IRS Publishes 86 FAQs on ARPA COBRA Subsidies

Employers have been waiting for more detailed guidance on the COBRA subsidies that took effect April 1, 2021.  With notices required to be sent to assistance eligible individuals (AEIs) no later than May 31, 2021, time is running out.  Thankfully, on Tuesday, May 19, the IRS published a 41-page set of 86 FAQs addressing some (not all) of the outstanding questions employers have been needing answered.  Below we highlight the updated guidance we believe employers have been the most eager to see.

• Q&A 1 (and Q&A 19): The subsidy is only for “a qualified beneficiary” (QB).
  • This means others who have been able to tag along on COBRA coverage but are not themselves a qualified beneficiary are not eligible for the subsidy.
  • Individuals who would not be QBs include civil union/domestic partner, or those who were later added to COBRA at open enrollment or due to a qualifying event.
  • The only exception is a new child added due to birth/adoption, which is a QB despite not being on the plan back at the time of the initial COBRA triggering event.
  • Q&A 68 clarifies that if there is a mix of AEIs and non-AEIs enrolled, the employer can first identify the premium it takes to cover the AEIs and claim a tax credit for that amount, then determine what’s left to be charged to cover the non-AEIs.
    • For example, if the premium to cover the employee plus 2-or-more dependents is the most premium that could be charged and covers all the AEIs, then the employer can charge $0 if a non-AEI (such as a civil union/domestic partner or another non-QB) is also enrolled.
    • But if that employer has a self plus children rate and a family rate, then in that instance the self plus children rate is what would likely cover the AEIs and be taken as a tax credit, with the difference between that and the family rate being charged to the employee to cover the non-AEIs (such as a civil union/domestic partner or other non-QB).
• Q&A 3: An individual can be an AEI more than once during the April through September window.
  • For example, if someone gets a new job and the waiting period to join that health plan ends May 31, they can be an AEI for April and May; then if they involuntarily lose that job in June and that coverage ends June 30, they can be an AEI again for July through September.
• Q&A 13: A person cannot receive an advance premium tax credit (APTC) for Exchange coverage for any month enrolled in COBRA, but also shows in Q&A 44 that the AEI can prospectively drop the Exchange coverage and prospectively elect the subsidized COBRA to replace it with no overlap.
• Q&A 14: If the initial COBRA triggering event was not a reduction in hours or involuntary termination of employment, then the QB is not an AEI.  Even if the employee later experiences a reduction in hours or involuntary termination of employment, that event did not trigger COBRA for that QB, so they are not an AEI.
  • For example, if a dependent turned 26 or a spouse divorced the employee, their COBRA will never qualify for the subsidy.
  • If the employee later experiences a reduction in hours or involuntary termination of employment during the April through September window, then only the QBs that had remained enrolled on active coverage would be able to be AEIs.
• Q&A 15: Plans not subject to COBRA or state continuation cannot voluntarily offer the subsidized COBRA or claim the tax credit for it.
  • This would include self-funded church plans and certain small employer plans.
• Q&A 17: If COBRA or state continuation qualifies to last beyond 18 months, and that extended timeframe falls within the April through September window, that COBRA can still qualify for the subsidy – but with a catch.  The initial triggering event had to be a reduction in hours or involuntary termination, and they must have elected and kept COBRA active this entire time.  So extensions due to longer state continuation allowances, second qualifying events, or Social Security disability do allow someone to continue qualifying for the subsidy during those periods of active COBRA lasting beyond 18 months.
• Q&A 18 (and Q&A 36): Most retiree situations are a voluntary termination of employment, but these two Q&As do address some retiree plan offerings in relation to the subsidy.
• Q&A 23: In a departure from 2009 ARRA COBRA subsidy guidance, a strike will be treated as a reduction in hours event that can qualify for the ARPA COBRA subsidy if the employer and employee intend to continue the employment relationship.
  • A lockout is also treated as a qualifying reduction in hours event, same as it was in 2009.
• Q&As 24-34 address involuntary termination of employment and mirror guidance we saw in 2009 which we already covered in our previous webinar.
  • Q&A 31 is new, however, as it clarifies how an employee that quits due to school/child care being unavailable due to COVID-19 is not an involuntary termination, but a temporary leave for this reason can be a reduction in hours event that would qualify for the subsidy.
  • The IRS is still unwilling to clearly address whether an employee’s signature acknowledging a no-call/no-show policy as a voluntary resignation can be treated as a voluntary termination of employment.  As we’ve been suggesting thus far, in the absence of a clear directive on this, it would appear this is termination “for cause” which would be an involuntary termination of employment, but you are always encouraged to seek your own counsel on gray areas.
• Q&A 35-39: Stand-alone dental and vision plans, health reimbursement arrangements (HRAs), and individual coverage HRAs (ICHRAs) do qualify.
