COBRA and the Health Reimbursement Arrangement

COBRA and the Health Reimbursement

Arrangement

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3© 2012 Employee Benefits Corporation

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COBRA and the Health Reimbursement Arrangement (EBC HRA)

Peter AntonieCompliance Communications

SpecialistEmployee Benefits

CorporationThe material provided in this webinar is by Employee Benefits Corporation and is for general information purposes only. The information does not constitute legal advice and may not be relied upon by anyone as such. Nor may the information be disseminated in any form.


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COBRA & the EBC HRA• The EBC HRA is a group health

plan maintained by the employer

• The EBC HRA is subject to COBRA

• COBRA applies to qualified beneficiaries (QBs) who experience a triggering event that causes the QB to lose the EBC HRA coverage

• We can answer your questions about applying COBRA to the EBC HRA

• We can administer COBRA for the EBC HRA through our COBRASecureSM service


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Our Agenda

• COBRA’s basic requirements• Application of COBRA to the

EBC HRA• Calculating the COBRA

premium for the EBC HRA• Determining the coverage

available after a qualifying event (the EBC HRA balance)

• Common compliance issues involving COBRA and the EBC HRA


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COBRA Basics

• A qualified beneficiary (QB)• Who experiences a triggering

event• That causes loss of group health

plan coverage• Must be offered COBRA

continuation • For a specific time period• With a premium not to exceed

102% of the “applicable” premium (150% during the disability extension)


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COBRA Basics

Qualified Beneficiary (QB)• The employee, spouse* or

dependent child**• Who is covered the day prior to

the loss of coverage

* Under federal regulation, same sex spouses and/or domestic partners are not spouses

** Children are eligible for tax free health coverage to the end of the year they attain age 26 (health plan can limit coverage to the 26th birthday)


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COBRA Basics

• Triggering Events*– Termination of employment– Reduction in hours– Divorce or legal separation– Death of the covered employee– Dependent child ceases to be a

dependent– Covered employee becomes

entitled to Medicare– Employer bankruptcy

* All apply to the EBC HRA


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COBRA Basics

Loss of Coverage• Triggering event date and loss of

coverage date need not be the same (can postpone loss)

• Triggering event must cause loss of coverage within the maximum continuation period for the triggering event (e.g., maximum period for termination of employment is 18-months. Loss of coverage must occur within that 18-month period. COBRA offered for 18-months from loss of coverage date)


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COBRA Basics

COBRA Coverage Offered• QB is offered same coverage as

in place the day prior to the loss of coverage

• If coverage included spouse or dependents, each family member has independent election rights

• QB is offered the coverage under the same terms and conditions that applied prior to the loss (e.g., plan type, applicable premium, etc.)


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Calculating the COBRA Premium for the EBC HRA*• IRS guidance is that EBC HRA

premium is calculated using actuarial methods – same as a self-funded health plan

• Past cost method may be used in some cases – never in first year

* The only time a participant can provide any funding for the EBC HRA is by paying COBRA premium for EBC HRA coverage


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Calculating the COBRA Premium for the EBC HRA• Cannot be based on the actual

claims paid for the specific former employee or family member

• Cannot equal the maximum benefit available, unless the plan can demonstrate that all of the EBC HRA dollars are always reimbursed

• The 2% COBRA administrative fee (or 150% during the disability extension) can be added to the applicable premium

• Most plans use an arbitrary calculation based on previous claims history for the group applied to the future maximum reimbursement


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Calculating the COBRA Premium for the EBC HRAExample:• Employer A has an EBC HRA that

reimburses up to $2,000 of the single plan deductible or up to $4,000 of the family plan deductible each year

• Employer A reviews prior plan utilization and determines that the average reimbursement was 25% of the maximum benefit available for single or family coverage


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Calculating the COBRA Premium for the EBC HRAExample: (continued)• Employer A determines that the

applicable premium will be $41.67 per month for a single participant*$2,000 / 12 months x 25% =

