As previously discussed here, the American Rescue Plan Act of 2021 (“ARP”), contains a number of benefits for American workers and their families that employers will need to understand. An immediate concern is a provision for subsidized COBRA continuation coverage for employees and family members who experience a loss of group health plan coverage due to the employee’s involuntary termination or reduced hours of employment (the “COBRA Subsidy”). This COBRA Subsidy is based on a prior program from the American Recovery and Reinvestment Act of 2009. Plan sponsors and administrators who dealt with that program will be able to draw upon those experiences when administering the current program.
The COBRA Basics
The Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) gives employees and their eligible family members who lose employer-provided group health plan coverage under certain circumstances the right to continue that coverage for limited periods of time (“COBRA continuation coverage”). COBRA generally applies to group health plans (e.g., medical, vision and/or dental) covering twenty (20) or more employees. Ordinarily, COBRA allows employers to charge these eligible individuals for the entire premium for the coverage and administrative expenses, up to one hundred and two percent (102%) of the applicable premium. The rules under COBRA require employers and/or plans to provide certain notices to eligible individuals about their COBRA rights and obligations, and they also outline the process for individuals to elect COBRA continuation coverage.
COBRA Subsidy – Amount, Eligibility, Timing and Tax Treatment
Section 9501 of the ARP establishes the COBRA Subsidy, which provides that premiums for COBRA continuation coverage for any “assistance eligible individual” are required to be treated as having been paid in full (100%). Employers will be eligible for a payroll tax credit to recoup this cost. The COBRA Subsidy applies to COBRA continuation coverage for assistance eligible individuals during the period from April 1, 2021 through September 30, 2021. Thus, the COBRA Subsidy is available for no more than six (6) months.
In order to qualify for the COBRA Subsidy, an assistance eligible individual must meet the following requirements:
- The individual is a qualified beneficiary (for these purposes, the employee and the employee’s spouse and dependent child(ren)) enrolled under a group health plan (e.g., medical, vision and/or dental plan);
- The individual lost coverage due to a reduction in the employee’s work hours or an involuntary termination of employment; and
- The individual timely and properly elects COBRA continuation coverage.
Individuals who previously elected COBRA continuation coverage prior to April 1, 2021 based on a loss of coverage due to a reduction in the employee’s work hours or an involuntary termination of employment would be eligible for the COBRA Subsidy. The COBRA Subsidy would end before September 30, 2021 if the assistance eligible individual becomes eligible for coverage under any other group health plan, a qualified small employer health reimbursement arrangement, or Medicare. In addition, the COBRA Subsidy would end if the assistance eligible individual reaches the end of the normal period for COBRA continuation coverage, which is generally eighteen (18) months.
Employers have an option under ARP (but are not required) to allow assistance eligible individuals to enroll in a different coverage option. In other words, employers can permit assistance eligible individuals to change their group health plan election. Under this provision, the alternative coverage must be available to active employees and cannot be more expensive than the option in which the assistance eligible individual had been enrolled prior to the qualifying event.
ARP provides that the COBRA Subsidy is not taxable income to assistance eligible individuals. In addition, if an assistance eligible individual paid a COBRA premium for coverage that otherwise qualifies for the COBRA Subsidy, then the employer is required to return such amounts to the individual.
Relief for Individuals Who Have Not Elected or Previously Declined or Discontinued COBRA Continuation Coverage
For individuals who have not elected COBRA continuation coverage by April 1, 2021 (including individuals who may have declined to elect), or who elected COBRA coverage but then discontinued it, ARP provides a special enrollment period. Under the provision, assistance eligible individuals can elect COBRA continuation coverage starting April 1, 2021 and ending sixty (60) days after the date on which the new COBRA notification (see below) was delivered. Any election made within the sixty (60) day period will be retroactive to April 1, 2021. This special enrollment period will not otherwise extend the normal period of COBRA continuation coverage as measured from the date of the underlying qualifying event.
New Notice Requirements
ARP adds several new notification requirements for employers (plan administrators) and directs the Department of Labor to issue a revised model notice for employers by April 10, 2021. The information to be included in the notice includes:
- The forms necessary for establishing eligibility for the COBRA Subsidy;
- Contact information for the plan administrator;
- A description of the extended election period for those who have not elected or previously declined or discontinued COBRA continuation coverage;
- A description of the obligation of the qualified beneficiary to notify the plan if he or she becomes eligible for subsequent coverage under another group health plan or Medicare (thus terminating eligibility for the COBRA Subsidy) and the penalty for a failure to notify;
- A prominent description of the qualified beneficiary’s right to the COBRA Subsidy; and
- A description of the option to enroll in different coverage under the group health plan, if applicable.
In addition to providing the notice prospectively, employers are required to provide this new COBRA notice to any assistance eligible individual who became entitled to elect COBRA continuation coverage before April 1, 2021. This notice must be provided by May 30, 2021, and is intended to ensure that individuals who may benefit from the COBRA Subsidy are adequately informed. Failure to do so will be deemed to be a violation of COBRA.
Employers will also be required to provide a notice to assistance eligible individuals who are enrolled in COBRA continuation coverage when their COBRA Subsidy is nearing expiration (within 15-45 days). This notice must identify the date of such expiration and explain available options for continuation of coverage. For example, an individual may still be eligible for COBRA continuation coverage without the COBRA Subsidy. The Department of Labor is required to issue a model notice for employers under this provision by April 25, 2021.
Tax Credits
To fully offset the costs imposed on employers by the COBRA Subsidy, ARP provides that the federal government will reimburse employers through refundable payroll tax credits. Specifically, ARP adds Section 6432 to the Internal Revenue Code, which details the process by which employers can claim the reimbursement. Essentially, employers are directed to reduce the amount of employment tax deposits by an amount equal to the COBRA Subsidy each calendar quarter, and these credits are to be reported on Form 941, Employer’s Quarterly Federal Tax Return.
Practical Takeaways
Employers will want to become familiar with the COBRA Subsidy rules and plan accordingly to quickly implement the statutory provisions, any additional regulatory guidance and the model notices to be issued by the Department of Labor. While the initial notification period will entail much of the heavy lifting, employers need to continuously identify potential qualified beneficiaries and provide proper notice to those individuals. Also, notification of coverage expiration will be an ongoing process for employers over the next six (6) months. Meanwhile, the employers will want to continuously monitor their quarterly payroll tax credits to ensure full reimbursement of the COBRA Subsidy.
Should you have any questions regarding the COBRA Subsidy, please contact:
- Calvin Chambers at (317)977-1459 or cchambers@wp.hallrender.com;
- Robin Sheridan at (414) 721-0469 or rsheridan@wp.hallrender.com;
- Claire Bailey at (317) 429-3608 or cbailey@wp.hallrender.com; or
- Your primary Hall Render contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
