Issue 22

An employer-funded health reimbursement arrangement (HRA) qualifies as a group health plan under COBRA. Therefore, you the employer are required to offer the HRA as part of the COBRA election notice package you offer to your eligible COBRA-qualified beneficiaries.

As the employer, you are entitled to charge a separate premium for the HRA COBRA benefit in addition to the premium for the medical COBRA benefit. Calculating the HRA COBRA premium can be confusing. We cannot establish this premium for you, but we can guide you on how to calculate it.

You can use either of two methods to determine the HRA COBRA premium: the past cost method or the reasonable actuarial determination.

1. Past cost method

The past cost method looks at the total cost of the HRA based on past utilization rates. For example, let’s say that employees have a $1,200 HRA plan ($100 employer contribution per month), but over the plan’s lifetime only 50% of the total benefits have been claimed and paid. In this instance, you would calculate the annual COBRA rate as follows:

$1,200 x 50% = $600
(Annual HRA Amount X Utilization Rate = Annual Rate)

In this example, the monthly premium for the HRA benefit would be $50 ($600/12). You (or your TPA) may also add 2% to the premium for COBRA administration fees, in which case the monthly rate would be $51.

2. Actuarial determination method

You can use the past cost method only if you have past costs, so it won’t work for a brand new HRA. In this case, use the actuarial determination method. You can engage a licensed actuary to use their data and resources to make a reasonable estimate of the cost of providing HRA coverage and use a formula to figure the monthly premium. For example, let’s say you estimate that, on average, employees who participate in the HRA will spend 50% of the available HRA dollars. You provide an annual $1,000 HRA contribution. You would calculate your premium like this:

• $1,000 X 50% = $500
• $500/12 (months) = $41.66
• You (or your TPA) may add 2% to the premium for COBRA admin fees.

Final tips

• You must calculate the HRA COBRA premiums each year before the 12-month determination period (usually at the beginning of the plan year for the HRA or when rates change for the underlying insured plan).
• You cannot charge different HRA COBRA premiums to different beneficiaries. The premium must be the same for everyone, except for differences in reimbursement maximums (e.g., single vs. family coverage).
• The method for calculating COBRA rates for an HRA is ultimately up to you. Your COBRA administrator cannot establish this rate for you.

As always, please reach out to your dedicated BMS analyst with any questions related to this and other COBRA administration topics.