How COBRA Interacts With HSAs, HRAs and FSAs

The Consolidated Omnibus Budget Reconciliation Act of 1985, better known as COBRA, became law on April 7, 1986. The law provides for continuation of health coverage from an employer-sponsored group health plan after an employee experiences a qualifying event like a job termination or reduction in hours. Even though it’s been in place for more than 30 years, there are still questions that arise related to employee benefit plans.

COBRA generally applies to plans covering 20 or more employees and affects private sector employers along with public employers such as state and local governments. In addition, many states require employers with fewer than 20 employees to offer a “mini-COBRA” plan with many features similar to the federal COBRA requirements. 

In recent years, we’ve seen questions from plan sponsors about the interaction of COBRA with account-based plans like Health Savings Accounts (HSAs), Health Reimbursement Accounts (HRAs) and Flexible Spending Accounts (FSAs). Below is a series of Q&As based on these questions.

How COBRA Interacts with HSAs, HRAs and FSAs

Health Savings Accounts (HSAs):

Q. If an employee elects COBRA, can he or she still contribute to an HSA?

A. Yes. Employees can contribute to an HSA if they are still covered by an HSA qualified, high-deductible health plan.

Q. Our company sponsors an HSA contribution for all active employees. If an employee elects COBRA, is the employer still required to make his or her contribution?

A. No. The employer is not required to continue the contribution after the employee terminates. The HSA itself is not a medical plan and not covered by COBRA.

Q. If an employee elects COBRA, can HSA funds be used to pay for COBRA premiums?

A. Yes. The premiums for health care continuation coverage under COBRA are considered an eligible medical expense, and payment of the premiums can be made using HSA funds.

[Learn More: COBRA E-Learning Course]

Health Reimbursement Arrangements (HRAs):

Q. Our company offers an HRA. If an employee terminates, are we required to offer COBRA for the HRA? If so, how do we know how much to charge for the premium?

A. The HRA is considered to be a self-insured medical plan, so the employer is required to extend COBRA rights.

At the beginning of each plan year, the employer should calculate a reasonable premium for the HRA, both for single and family coverage. The Internal Revenue Service (IRS) has defined two methods for determining the COBRA premium: the actuarial method and the past-cost method. Also, many employers rely on their third-party administrator (TPA) or insurance company to assist with calculating the premium amount.

Q. If an employee elects COBRA and had an unused balance in his or her HRA, what happens to the balance?

A. The employee must have access to the unused balance and any additional accruals provided to similarly situated employees, less any year-to-date reimbursements.

Q. If an employee elects COBRA, can the HRA funds be used to pay for COBRA premiums?

A. Generally, yes, as long as the plan is set up to accommodate this. It’s always a good idea to confirm with the plan administrator or TPA and refer to the summary plan description (SPD).

Flexible Spending Accounts (FSAs)

Q. Our company offers an FSA. If an employee terminates, are we required to offer COBRA for the FSA? 

A. Yes. The FSA is considered to be a medical plan, so COBRA rights must be extended.

Q. Why would an employee want to continue the FSA when electing COBRA?

A. Employees who have a balance in their FSA and then terminate employment may want to continue the plan so that they do not have to forfeit their accumulated funds. If they continue to pay premiums and incur expenses before the end of the plan year, they can claim their reimbursement.

Q. If an employee elects COBRA, can FSA funds be used to pay COBRA premiums?

A. No. COBRA premiums cannot be paid with either a traditional FSA or a limited-purpose FSA.

[Related Reading: Medicare and COBRA Coordination: What You Need to Know]

Need More Information on How COBRA Interacts With HSAs, HRAs and FSAs?

To help you review more on COBRA, the Department of Labor (DOL) has published two comprehensive guides, one for employers and one for employees. Two IRS publications may also be handy to have: IRS Publication 969 and IRS Notice 2002-45.

If you’re looking for further information, enroll today in these International Foundation e-learning courses for comprehensive and flexible online training:

Anne Newhouse, CEBS
Information/Research Specialist at the International Foundation of Employee Benefit Plans

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Comments (3)

  1. Karen Mangino

    My question is about HRA funding and Cobra.

    If the employee and his dependents upon separation of service are enrolled in a HRA medical plan where the company funds part of the deductible the employee is offered to continue the medical coverage as well as the funding through COBRA with a premium.

    But the employee does not elect COBRA coverage for themselves but the spouse and dependents elect to continue coverage through COBRA must the same funding be offered to the spouse and/or dependent?

  2. Jean Allred

    I have been under Cobra for 9 months. July 1st my former employer “health plan sponsor” elected to drop the Cobra HSA-qualified medical plan I was under. Is this legal for them to force me to change plan type and are my HSA contributions going to be considered “overpayments” from IRS? This doesn’t seem legal. Did I mention that the only way I discovered this is my MD office called me today to say that my Insurance would not cover my office visit next week. Then I had to navigate the COBRA company changes (my cobra payment was scheduled for tomorrow as a direct deposit). None of this seems appropriate…

  3. C Meyer

    My employment terminated 07/01/2020 but I had a balance in my FSA so I elected to continue in the FSA through the end of 2020. Can I still contribute to a HSA for 2020? If so, do I have to prorate the amount that I can contribute or can it be the full $4,550 (I am over 50)

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