled” rate.

For employers who offer a stand-alone HRA, or allow their employees to independently enroll in the HRA plan: COBRA allows the HRA to be offered individually to COBRA qualified beneficiaries. If Ameriflex is the COBRA administrator, the plan administrator could call this plan “HRA” (or something similar) in our COBRA plan section of the new client application.

Why are HRAs Subject to COBRA?

The IRS has made clear that HRAs are treated as group health plans for purposes of the federal COBRA continuation coverage requirement. The nature of the entitlement to COBRA coverage for HRAs is similar to that of standard health plans (e.g., terminated employees must be offered 18 months of coverage). Unfortunately, the IRS has not been very forthcoming with specific guidance regarding just how to calculate the monthly COBRA premium for HRAs. The general rule is that COBRA participants should be charged the cost of the coverage. In cases of insured group health plans, this “cost” is easily determined: it is whatever the insurer charges the employer for that coverage. HRAs, however, are self-insured plans (that is, claims are ultimately paid from employer assets) and can be designed in many different ways, making the determination of HRA COBRA premium calculations a fuzzy process.

The Role of Ameriflex in the Determination of COBRA Premiums for HRAs

Plan sponsors are used to relying on health insurers for health plan cost determinations. This makes sense for insured plans, because insurers by definition bear the cost of coverage. Ameriflex, however, is not an insurer. Ameriflex a third-party claims administrator for employerfunded plans. As such, Ameriflex has only limited means with regard to present plan cost assessment and it cannot make actuarial determinations with regard to future plan costs. It is therefore the ultimate responsibility of plan sponsors (employers) to determine the actual “cost” of HRAs for purposes of COBRA. Ameriflex will, however, offer assistance with this process as it relates to our usual and customary services for our clients, including:

General Guidelines for Determining the COBRA Premium for HRAs (Official Methods)

To further assist clients with the determination of HRA COBRA rates, AmeriFlex offers the following general guidelines based upon a good-faith analysis of the available law and guidance available:

The premiums should be the same for similarly situated participants, without regard to individual claims experience. According to IRS Notice 2002-45: “An HRA complies with the COBRA
requirements for calculating the applicable premium under § 4980B if the applicable premium is the same for qualified beneficiaries with different total reimbursement amounts available from the HRA (and otherwise also satisfies the requirements of § 4980B). For example, if the annual additional reimbursement amount credited under an HRA is $1,000 and the maximum reimbursement amount remaining for two similarly situated qualified beneficiaries at the time of their qualifying events is $500 and $5,000, the applicable premium is the same for each individual.”

From the above, IRS appears to be primarily concerned with employers treating HRA COBRA participants equally regardless of their HRA claims experience pre-COBRA. Clearly, IRS wants to curb the potential for abuse among employers, who may be tempted to “punish” or otherwise discourage COBRA participation among HRA participants who have above-average claims experience. One key phrase to remember, however, is “similarly situated participants,” meaning that just as with “regular” insurance plans, there is no prohibition against having different monthly premiums for different plan levels (e.g., “employee-only,” “employee-plus-spouse,” “family,” etc.), so long as the premiums themselves are the same for all participants in that level.

COBRA endorses either an “actuarial method” or a “past-cost” method for determining premiums.

COBRA offers two methods of determining premiums: an actuarial determination or a “pastcost” method. On balance, the “safest” way to make HRA COBRA premium determinations is actuarially, similar to the method by which insurance companies cost-out their own products. And, indeed, some HRA plan sponsors use an actuary for these purposes.

The alternative is the “past-cost” method (literally, the “cost” of the plan in the “past”), which is a seemingly simple (and therefore very tempting) solution. However, this method isn’t available for new HRAs (because these have no past costs), many “young” HRAs, or HRAs that have had any material plan design features changed. However, it’s also possible that a “pastcost” method analysis of past plan designs may result in a lower HRA COBRA premium than a pure “actuarial” method would, in which case it would probably be defensible. In any case, it has been our experience that HRA clients tend to prefer some variation on the “pastcost” method, both for reasons of cost (actuarial analyses can be expensive) and convenience (not too many employers—particularly small and mid-size employers—have actuaries on staff or on retainer.

Remember the purpose of COBRA.

When a law is enacted and it’s unclear just how to remain complaint with that law in unique situations, the best thing to do is look to the purpose of the law; that is, what were the people who enacted the law trying to do? In the case of the COBRA continuation coverage provisions, the purpose is crystal clear: to give employees who experience a life or work event resulting in the loss of their group health plan coverage a fair and reasonable opportunity to continue that coverage for a certain amount of time after the event. So, while there is certainly no requirement that employers give HRA COBRA coverage away for free or even at a nominal cost, it is perhaps even more important that an employer establish a rate that could not be reasonably interpreted as overinflated or otherwise intended to discourage HRA participants from electing COBRA. The best way to do this, in our view, is to keep careful records of the data used to make the analysis as well as the steps used in the analysis itself to establish the premium. Then, once the premium is established, finalize the records with a statement that the rates were established in manner completely consistent with the principle that qualified beneficiaries shall have the right to continue their HRA coverage so long as they are responsible for the payment of the monthly cost of the plan as established by this analysis. The general standard is this: if a federal government official (or a federal judge) were to make an inquiry as to how you determined your HRA COBRA rates, would you be able, in good faith and with adequate documentary support, to answer that question in a reasonably satisfactory manner. Ameriflex will take no position on whether or not an HRA COBRA premium is valid. After a client has established COBRA premiums for its HRAs (whether through claims experience, the 75-80% “rule-of-thumb,” or an actuary), Ameriflex is often asked whether those premiums will pass muster from a legal standpoint (in other words, “Is this OK?”).

We believe that unless a TPA uses a bona-fide actuary to make those determinations, a TPA has no standing to “approve” HRA COBRA premium determinations and that by doing this, many TPAs are unfairly (if perhaps unintentionally) misleading their clients. In the event of an audit or other government inquiry, any such informal “stamps of approval” by a TPA would have little to no bearing on the auditor’s ultimate decision. That said, Ameriflex believes that if employers follow the above general guidelines—with a particular emphasis on fairness, a “good-faith” attempt at allowing employees who have experienced qualifying events to continue their HRA coverage and proper documentation of that good faith—there should be few if any bumps in the HRA COBRA road.

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