The growing importance of COBRA rate methodologies

Schmidt-Robert-LThe Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) required employers to make health insurance available to employees who lose their coverage because of a variety of events such as termination, reduction in hours, or family status changes. The maximum time periods range from 18 to 36 months, and the cost of COBRA coverage is limited to 102% (or 150% in some circumstances) of the “applicable premium.”i Before the advent of the Patient Protection and Affordable Care Act (ACA), COBRA served the purpose of providing continuity of coverage at critical times when people may not otherwise have been able to obtain coverage. However, the need for COBRA may be reduced once the ACA health insurance exchanges are operational in 2014, because the individual market will offer guaranteed health plan coverage, with premium subsidies available through the exchanges that may reduce out-of-pocket and premium expenses for many low- and middle-income households. For this reason, there may be less of a need for COBRA health insurance after January 1, 2014. Whether or not COBRA remains relevant, the methodology used to determine COBRA premium rates is becoming more important for the following reasons:

1. Form W-2 reporting rules under ACA. Beginning with the 2012 W-2 forms issued in early 2013, employers are required to report the “aggregate cost” of “applicable employer-sponsored coverage” each year on Form W-2.ii The “applicable premium” under COBRA is one of the methods that are often used for this purpose.
2. ACA expansion of wellness incentives. For plan years beginning in 2014, the premium incentives that may be used to encourage participation in wellness programs are being expanded from 20% to 30% of the “cost of individual coverage” (up to 50% for tobacco-related programs). There has not been much explicit guidance on how to calculate the “cost of individual coverage” for self-funded plans. For this reason, it is likely that many will consider using the “applicable premium” method under COBRA.
3. “Cadillac Tax.” For taxable years beginning after 2017, an excise tax of 40% will be payable on the cost of coverage in excess of certain thresholds.iii For this purpose, the cost of coverage is defined with reference to the “applicable premium” used for COBRA purposes.

The expanded usage of the “applicable premium” under COBRA is increasing the importance of having appropriate and up-to-date calculation methods for health plan coverage costs. Employers and plan sponsors should work with their consultants and advisors to make sure that the methodologies used for COBRA rates, W-2 reporting, wellness incentives, and the “Cadillac Tax” are consistently applied on an annual basis and that they are actuarially sound.

iERISA Section 602(3). The applicable premium is generally the premium charged by the insurance company for insured plans. For self-funded plans, special calculations by a qualified actuary are often used.
iiPPACA, Pub. L. No. 111-148, §9002
iiiThe thresholds for 2018 are $10,200 for self-only coverage and $27,500 for coverage other than self-only. These amounts are adjusted in various situations as described in Code Section 4980I.