Employers Guide To COBRA Subsidy Under the New American Rescue Plan Act

On March 11, 2021, the American Rescue Plan Act of 2021 (ARPA) was signed into law by President Biden. Among other provisions, ARPA includes a 100% COBRA subsidy for up to six months for individuals who lost health coverage because of involuntary termination or reduction of hours during the pandemic. ARPA also provides an extended election period for those who would be eligible to receive the subsidy but did not initially elect COBRA or who let their COBRA coverage lapse. Read more about the ARPA provisions.

Regulations regarding the COBRA subsidy are forthcoming and the Internal Revenue Service (IRS) and Department of Labor (DOL) are planning to issue guidance to clarify implementation procedures in the near-term future. In the meantime, we’ve broken down employers’ top ARPA COBRA-related questions below. Please note that this information is as we know it now and these answers are subject to clarification and/or amendment based on the release of final regulations. We will update this post as more guidance is released.

Who’s eligible for the COBRA subsidy?

Eligible employees, referred to in the law as Assistance Eligible Individuals (AEIs) are those:

  • With COBRA eligibility between November 1, 2019 and September 30, 2021, even if they did not previously elect COBRA or elected COBRA and cancelled before the end of the term;
  • that lost coverage due to:
    • an involuntary termination of employment (other than by reason of gross misconduct); or
    • a reduction in hours; and
    • who enroll in COBRA coverage as of April 1, 2021 or who elect COBRA coverage during the 60-day period following the date they are notified of this premium subsidy and corresponding election

How long will the subsidy last?

From April 1, 2021, through September 30, 2021.

If someone voluntarily resigned, are they eligible for the subsidy?

No. The subsidy is not available for employees who voluntarily left their job. Further, individuals who are eligible for employer-sponsored health coverage or Medicare are not eligible for the subsidy and are obligated to notify the employer accordingly.

Are individuals who previously declined or discontinued their COBRA coverage eligible for the subsidy?

Yes, the subsidy extends to those who may have declined or discontinued their COBRA coverage, as long as they are still within their coverage period. Such election would be prospective from April 1, 2021, only, without needing to elect and pay retroactive to the date coverage was lost or discontinued. Eligible individuals must enroll within 60 days of receipt of the new COBRA extension notice.

Do all employers need to provide the subsidy and enrollment options to employees?

All group health plans (including insured and self-funded plans) subject to COBRA and state continuation (except health flexible spending accounts (FSA)) must provide this subsidized coverage. COBRA generally applies to all private-sector group health plans maintained by employers that had at least 20 employees on more than 50% of their typical business days in the previous calendar year. Both full-time and part-time employees are counted to determine whether a plan is subject to COBRA. In addition, several states have “mini-COBRA” laws that apply to additional employer sizes. The Act contains language that this subsidy is applicable to “a State program that provides comparable continuation coverage.” It is anticipated that the forthcoming regulations will clarify how the credit applies to employers covered under state continuation laws.

We offer multiple health care options. Can we allow those eligible to enroll in a different group plan?

Yes. Under the ARPA, employers have the option to allow eligible individuals to elect a different coverage option offered by the employer if that option is less expensive. This is not required. This plan enrollment option period lasts up to 90 days following ARPA-related COBRA-notice receipt. The DOL will be releasing model notices for employers to utilize.

How does the COBRA subsidy work?

The employer, insurer or multiemployer plan sponsor will offset the cost through a payroll tax credit against the Section 3111(b) Medicare tax. The credit includes the entire COBRA premium, including the 2% administrative fee. The credit is refundable. If an employer’s COBRA premium costs for affected plan participants exceed their Medicare payroll tax liability, they can file to get direct payment of the remaining credit amount.

What is the process for an employer that needs to file for the tax credit? Which forms will be used?

This information will be forthcoming as the IRS and DOL plan to release finalized regulations and guidance to clarify tax credit procedures in the near-term future.

What notices are required for employers to provide impacted employees and their eligible dependents?

Employers are required to provide notice of the availability of the subsidy, notice of the extended election period for COBRA coverage, and notice of the expiration of the subsidy. The DOL is supposed to issue model notices by April 10, 2021. Employers who rely on a third-party administrator (TPA) for COBRA should confirm that the TPA will send the required notices to those eligible and will provide you with the information necessary to claim the payroll tax credit. Employers will need to advise the TPA of which individuals are eligible for the subsidy.

How quickly must employers provide notifications to individuals that may be eligible for the COBRA subsidy?

Employers will need to send a notice to eligible individuals within 60 days after April 1, 2021, which is May 31, 2021. Upon receipt of the notice, eligible individuals will have a 60-day enrollment opportunity. The DOL is supposed to issue model notices within 30 days of ARPA’s enactment by April 10, 2021.

Do the ARPA provisions extend an individual’s COBRA coverage period?

No, the ARPA does not extend the COBRA coverage period, which typically expires 18 months after coverage was lost, even if that is in the middle of the subsidy period. Apart from ARPA, COBRA coverage can be extended for a second qualifying event (up to a total of 36 months). ARPA does not address whether the subsidy will apply during that period.

How would a second qualifying event impact the subsidy?

The current ARPA guidance does not address whether the subsidy applies if an individual has a second COBRA qualifying event. It is anticipated that the forthcoming regulations will provide additional clarity.

Employers Guide to COBRA Subsidy

Prepared by Reilly Billian.