As Individual Coverage Health Reimbursement Arrangements (ICHRAs) grow in popularity, especially with states considering ways to encourage adoption among small and mid-sized businesses, employers are asking how these plans interact with COBRA continuation coverage when an employee leaves or loses eligibility.
Understanding this relationship is crucial for compliance and for helping former employees make informed decisions about their health benefits.
What Is an ICHRA?
An ICHRA is an employer-funded, tax-advantaged health benefit that reimburses employees for individual health insurance premiums and qualifying medical expenses. Instead of offering a traditional group health plan, employers define a monthly reimbursement allowance, and employees purchase the individual health insurance plan that works best for their needs. To participate, employees must enroll in individual health coverage that meets minimum essential coverage (MEC) requirements.
Learn more from Healthcare.gov
Does COBRA Apply to ICHRAs?
Yes. ICHRAs are considered group health plans under federal law and are therefore subject to COBRA regulations under Internal Revenue Code (Section 4980B) and ERISA (Sections 601–608). If a participant experiences a qualifying event, the employer must offer COBRA continuation coverage for the ICHRA benefit.
Common qualifying events include:
- Termination of employment (except for gross misconduct)
- Reduction in work hours
- Divorce or legal separation
- Death of the employee
- Dependent child aging out of coverage
- Reclassification to a non-ICHRA-eligible employee class
For a full list of qualifying events, visit the U S. Department of Labor COBRA Guide.
Note: Employers with fewer than 20 employees, certain church organizations, and some government entities may be exempt from federal COBRA laws, however, state laws may apply.
How Does COBRA Work with ICHRA?
When COBRA is triggered, the former employee or dependent has the right to continue receiving the ICHRA benefit — meaning they can receive reimbursements for eligible expenses for the duration of the COBRA period (typically 18-36 months).
However, the employee becomes responsible for funding the ICHRA themselves—meaning they pay the employer the full value of the reimbursement benefits to retain access to it. This COBRA Premium is then calculated as: The maximum allowable ICHRA reimbursement the employer could have provided + 2% administrative fee (if required by the employer). This is often misunderstood so accurate communication and cost calculation are essential.
For more details on COBRA costs and compliance, review IRS COBRA FAQs.
Important Considerations for Employers
COBRA Notices Must Include ICHRA-Specific Information
Employers must update their COBRA election notices to include:
- A clear explanation of how the ICHRA works
- What expenses are reimbursable
- The monthly COBRA premium (ICHRA reimbursement + 2% fee)
Model COBRA notices are available from the Department of Labor (DOL) and can be tailored for ICHRA plans.
ICHRAs and Individual Coverage
While COBRA can continue the ICHRA benefit, it does not continue the employee’s individual health insurance plan. Because ICHRA is a reimbursement arrangement (not an insurance policy), employees must actively maintain individual coverage to remain eligible for reimbursements.
For Marketplace enrollment rules during COBRA, check Healthcare.gov’s COBRA Coverage Guide.
What Happens If the Employee Declines COBRA?
Although employees have the right to continue ICHRA through COBRA, the practical benefits are limited and are often outweighed by the cost. That is because:
- The employee is now paying to access a reimbursement benefit, rather than receiving employer-funded dollars
- COBRA for ICHRA does not maintain their insurance plan—they still must purchase individual coverage separately
- Employees cannot claim premium tax credits while enrolled in an ICHRA (even if they fund it themselves)
- For many, it’s more cost-effective to opt out of COBRA, and instead enroll in a new Marketplace plan during their Special Enrollment Period (SEP).
In some cases, electing COBRA for ICHRA may make sense for employees:
- With high ongoing medical expenses who want to maintain the ICHRA structure temporarily
- Who are mid-year in using HSA-compatible plans and want reimbursement continuity
- Or whose employers offer rich ICHRA benefits with broad eligible expense categories
While employees are ultimately responsible for deciding whether to elect COBRA, employers have a legal and ethical obligation to clearly explain what COBRA continuation of ICHRA entails—including the cost, limitations, and how it differs from traditional health insurance continuation.
If an employee declines COBRA, no further action is required from the employer other than ensuring the employee had access to a timely, accurate COBRA election notice, processing any final eligible reimbursement claims incurred before the coverage ended, and documenting the employee’s COBRA declination for compliance purposes.
Providing clear, proactive communication helps employees make informed decisions and protects the organization from compliance risks down the road.
Best Practices for Employers
To stay compliant and support a smooth transition, employers should:
- Ensure COBRA election notices include ICHRA details:
- Reimbursement structure
- Eligible expenses
- Monthly COBRA premium owed by the employee (including admin fee)
- Option to decline the COBRA benefit
- Deliver notices timely—within 90 days of ICHRA start or qualifying event
- Ensure COBRA cost calculations are documented and supportable
- Work with a TPA or legal advisor if needed to manage COBRA notices and premium administration
- Allow claims for eligible expenses incurred before the COBRA election—even if submitted afterward, within the plan’s run-out period
Conclusion: Navigating ICHRA and COBRA Compliance
ICHRAs offer employers a scalable, flexible benefit option—but that flexibility comes with ongoing COBRA compliance responsibilities.
As more states encourage ICHRA adoption to expand healthcare access for small and mid-sized employers, it’s more important than ever for organizations to understand how to administer post-employment coverage correctly.
By educating employees, maintaining proper documentation, and delivering clear notices, employers can support compliance and help former employees navigate their options with confidence.