• Q&A 42: If the plan the AEI was previously enrolled in is no longer available, the employer should offer the most comparable current plan available.
• Q&A 44: A “second chance” AEI may decide whether the coverage will begin retroactively to as early as April 1, 2021, or will begin prospectively the first of the next month after submitting their election forms.
  • For example, if they are currently enrolled in Exchange coverage with an APTC, they can contact the Exchange to end that coverage as of May 31 and elect for the subsidized COBRA coverage to begin June 1 rather than April 1.  This will avoid the individual having to repay an APTC for April and May.
• Q&As 45: An employer must provide AEIs this opportunity based on their status (i.e., being subject to COBRA vs state continuation) as of the initial COBRA triggering event rather than based on the employer’s current status.
  • So if the employer was subject to COBRA back then, the employer must offer this AEI opportunity under the COBRA rules.
  • If the employer was subject to state continuation back then, the employer must adhere to the state continuation rules in determining whether and how long to provide this AEI opportunity.
• Q&A 46: If someone’s 60 days to elect COBRA is beyond September 30, 2021, but they are eligible for that COBRA to have begun before October 1, then they can request treatment as an AEI for the COBRA coverage that occurs before October 1, 2021.
• Q&A 50: While the employee’s death as a COBRA triggering event does not qualify the surviving dependents to be AEIs, if the initial COBRA triggering event did qualify the QBs for treatment as AEIs, the employee’s subsequent death will not take away their treatment as AEIs.
• Q&A 52: The “second chance” election opportunity is not available under state continuation unless the state passes a law or otherwise provides guidance allowing it.
• Q&A 58: A QB that elects retroactive coverage under Outbreak Period extensions but fails to pay back premiums should not be denied treatment as an AEI with active coverage under a second chance election.  They can just be treated as having a gap in COBRA between the date they are properly paid through and the start of subsidized COBRA.
• Q&A 59: An AEI with a “second chance” election that elects to have subsidized COBRA begin on/after April 1, 2021, will not be able to elect retroactive COBRA under the Outbreak Period extension once the 60-day “second chance” election window expires.  As of that 60th day, their Outbreak Period extension rights are relinquished.
  • However, someone who does not elect treatment as an AEI will not be relinquishing Outbreak Period extension rights.
• Q&A 60: In an insured plan subject to COBRA, the IRS clarifies that, “Notwithstanding the agreement between an employer and insurer, the employer is required to pay the premium to the insurer for the months of COBRA premium assistance with respect to the individual.”
  • This would appear to indicate an insurer must bill the employer for AEI premiums, and the employer (not the insurer) will be responsible to claim the respective tax credits.
  • Q&As 71 and 72 further solidify that the “premium payee” allowed to claim tax credits is the employer plan sponsor for insured plans subject to federal COBRA, and making a point to say the insurer is only able to claim the credit for plans subject to state continuation.
• Q&A 64: If an employer is subsidizing COBRA for some employees, the employer can only take a tax credit for the premium they would have charged the employee and cannot claim a tax credit on the portion the employer had agreed to subsidize.
  • However, Q&A 65 clarifies that the employer could begin charging the full allowable COBRA rate for all similarly situated individuals, assuming any severance or other agreements allow such a change and it’s applied across the board.
  • Q&A 66 likewise clarifies that the employer could offset the increased premium with taxable compensation (again, assuming that would satisfy the terms of any severance or other agreements and it’s applied across the board).
• Q&A 75 explains how the premium payee can claim the tax credits on their quarterly 941 but can withhold from each payroll tax deposit (including from paycheck withholdings) the amounts of credits they’re currently owed.  The premium payee can also complete IRS Form 7200 to request any additional reimbursements owed that couldn’t be withheld from previous payroll tax deposits, but there are timing restrictions outlined in Q&A 76 addressing when this form can be filed.
• Q&A 78: The premium payee will not have to reverse credits claimed on someone who failed to notify them they are eligible to enroll in other group medical coverage or Medicare.  Once the employer learns of the failure of the AEI to notify them, they simply stop allowing the subsidy to continue.  The individual will then be personally liable to pay a potential penalty to the IRS.
• Q&A 79: Any credits claimed are taxable income to the premium payee (i.e., tax credits claimed are taxable income to the employer unless it’s a multiemployer Taft Hartley plan or a state continuation plan).
• Q&As 81-84 explain how to handle tax credits when using third party payroll assistance, including PEOs.
• Q&A 85: If an AEI had paid a premium for a month that should have been subsidized, the premium payee can claim the tax credit once it reimburses the AEI.

The IRS acknowledges this guidance does not address everything employers may be needing to know, so they will publish additional guidance as they deliberate on more complex needs.

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.