Understanding COBRA Differences in the Group and ICHRA Models

Many Americans covered by employer-sponsored plans and ICHRAs are entitled to continue those arrangements after they lose their eligibility for benefits. But the consequences are different.

COBRA is a federal law that provides certain eligible individuals the option to remain covered by their group health plan when they're not otherwise eligible to continue coverage. Both traditional employer-sponsored medical plans and Individual-Coverage Health Reimbursement Arrangements are subject to CONBR continuation. But COBRA works differently for each model.

As a refresher, an ICHRA is an employer-funded account from which employees can withdraw funds to pay for medical coverage that they purchase in their local nongroup market. It's an alternative to the more traditional employer-sponsored model in which the company selects several options, usually pays a percentage of each plan's premium, and actively manages the enrollment process.

Understanding COBRA

The Consolidated Omnibus Budget Reconciliation Act of 1985 includes a provision that requires companies with 20 or more employees to allow both employees and their dependents who are no longer eligible for benefits to continue their coverage temporarily (between 18 and 36 months, depending on the nature of the loss of eligibility).

Most commonly, former employees use COBRA to bridge a coverage gap between jobs. But it also applies in other situations:

• A dependent child ages off the plan when she turns age 26.
• The employee, who has family coverage, dies or is permanently disabled.
• The employee, who has family coverage, divorces.

Although applicable employers must offer COBRA, they're not required to subsidize premiums, as they are by their insurer for active employees. Some companies offer a temporary subsidy, particularly during large layoffs, but many don't. In those cases, the COBRA-eligible individual must pay the full premium. In addition, the company is permitted to add a 2% administrative fee. Thus, a recently laid-off employee who paid, say, $500 of his $2,000 monthly premium (the company paid the other $1,500, or 75%, when he was active at work), must now pay $2,040 (102% of the full $2,000 premium) to continue coverage on that plan.

Employers must notify COBRA-eligible individuals promptly (within 14 days) that they're entitled to COBRA. Individuals then have 60 days to state whether they'll exercise this right. If they do, they then have 45 days to pay their initial premium payment. If they miss any of these deadlines, they lose their right to continuation. Also, if they fail to pay their monthly premiums within payment deadlines established by law, they forfeit further continuation.

COBRA and Group Plans

Group plans are medical coverage (which is different from ICHRAs, as we'll explore in a moment). The timelines outlined above permit COBRA-eligible individuals to retain their right to exercise their continuation rights without paying prospective premiums as they look for new coverage (typically via a new job through which their company pays most of their premium). If you understand how to protect your continuation rights, you effectively hold an option to enroll in retrospective continuation if you need coverage. If you don't need it, you can decline your option by not making your first premium payment by the deadline.

The benefit of accepting COBRA continuation and paying premiums to keep your coverage in force is that you can retain a good group medical plan. Also, if you (or your family) have met most of or all your deductible or out-of-pocket limit for the year, retaining that coverage reduces your financial responsibility for deductibles, copays, and coinsurance when you do receive care. This situation may make COBRA a more attractive option than enrolling on your spouse's coverage (with an employer premium subsidy) or nongroup plan (where you can choose your combination of premium and out-of-pocket responsibility) during your window to pick up this coverage with a qualifying event (loss of coverage).

The downside is that you're locked into that plan, which was much more affordable when you were working, and must (in most cases) pay 102% of the premium to continue coverage.

?COBRA and ICHRAs

COBRA under ICHRAs works differently. ICHRAs aren't medical coverage, but rather a funding mechanism to pay premiums on nongroup coverage that remains in effect independent of your employment, COBRA eligibility, or decision to accept or decline COBRA. ICHRA enrollees often have COBRA rights, but they can't retain the option to continue their medical coverage for a time without actually paying premiums.

Example: Luciana's employer offers her an ICHRA with a monthly value of $400. She applies that amount toward the $550 monthly premium on her nongroup plan. When she loses her job July 1, she, too, is entitled to COBRA continuation. But she must pay her August premium within her insurer's deadline, regardless of her COBRA decisions.

That's one issue that ICHRA recipients face with COBRA. You don't have the opportunity to maintain the option to avoid paying premiums immediately to retain hour option to continue coverage, then retrospectively enroll several months later, as you do with COBRA on a group plan.

The larger issue is whether COBRA offers any benefit. In the example above, Luciana could exercise her COBRA continuation rights by paying $408 (102% of $400) monthly. But she'd receive only a $400 ICHRA stipend. If she declined COBRA and paid the same $408 to her insurer, she'd pay $408, not $400, of her monthly premium.

In this typical scenario, a COBRA-eligible individual would not benefit financially by continuing the ICHRA.

When ICHRA Continuation Makes Sense Financially

There are some situations when exercising COBRA rights to continue on an ICHRA program makes sense.

Example: Min, age 25, receives a $400 monthly stipend from her insurer. Min doesn't access medical care other than routine preventive services covered in full, so she purchased a catastrophic plan with a high deductible and low monthly premium of only $280. Her employer's ICHRA design allows her to spend any balances (after paying premiums in full) on other eligible expenses ("Health FSA" expenses) and retain unused balances from year-to-year.

In Min's case, exercising her COBRA continuation rights may make sense. Sure, she could send $280 to her insurer to pay her monthly premium in full. But if she sends $408 (102% of $400) to her former employer (or the company's COBRA administrator) each month to continue her ICHRA, she can pay her $280 premium from her ICHRA and retain the $120 balance to pay medical out-of-pocket expenses, plus dental or vision expenses, and the cost of over-the-counter drugs, medicine, equipment, and supplies. Particularly if she has accumulated a large balance of unspent funds in the ICHRA, it may make financial sense to pay $408 rather than $280 every month to maintain and build that medical emergency fund in case she has planned or incurs unplanned medical expenses, or decides that she wants to undergo vision-correction surgery.

Understanding Your ICHRA Design

It's critical to understand your ICHRA design before you make a COBRA decision. If your plan is designed like Min's, you may benefit from electing COBRA to retain those unspent funds. But Min's situation isn't common. In fact, it is based on two atypical factors.

First, Min's employer allows ICHRA recipients to spend balances in excess of premium on other Section 213(d) qualified expenses. Most employers limit their ICHRAs to reimbursing premiums.

Second, Min's ICHRA stipend is less than her premium. Most employers design their plans to adjust the ICHRA stipend for age, so that the value of the ICHRA never is more than the premium, even for the youngest workers. Min is young and qualifies for a catastrophic plan, which has high cost sharing and corresponding low premiums. These plans benefit only young people (older people are barred from purchasing catastrophic coverage) with low claims.

The Bottom Line

COBRA provides a valuable continuation option for employees enrolled on an employer-sponsored plan. It's also applicable to ICHRAs, though the nature of the ICHRA - it's a funding mechanism to pay premiums on a nongroup plan, rather than medical coverage itself - renders it not useful in most situations. But with the right ICHRA design and nongroup premium, you may benefit from exercising your COBRA continuation rights to remain enrolled on your former company's ICHRA program.

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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.

ICHRA Insights is published (approximately) weekly.

Does COBRA apply to ICHRAs? Yes. Does it work as it does with group health plans? No. Learn when it may make financial sense to exercise your COBRA rights on an ICHRA – and why it rarely makes sense.

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