$41.67• Employer A determines that the

applicable premium will be $83.33 per month for a family participant*$4,000 / 12 months x 25% =

$83.33*Does not include the 2% COBRA

fee


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Applying COBRA to the EBC HRAEBC HRA “linked” to group

plan• Employees who enroll in the group plan

are provided the EBC HRA (do not separately enroll)

• QB is offered COBRA for both plans – cannot elect one without the other

• Example – ABC Co. provides the EBC HRA only to employees that enroll in the company’s health insurance plan. Joe is laid off and is offered COBRA continuation for the health plan including the EBC HRA. Joe cannot elect just the health plan since the health plan and EBC HRA are linked. He must choose both or choose no COBRA coverage.


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Applying COBRA to the EBC HRAEBC HRA provided as a stand-

alone plan• Employees are provided the EBC HRA

separately from other plans• QB is offered the EBC HRA as a separate

election from any other plans offered• Example – ABC Co. provides an EBC HRA

for all employees that work 30 hours per week or more, regardless of any other plans the employee enrolls in. Joe is laid off and is offered COBRA for the EBC HRA and any other plans he was enrolled in as separate plans to continue. Joe can elect COBRA continuation coverage for any or all of the plans.


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EBC HRA Balance After a Qualifying Event• QB is provided COBRA

coverage for the balance of funds available from the EBC HRA

• Calculating the EBC HRA balance available depends on the EBC HRA design


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EBC HRA Balance After a Qualifying Event• EBC HRA with no rollover

(carryover)• EBC HRA with rollover• EBC HRA with Post

Employment Benefit (PEB)


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EBC HRA Balance After a Qualifying EventEBC HRA with no rollover

provision• QB is offered standard 18, 29

or 36 months of COBRA coverage

• Applicable COBRA premium based on coverage level (e.g., single, family)

• Balance of unused EBC HRA is available

• Independent election rights apply for family members

• QB eligible for new plan year benefit funding when next plan year begins


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EBC HRA Balance After a Qualifying EventEBC HRA with no rollover

provisionExample: Beth’s EBC HRA reimburses 75% of her $2,000 single plan deductible

• At the time of her qualifying event, Beth has already been reimbursed $750 (75% of the $1,000 of deductible expenses she incurred)

• Beth is offered COBRA with a balance available for reimbursement of $750 for the rest of the plan year

• Beth pays the applicable COBRA premium for EBC HRA coverage

• If continued, Beth will have $1,500 available for the next plan year (assumes no change in EBC HRA benefit for active employees)


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EBC HRA Balance After a Qualifying EventEBC HRA with rollover

• QB offered standard 18, 29 or 36 months of COBRA coverage

• EBC HRA including rollover balance is subject to COBRA

• Applicable COBRA premium is cost to the employer for providing the EBC HRA with rollover to active employees (e.g., single plan with rollover)

• Independent election rights apply for family members

• QB eligible for new plan year benefit funding plus remaining rollover balance for next plan year


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EBC HRA Balance After a Qualifying EventEBC HRA with rollover

• Example: Luke is enrolled in a single plan EBC HRA with rollover. Each year single plan participants have $1,000 available plus any rollover in their EBC HRA accountAt the time Luke loses coverage, he

has an EBC HRA balance of $5,000 (current year available funding + roll over – claims reimbursed to date of event)

Luke’s COBRA premium is the applicable cost to provide the EBC HRA with roll over to other single plan employees – not a premium based on Luke’s account value

If Luke elects COBRA, he would have another $1,000 available in the EBC HRA at the beginning of the next plan year plus any remaining rollover balance


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EBC HRA Balance After a Qualifying EventEBC HRA with PEB• Generally designed for retirees

or others who terminate employment

• One-time funding by the employer could be:Roll over accumulated while

employedFunding based on a formula (e.g.,

X $ for each day of unused sick leave, etc)

