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Fully Subsidized COBRA Under the American Rescue Plan Act

March 25, 2021

Overview

The American Rescue Plan Act of 2021 (ARPA) requires fully subsidized COBRA premium payments for assistance eligible individuals beginning as early as April 1, 2021, and ending as late as September 30, 2021 (the Subsidy Period). Eligible individuals who elect COBRA coverage during the Subsidy Period will not pay any of the COBRA premiums. Employers (and in some cases the insurer or health plan) will be required to pay the premiums and, in turn, will be reimbursed through Medicare tax credits and refunds.

The Basics. An assistance eligible individual (AEI) is a COBRA qualified beneficiary who became (or becomes) eligible for COBRA coverage due to involuntary termination of employment or reduction in hours of employment[1] and elects (or elected) COBRA coverage that is effective during all or a portion of the Subsidy Period. Note that the subsidy is available to AEIs during the Subsidy Period even if the AEI did not previously elect COBRA coverage or elected COBRA coverage, but discontinued it.

The Subsidy Period begins upon the later of April 1, 2021, or the date that the AEI becomes eligible for COBRA coverage. The Subsidy Period ends upon the earliest of (a) September 30, 2021; (b) the end of the 18-month maximum COBRA coverage period; or (c) the date that the individual becomes eligible for other group health coverage (see below) or Medicare. An individual who becomes eligible for other group health coverage or Medicare must notify the plan.[2] Group health coverage does not include excepted benefits,[3] flexible spending accounts (FSAs), and qualified small employer HRAs (QSEHRAs).

For example, imagine four employees, Amy, Barry, Cathy, and Danny. These employees lost employer health plan coverage due to involuntarily termination on January 31, 2020:

  • Amy elected COBRA coverage a few weeks after termination by completing and returning the COBRA election form. As of March 31, 2021, Amy still has COBRA coverage. Amy’s 18-month maximum COBRA period will end June 30, 2021. Amy is entitled to the COBRA subsidy for the months of April, May, and June 2021.
  • Barry elected COBRA coverage after termination, but discontinued COBRA coverage after two months. Berry will receive subsidized COBRA coverage for April, May, and June of 2021 if Barry elects COBRA coverage during the extended election period outlined below.
  • Cathy did not elect COBRA coverage following termination of employment. Like Barry, Cathy will receive subsidized COBRA coverage for April, May, and June of 2021 if Cathy elects COBRA coverage during the extended election period.
  • Danny became entitled to Medicare in March 2021. Danny is not eligible for the COBRA subsidy because of Medicare entitlement. Note that entitlement for these purposes means enrolled in Medicare Part A or B (or both) and not merely eligible to enroll.

Although the examples above use employees, it should be noted that an AEI may be a spouse or dependent child of the employee who loses coverage because of the employee’s involuntary termination or reduced hours of employment.

Initial Subsidy Notice Required. The administrator must provide written notice to all individuals who are eligible for subsidized COBRA coverage. For persons who first become eligible for COBRA coverage and the subsidy during the Subsidy Period, the notice obligation can be met by amending the usual COBRA election notice or by providing the required notices in a separate document. For persons who are eligible for subsidized COBRA coverage but did not elect COBRA coverage or elected COBRA coverage but discontinued the coverage, a new COBRA election notice must be provided. The subsidy notice must include:

  1. Any forms required to establish eligibility for the subsidy;
  2. The name, address, and telephone number for the plan administrator or other person who may provide information about the subsidy;
  3. A description of the extended election period to elect subsidized coverage;[4]
  4. A statement that the AEI must provide notice that the AEI has become eligible for other group health benefits or Medicare and the penalty for failing to provide notice (under Internal Revenue Code 6720C[5]);
  5. A description, “displayed in a prominent manner,” of the AEI’s right to the subsidy and any conditions that must be met to receive the subsidized coverage; and
  6. A description of the plan enrollment option if the employer permits the enrollment in other coverage (see “Plan Enrollment Option” below).

Extended Election Period. Individuals who did not elect COBRA previously and individuals who elected but discontinued COBRA are eligible for the subsidy (if their loss of coverage was due to involuntary termination or a reduction of hours) if any portion of the 18-month maximum COBRA coverage period overlaps with the Subsidy Period. These individuals must be given a second chance to elect COBRA. The second COBRA election period (or “extended election period”) begins April 1, 2021, and ends 60 days after they are provided the initial subsidy notice.

