As health-care costs continue to rise every year, companies across the country are increasingly turning to alternatives to offering traditional employer-sponsored group benefits plans.

A leading alternative today is called an Individual Coverage Health Reimbursement Arrangement, or ICHRA.

These plans provide companies with the ability to reduce and control expenses, while also satisfying requirements under the Affordable Care Act (ACA). Likewise, ICHRAs provide employees with numerous advantages, including tax-free money and direct control over their own health-care expenses.

But, what happens with an employee’s health insurance under an ICHRA when an employee leaves a company?

In this article, we’ll describe the options employees have in relation to an ICHRA plan, including COBRA options.

What is COBRA?

The Consolidated Omnibus Budget Reconciliation Act, better known as COBRA, is a federal law that provides employees the opportunity to retain their health insurance plan even after they leave a company. While there is a limit to how long the employee can retain this coverage — typically about 18 months — it does ensure that they don’t instantly lose their health insurance when they leave a job.

To maintain their health care coverage under COBRA, employees must pay the full cost of the health insurance premium, plus an administrative fee that equals 2%. This can prove to be very costly for employees, but it is an option for people who need a short-term solution.

What Are ICHRA Plans?

ICHRA plans offer many benefits to both employers and employees.

Under these plans, companies can separate their workers into separate “classes” such as full-time and part-time/seasonal workers. Then, they elect how much money they wish to provide each class to cover the cost of health insurance premiums and other out-of-pocket medical expenses.

Employees then use these pre-tax dollars to secure health insurance coverage on their own. This provides employees with significantly more choice and flexibility, since they can choose the health insurance plan that works best for them and their family.

Another major advantage of ICHRA plans is they aren’t tied directly to the employer. Since the employee purchases the health insurance coverage on their own, they don’t need to give it up if they change employers or leave a company.

They can simply retain that current plan without any interruption or changes.

How Does COBRA Interact with ICHRA?

Technically speaking, ICHRA plans are subject to COBRA. In other words, companies that offer their employees health insurance coverage through ICHRA plans must offer them COBRA if they leave the company.

This may seem counterintuitive, since employees purchase their health insurance plans directly under ICHRAs, but there are some reasons why electing COBRA might be beneficial to them.

When employees leave their company for whatever reason, they will essentially have four choices for how to handle their ICHRA health insurance.

Cancel the Plan

The first option would be for the employee to cancel their current health insurance plan that they purchased as part of the ICHRA. This might be a good option for an employee who is moving to a new company that offers an employer-sponsored health insurance plan — or another ICHRA — that is less expensive and/or provides more coverage.

Changing jobs would likely qualify the employee for a special enrollment period, meaning they can make this change without a penalty even if it’s outside of the typical open enrollment period.

Pay Directly for the Plan

Another option is to continue paying for the health insurance plan without the financial assistance provided under the ICHRA. In this scenario, nothing about the health insurance plan itself would change at all.

The only difference is the employee wouldn’t be enjoying the stipend they got under their former employer’s ICHRA.

Take Advantage of APTCs

Under ICHRAs, employees can purchase health insurance plans through the federal or state health insurance marketplaces. In most cases, employees who have an ICHRA can’t “double dip” and take advantage of Advanced Premium Tax Credits (APTCs) offered by the federal and/or state governments.

Once they no longer receive tax-free money under an ICHRA, though, the employee may not qualify for APTCs, which could help them significantly reduce the cost of their monthly premiums.

Employees would simply need to reach out to the marketplace where they purchased their health insurance coverage to figure out if they qualify for APTCs and what they have to do to get them.

Use COBRA

Electing COBRA could also be an option, though it’s generally not advantageous. After all, it is the same as paying directly for the plan, with an added 2% cost.

The question, then, is who might consider using COBRA if they have an ICHRA plan? The answer is any employee that has a significant outstanding balance from their former employer.

For example, any employee who has $1,000 left in their balance might elect COBRA for a short period of time, absorbing the 2% added cost to draw down that money. Then, once that balance is used up, they could elect to cancel the COBRA coverage and simply pay for the health insurance coverage directly.

Beckham Ellis Insurance Group Educates Employers and Employees About COBRA Options

Technically speaking, ICHRA plans are subject to the COBRA law. However, it’s generally not in the best interest of employees to elect COBRA coverage once they leave a company if they were previously offered an ICHRA plan.

Navigating the complicated web of employee health benefits can be challenging for employers and employees alike. That’s why it’s important for companies to enlist the services of a benefits expert like Beckham Ellis Insurance Group.

Our team has specialized expertise in all aspects of benefits, and can advise both companies and their workers on the best options for them.

To learn more, please contact us today.