Issue 4

COBRA HRA Premium Calculation

An employer-funded health reimbursement arrangement (HRA) qualifies as a group health plan under COBRA. That means you must offer it as part of the COBRA election notice package available to your eligible COBRA-qualified beneficiaries.

As the plan sponsor, 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. Although we cannot establish this premium for you, we can guide you in calculating it.

You have two ways 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 percent of the total benefits have been claimed and paid. You 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 third-party administrator [TPA]) may also add 2 percent to the premium for COBRA administration fees, in which case the monthly rate would be $51.

 

2. Actuarial determination method

If you don’t have past utilization of an HRA, you can’t use the past cost method. So for a new HRA you use the actuarial determination method. For it 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 then 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 percent of the available HRA dollars. You provide an annual $1,000 HRA contribution. Here’s how you calculate your premium:

  • $1,000 X 50% = $500
  • $500/12 (months) = $41.66
  • You (or your TPA) may add 2% to the premium for COBRA admin fees ($41.66 X .02 = 83 cents).

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)
  • Which method you choose to calculate COBRA rates for an HRA is up to you; your COBRA administrator cannot establish this rate for you.

Flexible Spending Accounts – Why Substantiate

Here’s a common scenario we hear with flexible spending accounts:

“Why do I need to provide receipts to show what I paid for? I used my debit card at a UPMC facility. Why do I need to prove that I am using my flexible spending account funds for eligible items?”

While it may seem cumbersome to substantiate transactions, the real benefit is helping members comply with IRS regulations.

The IRS defines qualified medical care expenses within IRS Section 213(d) as amounts paid for the diagnosis, cure, mitigation, or treatment of a disease, and for treatments affecting any part or function of the body. That’s why expenses require substantiation of the services rendered or the products purchased.

UPMC Benefit Management Services, as an administrator, works to maintain records to prevent discrepancies if a member were to be audited. If the member is also a UPMC Health Plan member, UPMC Benefit Management Services’ system attempts to automatically substantiate claims up to 90 days before an audit. Our team can also locate expenses that match a member’s medical claim if the claim does not automatically substantiate.

If our systems cannot locate an expense, we send a receipt request to the member. As always, if a member needs assistance with acquiring requested documentation, our Member Services team is available to help via the phone number located on the back of the member’s debit card.

The above information is for informational purposes only and is not legal or tax advice. UPMC Health Plan and UPMC Benefit Management Services do not provide legal or tax advice. For legal or tax advice, please contact your attorney or tax adviser.