• Participant “spends-down” the PEBCan be limited to a certain time

period (e.g., 3 years) and/or until the account is exhausted


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EBC HRA Balance After a Qualifying EventEBC HRA with PEB – 3 options#1 - Active employee EBC HRA balance is converted into PEB HRA at termination or retirement

Must offer COBRA for the active employee EBC HRA when an event occurs

If COBRA is elected, active employee EBC HRA remains in effect (QB pays premium and normal claims reimbursement continues)

- This is an issue when the health plan & EBC HRA are linked; expectation that PEB would be used to pay COBRA premiums for health plan

When COBRA coverage ends or is not elected, PEB HRA begins

PEB HRA is a spend down account and no COBRA rights apply for family members if participant dies, divorces, etc. while using PEB


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EBC HRA Balance After a Qualifying EventEBC HRA with PEB – 3 options#2 - No active employee EBC HRA, eligible employees receive a PEB HRA at termination or retirement

Family members who experience a qualifying event (e.g., divorce) while covered by the PEB are offered COBRA for the remaining PEB balance

Applicable COBRA premium is the cost to the employer of providing the PEB for its other PEB participants

Example: PEB usage is 30% of account value each year. Ex-spouse Mary is offered COBRA for PEB account with value of $9,000. Applicable monthly premium is:$9,000 X .3/12 months = $225 + 2% fee


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EBC HRA Balance After a Qualifying EventEBC HRA with PEB – 3 options#3 - PEB HRA as an alternative coverage

Employer has an active employee EBC HRA linked to the health plan

Employer maintains an alternative health plan & PEB HRA for employees who experience a specific event (e.g., termination of employment, retirement, etc)

When a qualifying event occurs, the employee can choose COBRA for the active employee health plan & EBC HRA or coverage under the alternative health plan and PEB HRA


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EBC HRA Balance After a Qualifying EventEBC HRA with PEB – 3 options #3 - PEB HRA as an alternative coverage

(continued) Employees who opt for the alternative

health plan & PEB HRA waive their COBRA rights

Family members who experience a qualifying event (e.g., death of former employee) while covered by the alternative health plan and PEB HRA are offered COBRA for the alternative health plan and PEB HRA balance


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EBC HRA Balance After a Qualifying Event#3 - PEB HRA as an alternative coverage;

example George can elect COBRA and stay in

the active employee health plan & EBC HRA or he can select an alternative health plan and PEB HRA of $10,000 when he terminates his employment

George selects the alternative health plan with PEB HRA and waives his COBRA rights to the active employee health plan and EBC HRA

George dies while still covered by the alternative coverage. His wife is offered COBRA for the alternative coverage for a period of up to 36-months from George’s death.


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EBC HRA Balance After a Qualifying Event• EBC HRA balance is subject to

plan design• Aggregate benefit design versus

individual embedded amount with family maximum design affects the balance available for a QB

• Could affect Deductible Co-insurance Co-pays (drugs, office visits, etc.)

• Majority of EBC HRAs provide reimbursement for deductible expenses


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EBC HRA Balance After a Qualifying EventDeductible designs• Aggregate deductible – health

plan only pays after expenses for any or all individuals exceed the deductible amount Example: Sam covers his wife and two

children in a health plan with a family aggregate deductible of $4,000. Sam’s health plan will cover the family’s medical expenses only after Sam and/or his family members have had $4,000 in out-of-pocket deductible expenses


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EBC HRA Balance After a Qualifying EventDeductible designs• Individual embedded

deductible with family maximum Health plan pays when any individual has

expenses that exceed the individual embedded deductible amount; or,

Health plan pays when the family’s deductible expenses exceed a maximum threshold amount


