IRS Provides Needed Guidance On Cobra Premium Assistance

The Department of Labor’s (DOL’s) April FAQ release gives some insight and guidance to current and would-be COBRA participants. However, it did not tackle employer’s questions concerning who is eligible, who makes the premium payments, and how the tax credit will work.

We’re happy to announce that the IRS’s new release, Tuesday, May 18, addresses most of these outstanding questions. The COBRA premium assistance provision comes from the American Rescue Plan Act (ARPA) that Congress passed March 11, 2021. This section of the law requires that health insurance issuers and group health plans treat Assistance Eligible Individuals (AEIs) as having paid the full amount of their COBRA premium for the specified period.

The person to whom premiums for COBRA continuation coverage are payable (the employer, insurer, or multiemployer plan, as applicable) is entitled to a refundable tax credit.

Eligibility for the Cobra premium subsidy

  1. Only AEIs, covered by a plan that is subject to COBRA or state continuation, are eligible for premium assistance (ineligible plans include church or small group self-funded plans – Q&As #15-16) – and retiree plans)
    1.  AEIs include spouse and dependent children – (Q&A #51)
    2.  Domestic partners or others who are not qualified beneficiaries are not AEIs and do not qualify for premium assistance (Q&A #19, 67, 68)
  2. Individuals can be an AEI more than once (Q&A #3)
  3. Employers can require self-certification, regarding other group health coverage, but must keep records if they do so (Q&As #4 -#7)
  4. Being eligible (not enrolled), in other group coverage, disqualifies the individual from premium assistance only if the eligibility occurs on or after April 1, 2021 and before September 30, 2021. (Q&A #10)
  5. “Other” group coverage:
IncludesExcludes
spouse’s group health planFlexible spending accounts
health reimbursement arrangements (HRA),Individual health insurance plans (Q&A #13)
individual coverage HRA (ICHRA) but not the underlying health insurance planMedicare
coverage under a separate retiree health plan (Q&A #18)Excepted benefits, e.g. hospital indemnity plans, stand-alone dental and vision plans, cancer and critical illness plans, etc.
  1. Individuals are eligible for premium assistance during the waiting period, i.e. prior to the day they become eligible for other group health coverage (Q&A #9)
  2. Eligibility for COBRA coverage and eligibility for COBRA premium assistance are determined differently
  3. Any late or unpaid premiums for retroactive coverage will not affect an individual’s eligibility for COBRA premium assistance (Q&A #20)
    • COBRA period extensions, such as disability, second qualifying event, extension under a Stat mini-COBRA are eligible for premium assistance as long as the original qualifying event was a reduction in hours or an involuntary termination of employment AND the additional periods fall between April 1, 2021 and September 30, 2021

Reduction in Hours

  1. AEIs are eligible for COBRA premium assistance for either a voluntary or involuntary reduction in hours (Q&A #21)
  2. Furloughs constitute a reduction in hours if there is a reasonable expectation of return to employment/willingness to maintain the employment relationship (Q&A #22)
  3. Includes work stoppage because of lawful strike initiated by employees, representatives or lockout by the employer-provided the employer and employee intend to maintain the employment relationship (Q&A #23)
    • Inability to find childcare due to national emergency if the individual maintains ability to return to work and that this was a temporary leave of absence (Q&A #31)

Involuntary Termination of Employment

  1. Employee is willing and able to perform services but the employer exercises “unilateral authority” to terminate employment (Q&A #24)
  2. Employee voluntarily terminates but facts and circumstances indicate that employee wanted to continue employment, but the employer did not want to maintain the employment relations (Q&A #24)
  3. Employer-initiated termination during the leave of absence due to disability or illness (Q&A #25)
  4. Retirement is not an involuntary termination unless asked to, or “encouraged” to, retire early (Q&A #26)
  5. Employer change in geographical location (Q&A #27)
  6. Employee acceptance of employer’s offer to terminate or leave employment, during a given time period, in exchange for beneficial severance package (Q&A #29)
  7. Employer’s act or failure to act, results in a material negative change in the employment relationship (Q&A #30)
  8. Does not include employee’s personal reasons or concerns about workplace safety unrelated to any employer’s act or failure to act (Q&A #30)
  9. Includes termination for cause but not gross misconduct since gross misconduct is not a COBRA-qualifying event (Q&A #27)
  10. Employee-requested termination due to employer’s mandatory reduction in hours (Q&A #32)
  11. Non-renewal of an employee’s contract, if the employee was otherwise willing to continue under similar terms, with or without a contract, and the original contract was not for specified services over a specified term and understood that it would not be renewed (Q&A #34)

Plans eligible for premium assistance

  • Group health plans, including: (Q&As #35-42)
    • Vision-only plans
    • Dental-only plans
    • Retiree coverage only if offered under the same group health plan as similarly situated employees
    • Health Reimbursement Arrangements (HRAs)
    • Individual Coverage HRAs (ICHRAs)
    • A different health plan offered to active employees but for which the premium does not exceed the premium of the plan that the individual was enrolled in previously unless it is the only plan offered
    • Certain flexible spending accounts (FSAs) and employee assistance plans (EAPs)

