When an employee leaves a company, has a reduction in hours, or experiences another qualifying event, COBRA comes into play. COBRA is a federal law that allows employees to temporarily continue their employer-sponsored health benefits after certain qualifying events—typically by paying the full cost of coverage themselves.
But when an employer offers an Individual Coverage HRA (ICHRA) instead of a traditional group plan, COBRA works a little differently. Because ICHRAs are structured in a fundamentally new way, the continuation rules—and the real-world employee experience—don’t look like traditional COBRA at all.
Below is a clear breakdown to help brokers, HR teams, and employers confidently guide employees through their options.
What is ICHRA?
An Individual Coverage HRA (ICHRA) is a tax-free allowance employers offer to help employees buy their own individual health insurance. Instead of enrolling everyone in one group plan, employers set a monthly allowance and employees choose the plan that works best for them—often with more flexibility, personalization, and cost control than traditional benefits models can provide.
ICHRA allowances can be used toward premiums and, depending on the employer’s design, other qualified medical expenses. And because employees own their individual health plans, coverage is fully portable, meaning it can continue even after employment ends.
What is COBRA?
COBRA (the Consolidated Omnibus Budget Reconciliation Act) gives employees the right to temporarily continue their employer-sponsored health benefits after a qualifying life event—such as termination, reduced hours, divorce, or a dependent aging off coverage.
Under traditional group plans, COBRA allows someone to stay on the employer’s plan for a limited period of time—as long as they pay the full premium (both the employer and employee share) plus a 2% administrative fee.
With ICHRA, that continuation works differently, which makes it especially important for employers and brokers to clearly explain what actually continues and what doesn’t.
How COBRA works with ICHRA
By design, ICHRAs are portable: employees own their individual health plan, not the employer. That means when employment ends, the coverage itself doesn’t go away—employees can keep the same policy simply by paying the carrier directly.
This is a shift from traditional COBRA. While employees can continue coverage, they must continue the employer’s group plan—and pay the full premiums, plus a 2% administrative fee.
Under an ICHRA, COBRA continuation applies only to the allowance, not to the insurance plan itself.
Are employers required to offer COBRA coverage after switching to an ICHRA?
Yes—if an employer is subject to COBRA (typically those with 20+ employees in the prior calendar year), they must offer COBRA continuation for the ICHRA allowance.
However:
- COBRA applies only to the allowance, not the health plan.
- Employees do not continue their individual policy through COBRA.
- Instead, they simply continue their plan by paying the carrier directly (if they decline COBRA) or accepting the employer contribution to pay for the premium, then repaying the employer in full (plus a 2% administrative fee).
Employers must still send COBRA election notices and follow standard COBRA timelines, even though the continuation benefit looks different.
Employee options after a COBRA-qualifying event
When an employee becomes eligible for COBRA, they have a few options:
Option 1: Elect COBRA to continue receiving their ICHRA allowance
Employees can elect COBRA to continue accessing their employer-funded ICHRA allowance.
But there’s a twist: they must repay 102% of that allowance each month.
Example: If the ICHRA allowance is $400/month, COBRA requires the employee to pay
$408/month ($400 + 2% administrative fee).
As a result, this is often not the most cost-effective path.
Option 2: Decline COBRA and pay the carrier directly (most common)
Because employees already own their individual health plan, they can simply update their payment method with the carrier and continue coverage without COBRA at all. This option eliminates the administrative fee (and added complexity!), and enables the employee to set up direct payment via personal debit, credit card, or bank account instead of receiving an employer-funded benefit.
This option is typically the most affordable and straightforward for employees, which is why it’s the path most employers and brokers recommend.
But it’s important to remember: When choosing this option, employees stop receiving ICHRA reimbursements as of their termination date.
Option 3: Cancel their health insurance policy
Employees can also cancel their coverage entirely. This is most common when they plan to:
- Enroll in a spouse’s plan
- Start a new job with group coverage
- Move to a different individual policy (e.g., cancel their current coverage and enroll in something less expensive)
Why direct payment is usually the better choice for employees
Most employees decline ICHRA-COBRA because:
- The plan itself does not terminate with employment
- Direct payment avoids COBRA’s 2% fee
- Deductibles, networks, and coverage stay intact
- COBRA adds cost without meaningful benefit
In other words: under ICHRA, COBRA rarely improves the employee’s situation.
Employer best practices for ICHRA and COBRA
Even with a benefits model like ICHRA, employers still have important responsibilities during COBRA-qualifying events. Following best practices ensures compliance and reduces confusion for employees.
1. Communicate early and clearly
Clear, proactive communication is the most important step employers can take during a COBRA-qualifying event. Employees need to understand that COBRA continuation with an ICHRA applies only to the allowance, not their individual health insurance policy, and opting into COBRA incurs an additional 2% fee.
Because this differs from traditional COBRA, spelling out the distinction helps prevent confusion. Framing these choices in simple, accessible language empowers employees to make confident, informed decisions from the start.
2. Clarify timing and required next steps
Even though employees typically have 60 days to elect COBRA, maintaining uninterrupted coverage often requires immediate action, especially if the employee plans to decline COBRA and pay the carrier directly.
Employers should provide step-by-step instructions for updating payment information with the insurance carrier and clearly communicate when ICHRA reimbursements end. Establishing expectations around timing and documenting those communications helps employees stay on track and ensures employers remain compliant with COBRA and ERISA requirements.
3. Help employees compare costs and avoid gaps
Cost comparison is often the factor employees care about most, and ICHRA offers a unique set of considerations. Employers should help employees understand that electing COBRA requires them to repay 102% of their monthly allowance, which is rarely the most affordable option.
Providing clear explanations of how direct carrier payments work and why they may be more cost-effective helps employees make practical financial decisions. Discussing whether employees have access to other coverage, such as a spouse’s plan or a new employer’s group plan, can also prevent interruptions in coverage and reduce unnecessary stress.
4. Build clean internal workflows
Supporting employees through ICHRA and COBRA transitions requires alignment across HR, payroll, benefits administrators, and COBRA vendors. Employers should establish consistent internal workflows that automatically trigger the correct notices, reflect the accurate allowance amounts in COBRA communications, and ensure each stakeholder knows their role in the process.
When internal systems run smoothly, the employee experience becomes more predictable, and administrative risk is reduced. Clean workflows also help prevent errors or delays that could impact coverage continuity.
5. Stay aligned with compliance requirements
Employers subject to COBRA must ensure their processes remain compliant with federal requirements, even when offering an ICHRA. This includes sending timely COBRA election notices, incorporating ICHRA-specific explanations into those notices, and maintaining accurate documentation. Staying proactive about compliance protects the organization while ensuring employees receive the correct information during critical transition periods.
In conclusion
Navigating COBRA alongside an ICHRA may feel unfamiliar at first, but once employers and employees understand that COBRA applies only to the allowance—not the insurance policy itself—the process becomes far more intuitive.
Most employees can simply continue their existing plan through direct payments to the carrier, avoiding the cost and complexity of COBRA. Employers play a key role in supporting this transition by communicating clearly, guiding cost comparisons, and maintaining clean internal workflows. With the right approach, ICHRA + COBRA transitions can be smooth, compliant, and far easier than traditional COBRA administration.