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EBC HRA Balance After a Qualifying EventDeductible designs – individual embedded deductible with family maximum• Example: Mary covers her husband and a

child in a health plan with a $2,000 individual embedded deductible with a family maximum deductible of $4,000 Mary’s plan will reimburse expenses

when any covered family member has deductible expenses of $2,000

If remaining family members incur an additional $2,000 of deductible expenses (a total of $4,000 in deductible expenses), the plan will cover all future expenses

The health plan will also reimburse future expenses if the family incurs $4,000 of deductible expenses even though no individual has incurred $2,000 of deductible expenses


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EBC HRA Balance After a Qualifying EventChanges from family coverage to single coverage (divorce or loss of dependent status)

– EBC HRA balance will vary upon aggregate or individual embedded deductible design

• The following examples all use the same facts


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EBC HRA Balance After a Qualifying EventChanges from family coverage to single coverage – examplesFacts:

• John and Jane Doe are married • John has an EBC HRA linked to the health

insurance plan that reimburses 100% of the health plan’s deductible expenses

• Single EBC HRA reimburses the $2,000 deductible and family EBC HRA reimburses the $4,000 deductible

• John and Jane divorce • Jane is offered COBRA


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EBC HRA Balance After a Qualifying EventChanges from family coverage to single coverage – examplesFacts: (continued)

• Prior to the divorce, Jane had $1,500 in deductible expenses reimbursed from the EBC HRA

• John had $800 in deductible expenses reimbursed from the EBC HRA

• Single and family premium for health plan plus EBC HRA are established monthly premium amounts

• Single premium is $350 and family premium is $900 (health plan + EBC HRA)


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EBC HRA Balance After a Qualifying EventAggregate deductible – divorce

balance• Based on facts

$2,300 towards the aggregate deductible satisfied ($1,500 from Jane, $800 from John)

Jane is offered COBRA for a single plan


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EBC HRA Balance After a Qualifying EventAggregate deductible – divorce balance (continued)• Jane’s deductible changes from

$4,000 to $2,000 In an aggregate design, the EBC HRA

doesn’t track claims against specific individuals

Jane is credited with $2,300 towards the $2,000 deductible (deductible is satisfied)

Jane pays $350/month for single health plan with EBC HRA coverage

Jane has no EBC HRA funds available for the remainder of the plan year

Jane will have $2,000 of EBC HRA funding available the next plan year


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EBC HRA Balance After a Qualifying EventIndividual Embedded Deductible – divorce balance• Based on facts

Jane has satisfied $1,500 of deductible expenses

Jane is offered COBRA for a single plan


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EBC HRA Balance After a Qualifying EventIndividual Embedded Deductible – divorce balance (continued)• Individual embedded deductible of

$2,000 applies to each person With individual embedded design, claims

are tracked against specific individuals Jane is credited with $1,500 toward $2,000

single deductible Jane pays $350/month for single health

plan with EBC HRA coverage Jane has possible additional $500 of EBC

HRA funds for the rest of the plan year Jane will have $2,000 of EBC HRA funding

available the next plan year


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Common compliance issues• Not offering COBRA for the EBC HRA• Not offering COBRA for all of the

qualifying events (e.g., not offering COBRA to ex-spouse, etc.)

• Offering COBRA for the EBC HRA separately when the EBC HRA is linked to the health plan for active employees

• Not creating an applicable premium for the EBC HRA or creating an unreasonable applicable premium

• Automatically moving participants to a PEB HRA without offering COBRA for the active employee EBC HRA


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Summary

• COBRA applies to the EBC HRA• All COBRA rules apply (e.g., QBs,

events, applicable premium, etc.)• EBC HRA COBRA coverage after an

event is affected by plan design• We can answer your questions about

applying COBRA to the EBC HRA• We can administer COBRA for the

EBC HRA through our COBRASecure service


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Thanks for Attending

Questions on this issue or any COBRA, EBC HRA or Cafeteria Plan issue can be directed to:

Compliance Department

1-800-346-2126Or

[email protected]

Documents

COBRA and the Health Reimbursement Arrangement