COBRA’s Interaction With HSAs, HRAs and FSAs

The American Rescue Plan Act of 2021 (ARPA), signed into law on March 11, 2021, contains new COBRA provisions, including a subsidy for the full monthly COBRA premium from April 1, 2021 through September 30, 2021. Our March 25, 2021 blog addressed the new COBRA requirements that resulted from this legislation. In addition, our April 27, 2021 blog specifically discussed the Department of Labor (DOL) Model Notices.

The changes based on ARPA do not change the basic elements of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) that 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 such as a job termination, a reduction in hours, a personal life change like a divorce or a dependent turning age 26. Even though COBRA has been in place for more than 30 years, questions still arise for various situations.

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 similar features to the federal COBRA requirements. 

COBRA’s Interaction With HSAs, HRAs and FSAs

In recent years, plan sponsors may have questions about the interaction of COBRA with account-based plans like health savings accounts (HSAs), health reimbursement arrangements (HRAs), and flexible spending accounts (FSAs). While there have been regulatory changes in recent years that affect COBRA, the below Q&As still apply to questions about how COBRA interacts with HSAs, HRAs and FSAs.

Health Savings Accounts (HSAs):

Q. If an employee elects COBRA, can they still contribute to an HSA?

A. Yes. Employees can contribute to an HSA while on COBRA 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 their 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 is 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.

HBCE

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 their 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, if 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. Is an employer required to offer COBRA when an employee has submitted FSA claims in excess of what they have contributed at that point of the plan year?

A. No. The employer is not required to offer COBRA when an employee has overspent their FSA.

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 During COVID-19]

Resources

To review more on COBRA, the DOL has published two comprehensive guides, one for employers and one for employees.

IRS Publications:

  • IRS Publication 969 Health Savings Accounts and Other Tax-Favored Health Plans
  • IRS Notice 2002-45 Health Reimbursement Arrangements Part III—Administrative, Procedural, and Miscellaneous
  • IRS Notice 2015-87 Further Guidance on the Application of the Group Health Plan Market Reform Provisions of the Affordable Care Act to Employer-Provided Health Coverage and on Certain Other Affordable Care Act Provisions (See Section V.)

Learn More About COBRA, FSAs, HRAs or HSAs

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

Fraud Prevention Institute for Employee Benefit Plans

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Comment (1)

  1. Dawn

    If Cobra premiums are considered an eligible medical expense under the HSA, why are they not considered the same under an HCFSA? They both follow IRS Publication 502

    Reply

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