Information Letter Addresses Calculation of COBRA Premium for HRAs

On Sept. 20, 2017, the IRS posted Informational Letter 2017-0027 to address an inquiry of whether the COBRA premium charged by a specific employer to a terminating employee for a health reimbursement arrangement (HRA) was excessive.

The Facts:
The employer sponsors an HDHP combined with an HRA for its active employees. The employer's COBRA practice requires a COBRA Qualified Beneficiary (QB) to elect both the HDHP and the HRA.

An employee elected the COBRA coverage for the HDHP and HRA and now disputes (through his U.S. House Representative Ron DeSantis) the COBRA premium charged for the HRA, alleging that the employer was charging excessive premiums for the HRA portion of the COBRA coverage. The employee also claimed that the employer failed to notify him of an increase in the COBRA premium and failed to properly explain its open enrollment process in February 2016.

In its response, the IRS states that an employer can charge a QB an "applicable premium," which is the cost to the plan of coverage for similarly situated beneficiaries for whom a qualified event has not occurred, plus a 2 percent administrative fee. The IRS reiterates previous guidance that: (i) HRAs are subject to COBRA; (ii) the applicable premium under an HRA may not be based on a QB's reimbursement amounts available from the HRA; and (iii) the COBRA premium for an HRA is determined under existing COBRA rules. A plan administrator can calculate the COBRA premium for a self-funded plan using either an actuarial basis or on the basis of past costs to the plan.

The Result:
The IRS didn't make a determination of whether the employer's charge for HRA premiums exceeded the permissible "applicable premium" or whether the employer was operating in good-faith compliance with a reasonable interpretation of COBRA.

Regarding the request for an employer audit, the IRS referred the employee to Form 3949-A (an information referral form to report suspected tax law violations by a person or business) and stated that the IRS can use a submitted Form 3949-A as basis for an examination or investigation of an employer. The IRS clarified, however, that an employee cannot be given any information concerning any action the IRS may or may not have taken with respect to a submitted Form 3949-A. Further, the IRS advised that concerns regarding COBRA notice requirements and disclosures should be directed to the DOL's EBSA.

Please note: This Informational Letter is advisory only and has no binding effect on the IRS.

The Takeaways:

  • This Informational Letter serves as a good reminder that employee complaints submitted through the proper channels can trigger an audit from various government agencies.
  • We're still waiting for the IRS to provide specific guidance for the calculation of the COBRA "applicable premium" for an HRA under either the actuarial basis or on the basis of past cost.

IRS Information Letter 2017-0027 »