Subsidy Expiration Notice Required. In addition to the initial subsidy notice, plans must notify AEIs receiving the subsidy in writing of the subsidy’s expiration 15 to 45 prior days prior to the expiration date.[6] The expiration notice must state that the:

  1. subsidy “will expire soon” and prominently state the subsidy expiration date; and
  2. individual may be eligible to continue coverage under COBRA or another group health plan

DOL Model Notices Coming Soon. The Department of Labor has been directed to issue model initial subsidy notices by April 10 and a model expiration notice by April 25. Use of the model notices are optional.  

Plan Enrollment Option. The Act also creates a “plan enrollment option,” under which a plan may (but is not required to) permit AEIs to elect different coverage options. An AEI would have 90 days after notice of the enrollment option is provided to make the election. The different coverage cannot have a premium that exceeds the premium for the COBRA coverage that would otherwise apply and must be a coverage option that is also offered to active employees. Different coverage options that offer only excepted benefits, FSAs, and QSEHRAs are not treated as options for this purpose.

Premium Subsidy and Reimbursement. The employer (usually), the plan, or the insurer will pay 100% of an AEI’s COBRA premium during the Subsidy Period. That party that pays the COBRA premium will be reimbursed through a credit (offset) against the employer’s (or other party’s) quarterly Medicare payroll tax on wages paid on or after April 1, 2021. If the credit exceeds the Medicare payroll tax, the excess is treated as an overpayment of Medicare taxes and “refunded.” Note that if an AEI pays a COBRA premium during the Subsidy Period, the premium amount must be returned to the AEI.

Possible Regulations and Guidance. ARPA permits the Department of Labor, in conjunction with the Treasury Department and Department of Health and Human Services, to prescribe regulations and guidance regarding the COBRA subsidies and reimbursements.

Questions Remain. The statute leaves open many questions that remain unanswered, such as:

  1. How will the extended election period and Subsidy Period work with the COBRA notice, election, and premium payment periods that are or were paused for up to one year?
  2. What steps must a plan administrator take to ensure that the additional COBRA notices are received?
  3. What information or documents will be sufficient to support the tax credits?
  4. Multiple employer welfare arrangements (MEWAs) do not have payroll taxes. How will MEWAs receive compensation for paying COBRA subsidies?
  5. If the maximum (18-month) COBRA coverage period would end prior to September 2021 but for a second qualifying event, will the subsidy continue to be provided through September 2021?

Next Steps

  1. Identify each employee, spouse, and dependent child who lost health plan coverage because the employee was involuntarily terminated or had a reduction in hours on or after November 1, 2019.
  2. Keep an eye out for the DOL’s model notices and additional information regarding forms and procedures for obtaining the tax credits and refunds for COBRA subsidies paid.
  3. Determine who will draft the initial subsidy notice and subsidy expiration notice.
  4. Determine who will distribute the notices. If your company works with a COBRA administrator, you should contact the COBRA administrator as soon as possible.
  5. Determine who will provide documentation to support the tax credit. If your company works with a payroll provider, you should contact the payroll provider immediately.

This article summarizes aspects of the law.  It does not constitute legal advice. For legal advice for your situation, you should contact an attorney.

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[1] ARPA § 9501 (a)(3)(A) states that the qualifying event is termination of employment or a reduction in hours “except for the voluntary termination of such individual’s employment by such individual.” Note that the provision does not expressly state that a reduction in hours must be involuntary.

[2] The Department of Labor may provide guidance regarding the appropriate delivery and timing of the notice.

[3] Excepted benefits include such items as accident or disability insurance and workers’ compensation insurance. For a full list of excepted benefits, see ERISA 733(c). 

[4] This item is required only for persons who were eligible for COBRA prior to the Subsidy Period but did not elect COBRA coverage or did elect COBRA coverage but subsequently discontinued the coverage.

[5] The penalty is generally $250 for a failure to provide timely notice. The penalty for an intentional failure is the greater of $250 or 110% of the subsidy provided after eligibility for the subsidy was terminated. No penalty is imposed where the failure is due to reasonable cause and not willful neglect. 

[6] An expiration notice is not required if the subsidy has or will expire because the AEI is eligible for coverage under another group health plan or Medicare.

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