Time Periods – COBRA Premium and Election Assistance

  1. COBRA-eligible individuals may elect Federal COBRA coverage to begin either:
    • prior to 4/1/21, if still within their COBRA-election window (does not apply to state continuation) (Q&A #53);
    • beginning 4/1/21; or
    • or prospectively from time of application
  2. No extended election period for those covered under state continuation unless state regulations indicate otherwise, i.e. no retroactive election (Q&A #52)
  3. Premium assistance available for periods of April 1, 2021 – September 30, 2021
Starts with the later of:Ends the earlier of (Q&As #47-48):
The first period of coverage beginning on or after April 1 (calculated as the time period for which the premiums would normally be charged by the plan if the individual paid the premium (Q&A #43)),the date of the qualifying event, orthe date the qualified beneficiary elects to begin COBRA continuation coveragethe first date the AEI becomes eligible for other group health plan coverage (with certain exceptions) or Medicare coverage,the date the individual ceases to be eligible for COBRA continuation coverage, orthe end of the last period of coverage beginning on or before September 30, 2021

Emergency Relief Notices and Premium Assistance

  1. New premium assistance notice does not relieve employers of obligation to notify under the Emergency Relief Notice requirement (Q&A #56)
  2. The COBRA premium assistance notices must be issued by May 31, 2021
  3. AEIs have 60 days, after the premium assistance notice is provided, to elect coverage and receive premium assistance (Q&A #56) – if they do not elect retroactive coverage at that time, they forfeit the right to subsequently elect retroactive coverage (Q&A #59)
  4. Emergency Relief does not apply to ARPA extended election period or furnishing the notice (Q&A #57)
  5. Application of Emergency Relief Notices to payment of premiums for retroactive coverage (Q&A #58)
    • AEI elects retroactive coverage for a period beginning before April 1, 2021 – the employer may require the individual to pay the premiums for that period of COBRA continuation coverage consistent with the timeframes as extended under the Emergency Relief Notices.
    • Failure to pay by applicable deadline = if the individual fails to pay any amount towards the total premiums due for periods of retroactive COBRA continuation coverage, the employer may treat the individual as having not elected COBRA coverage until the first period of coverage beginning on or after April 1, 2021.
    • Individual pays only a portion of the total premiums due for retroactive coverage by deadline = the plan may credit those premiums to the earliest months of the retroactive COBRA continuation coverage and resume providing COBRA continuation coverage as of the first period of coverage beginning on or after April 1, 2021.

Penalties for Failure to Comply

  1. Employer
    • AEIs
  2. AEIs who fail to inform employer or plan of other group coverage, Medicare are subject to a Federal tax penalty of $250 for each failure to notify
    • AEIs who fraudulently declare eligibility or willfully choose not to inform employer if ineligibility are subject to the greater of $250 or 110% of the COBRA premium assistance improperly received (Q&A #49)

Claiming the Credit (Q&A #78)

  1. Party who claims the tax credit
If the Plan Type is…The Tax Credit is Taken by:FAQ
Small group fully insured planInsurance carrier#62 and #72
Fully insured group plan subject to COBRAInsurance company#60
Fully or partially self-insured group plan subject to COBRAEmployer#72
Multi-employer planMulti-employer plan#72

A third-party payer, like a PEO, can be the premium payee if it maintains the group health plan, is considered the sponsor of the group health plan and is subject to the applicable DOL COBRA guidance, and would have received the COBRA premium payments directly from the AEIs were it not for the COBRA premium assistance. (Q&A #82)

  1. Entitlement to the credit (Q&A #74)
    • As of the date the COBRA election is made and for the amounts of premium not paid by the AEI for the elected coverage timeframe,
      • COBRA election received June 17, 2021 for an April 1 effective date – credit can be claimed for April, May, and June
    • A period of coverage is defined as a monthly or a shorter period with respect to which premiums are charged by the plan or issuer.
  2. The amount of the tax credit
    • The amount that the employer would have charged to the AEI in the absence of premium assistance – if employer subsidizes some months of premium due to severance or other agreement, these amounts are not eligible for the credit (Q&A #64)
    • The credit for an individual coverage HRA (ICHRA) is limited to 102 percent of the amount reimbursed with respect to an AEI
    • Excludes any wages taken into account, and claimed, as qualified wages under the Cares Act or FFCRA
  3. Claiming the Credit/Filing (Q&A #75, 76, 84)
    • A premium payee claims the credit by reporting the credit (both the nonrefundable and refundable portions of the credit, as applicable) and the number of individuals receiving COBRA premium assistance on the designated lines of its federal employment tax return(s), usually Form 941, Employer’s Quarterly Federal Tax Return
    • Form 7200 may be used to claim an advance credit of the anticipated amount that exceeds the federal employment tax deposits
    • (This mirrors the process attributable to the FFCRA paid sick and family leave credits.)
    • Premium payees or a third-party payer claiming the assistance credit must maintain records to substantiate eligibility.
  4. Repayment of Credits Received in Error (Q&A #78)
    • If the premium payee learns that the individual is eligible for other coverage (and thus of the individual’s ineligibility for COBRA premium assistance), the premium payee is not entitled to the credit from that point forward.
    • If the individual fails to notify the premium payee about their eligibility for other coverage and ineligibility for the premium assistance, the premium payee does not have to refund the monies to the IRS
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