Understanding COBRA and ICHRA — When can employees choose between them?

What is COBRA?

Too many acronyms flying around? Here’s a quick refresher on COBRA, a common phrase related to ICHRA and other forms of insurance.

COBRA, or the Consolidated Omnibus Budget Reconciliation Act, provides employer-sponsored health insurance for employees for a limited period after a qualifying life event, such as termination of employment.

COBRA coverage is generally required for employers with 20 or more full-time employees in the prior calendar year.

What is ICHRA?

An Individual Coverage Health Reimbursement Arrangement, more commonly known as ICHRA, allows employers to reimburse employees for individual health insurance premiums and out-of-pocket medical expenses.

Companies of any size are eligible for ICHRA. The employer simply sets a reimbursement amount, and employees can apply for reimbursement of their health insurance premiums from the marketplace. ICHRA offers more flexibility for employees than traditional group health insurance.

What is the difference between COBRA for Group Insurance and for ICHRA?

Employers may be subject to federal COBRA regardless of whether they offer a group insurance plan or an ICHRA.

COBRA & Group Insurance

Employees enrolled in a group insurance plan can retain access to their plan after termination of employment.After termination, employees typically have to pay for the cost of their coverage(including the employee and employer share) and up to a 2% COBRA administration fee. Coverage under COBRA can last anywhere between 18 to 36 months, depending on the qualifying life event that triggered it.

COBRA & ICHRA

COBRA coverage works a little differently with ICHRA. When an employee experiences a qualifying life event making the employee COBRA eligible, the employee has a right to continue the ICHRA itself. Whereas the employer previously funded the reimbursements, a former employee who elects COBRA assumes the responsibility as primary payer for their ICHRA for the duration of the COBRA period.

COBRA for Group Insurance allows employees to continue receiving coverage under a group plan after a qualifying life event. COBRA for ICHRA allows employees to continue receiving reimbursements for their individual insurance secured under ICHRA, funded by the employee.

Importantly, the COBRA premium that the employee must pay to retain access to their ICHRA depends on their allowance and the actual amount used by members of the employee class.

Evaluating a COBRA offer as an ICHRA participant

Continuing their Group Insurance coverage under COBRA might make sense if an employee is terminated. Although they may be paying more for coverage than they did when employed, short-term coverage can help keep them safe and healthy until they get coverage under a new employer or shop for coverage on the marketplace.

For employees enrolled in ICHRA, electing for COBRA in the case of a termination might not make as much sense. COBRA was created to keep employees enrolled in health insurance, even if they lost benefits from an employer.

But, when an employee has coverage under ICHRA, they already have access to their individual plan because they technically own it. An employer just helps reimburse the cost of monthly premiums.

Because COBRA administrators typically charge an administration fee of up to 2% to the former employee, an employee enrolled in ICHRA will pay more for coverage under COBRA than on the marketplace for the same plan. They’ll have to pay their share of the monthly premium, plus employer reimbursement and the administration fee. For that reason, electing for COBRA under ICHRA may not make financial sense.

However, there is an exception to this. If an employee has accrued an outstanding balance on their monthly reimbursements, they might elect to stay on the ICHRA until the reimbursement runs out, at which point they would have to begin paying for their coverage.

Employer considerations and best practices for ICHRA and COBRA

COBRA is typically required for employers with 20 or more full-time employees in the prior calendar year. Employers should remember the following best practices to help employees understand COBRA coverage.

Informing employees

HR and benefits managers should clearly communicate the options available to employees during a qualifying life event. Employees should understand the differences between COBRA and ICHRA and when they might have to choose between them.

If an employee is eligible for COBRA after a job loss, HR should explain that COBRA allows them to continue their group health plan.

Timing and coordination

Employers should help employees navigate the timing of these decisions. For instance, an employee may want to evaluate the cost of COBRA versus the individual plan options available under ICHRA and decide which is the best financial and coverage fit for them.

Facilitating transitions

If an employee is initially on COBRA and then transitions to ICHRA after the COBRA period ends, employers should ensure that there is no gap in coverage and that employees are aware of the steps for switching from group to individual coverage.

Plan design

Employers offering COBRA and ICHRA must be prepared to handle different enrollment processes and administrative duties. HR and benefits managers should have systems to manage COBRA elections ICHRA reimbursements and ensure proper documentation.

Compliance

Employers must also ensure they comply with COBRA regulations regarding notification and election timelines and adhere to the rules for offering ICHRA plans.

ICHRA, COBRA, and Thatch

Depending on the size of the company and the number of employees, the employer may require COBRA coverage even if employees don’t elect to use it.

In the case of ICHRA, employees might even be less inclined to enroll in COBRA, yet the employer could still be required to offer it. This might sound confusing or complicated, but you don’t have to navigate the process alone.

Thatch is not only your partner in ICHRA, but we’re here to help administer COBRA on your employees' behalf. In a termination or other qualifying life event, Thatch can help employees navigate their options moving forward.