COBRA Subsidies under the American Rescue Plan

The American Rescue Plan Act of 2021 (ARPA) passed by Congress on Wednesday, March 10, 2021, includes a new 100% federal COBRA subsidy from April 1, 2021, through September 30, 2021, for employees with a reduction of hours or involuntary termination of employment.  This will be mandatory for the medical plan of all employers subject to COBRA (and possibly dental and vision, pending guidance).  Qualified small employer health reimbursement arrangements (QSEHRAs) and health flexible spending accounts (FSAs) are exempt.  It appears this also applies to state continuation, so we’ll be watching for clarifying guidance.

Below we provide additional details about what the new law requires.

• An employee that experienced a reduction in hours or involuntary termination of employment which triggered a right to elect COBRA less than 18 months ago can be an assistance eligible individual (AEI)
  • It’s unfortunate this does not include a federal subsidy for situations in which the employee has passed away
  • Termination for “gross misconduct” (i.e., the type of activity the employer would take an employee to court over) would disqualify the employee from being a qualified beneficiary entitled to any COBRA, which also means they’d be disqualified from the subsidy; but all other involuntary terminations of employment (even “for cause”) will qualify for the subsidy
  • Until we get clarifying guidance, employers might want to review the Q&As from IRS Notice 2009-27 discussing what constituted an “involuntary termination” for purposes of the American Recovery and Reinvestment Act (ARRA) COBRA subsidy
  • They can be eligible even if they never elected COBRA or had allowed their COBRA coverage to lapse
  • So COBRA due to reduction in hours or involuntary termination that could have begun November 1, 2019, or later will be eligible for at least 1 month under this newest relief (or, for those with a Social Security disability extension, such COBRA that could have begun December 1, 2018, or later will be eligible for at least 1 month under this newest relief)
• AEIs will be given a special election right lasting 60 days from receipt of a new special election notice to elect new COBRA to begin April 1, 2021
  • Federal regulators will have 30 days to provide employers a new model special election notice
  • Employers must identify qualifying individuals and provide them this new notice
  • While many of these employees could have up to a year to elect and pay for COBRA under the Outbreak Period extensions, that would be coverage retroactive to the original COBRA start date and the employee could owe a lot in back premiums…electing coverage under this newest relief will result in coverage that starts April 1, 2021, so there would be no retro coverage but also no need for a balloon payment of back premiums
• AEIs newly experiencing reduction in hours or termination of employment starting in April 2021 would have their subsidized COBRA begin when it normally should rather than retro to April 1, since they were actively employed with health coverage on April 1, 2021
  • The usual COBRA election notice will need to include new subsidy language
• Should the AEI elect it, COBRA coverage would cost the employee nothing from April 1, 2021, through September 30, 2021 (or if earlier, through the end of their 18 months, 29 months with Social Security disability extension, or the date they become eligible for Medicare or another employer’s major medical coverage)
• The employer can choose whether to allow the AEI an option to enroll in less expensive coverage the AEI would have typically been eligible while employed full-time…if allowing this, the employee has 90 days from employer notice (rather than 60) to submit their election
  • For example, if someone intends to remain enrolled past September 30, 2021, they might want to be enrolled in the lowest premium plan rather than the plan they previously had so that when they must start paying the full cost starting in October, it won’t be as expensive to them
• Employers must provide a subsidy expiration notice between 15 and 45 days before an AEIs subsidy is to expire
  • Federal regulators will have 45 days to provide employers a model subsidy expiration notice
  • The advance subsidy expiration notice is not required for those losing their subsidy due to becoming eligible for Medicare or other group coverage
  • It would appear providing the notice more than 45 days before the AEI’s subsidy expiration date will not be deemed compliant…there is a 30-day window between 15 and 45 days that the employer must provide the advance notice
• AEIs are required to timely notify the health plan of the date they will become eligible for Medicare or other group major medical coverage that will disqualify them from future COBRA subsidies
  • Intentional failure to do so will result in a penalty to that AEI of the greater of $250 or 110% of the ineligible subsidies received (such penalties are not enforced when the AEI fails to notify the plan due to reasonable cause and not willful neglect)
• COBRA subsidies are not taxable income to the AEI and will block the AEI from the health coverage tax credit (HCTC) those months
  • The HCTC is generally for those eligible for Trade Adjustment Assistance and retirees with PBGC pension benefits who lost employer health benefits

Employers will be responsible to ensure timely payment of these monthly COBRA premiums to their health plan.  Then the employer can claim a refundable credit against the employer’s share of that quarter’s Medicare tax liabilities.  Should the amount the employer needs to claim as credits exceed the employer’s share of Medicare tax liabilities for that quarter, then the rest of the refundable credit may be advanced to the employer by completing Form 7200.  Governmental entities are eligible for this credit.

IMA will continue to monitor regulator guidance and offer meaningful, practical, timely information.

This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.