Healthcare continuation coverage, commonly known as COBRA, must normally be paid in full by employees (plus a 2% administrative fee), often making such coverage cost prohibitive. The American Rescue Plan Act of 2021 (“Rescue Plan Act”), signed on March 11, provides “assistance eligible individuals” a 100% federally funded COBRA subsidy between April 1, 2021 and September 30, 2021. Similar to the COBRA subsidy under the 2009 American Recovery and Reinvestment Act (ARRA), Employers will be required to advance premiums for the subsidy but may be fully reimbursed by claiming tax credits on their quarterly payroll tax returns. There are still some questions about exactly how this will all work, which hopefully will be answered soon by guidance and regulations implementing the legislation. In the meantime, below are some FAQs on the key aspects of the new COBRA subsidy.
Who is eligible for the subsidy?
“Assistance eligible individuals” are employees, and their dependents, who are eligible for COBRA during the period April 1, 2021 through September 30, 2021, as a result of an involuntary termination of employment or a reduction in hours. Note, that this definition includes individuals involuntarily terminated or who had a reduction in hours prior to April 1, who are eligible for COBRA during the subsidy period. Significantly, individuals who are eligible for continuation coverage under a comparable state program (often called “mini-COBRA” laws) are also eligible for the federal subsidy.
Under a typical fully insured group health plan, or a self-insured plan, employers will advance payment of premiums for electing employees’ continuation coverage. Employers may then receive full reimbursement by claiming refundable tax credits on their quarterly payroll tax returns.The quarterly credit is initially limited to the employer portion of the Medicare tax (1.45%), although the legislation allows the excess credit to be advanced according to forms and instructions provided by the Treasury Department. For fully insured group health plans not subject to federal COBRA, the insurer is the entity that pays the premium, and then claims the tax credit.
So this full subsidy will last from April 1, 2021 through September 30, 2021?
Generally, yes, but if applicable, the subsidy period will end earlier on:
The date the original COBRA coverage period would end (generally 18 months), or;
The date the assistance eligible individual becomes eligible for other group health coverage, or eligible for Medicare.
What do I have to do now?
Send notices (see more below), or have your COBRA administrator send them on your behalf. A special COBRA subsidy election period notice must be provided to:
Individuals who do not have a COBRA election in place on April 1, but are otherwise eligible for the subsidy. This may require that an employer or COBRA administrator look back in its records up to 18 months to identify employees (and their dependents) who lost health coverage as a result of an involuntary termination or reduction in hours; and Individuals who would qualify for the subsidy and elected COBRA, but stopped paying premiums before April 1
Can you tell me more about this new notice requirement? And when is it due to “assistance eligible individuals”?
The special election period is a 60-day period commencing on or after April 1, and allows assistance eligible individuals to commence coverage on April 1, the period when the subsidy begins. The DOL is required by the Rescue Plan Act to provide a model notice regarding the special election period by April 10, 2021, which is 30 days after enactment of the law. This should enable employers to meet the May, 31, 2021 deadline of providing notice of the subsidy and election rights to assistance eligible individuals.
Based on the Rescue Plan Act, it appears that all COBRA notices provided during the subsidy period must contain:
- information about the subsidy, including the forms necessary for establishing eligibility for premium assistance;
- contact information including phone number for plan administrator and any other person having relevant information about the premium subsidy;
- a description of the extended election period; and
- a description of the obligation (and penalty) for individuals who do not notify the plan administrator of the availability of other coverage, among other items.
Ok, so after I send the special election period notice to assistance eligible individuals, and advance premiums for anyone electing the special coverage beginning April 1, do I have to do anything else?
Yes. Under the law, individuals must be notified of the approaching expiration of their COBRA subsidy periods. This notice must be sent between 15 and 45 days of the expiration of an individual’s subsidy. The DOL is required to provide a model notice by April 25 to assist employers in meeting this obligation.
What about employees involuntarily terminated (or with reduced hours), i.e. assistance eligible individuals, who pay for coverage on or after April 1, 2021?
The law requires that an assistance eligible individual who pays for coverage during the subsidy period be reimbursed not later than 60 days after the date the individual makes the payment. The employer may then claim a tax credit for this reimbursement.
Is the subsidy gross income to employees for W-2 purposes?
No. The law states that the premium assistance is not gross income to an employee receiving it.
That was a lot. What are the next steps?
Whether you use a COBRA administrator or administer COBRA in-house, it will be up to your organization to promptly start identifying those now eligible for COBRA who were either terminated involuntarily or had a reduction in hours. We recommend a look back over the last 18 months at this time. We will circulate the model notices provided by the DOL as they become available.
Any “Known Unknowns” that we should watch for?
Currently, there are differing views as to whether the Rescue Plan Act allows an election made during the special election period to be retroactive to when an employee first became eligible for COBRA, or if the special election under the Rescue Plan Act is available only for coverage beginning on April 1, 2021. The Rescue Plan Act only refers to a special COBRA election period for coverage (with the subsidy) beginning April 1, 2021. However, guidance is needed on interaction of the Rescue Plan Act with previously suspended COBRA election periods announced by the U.S. Department of Labor in connection with the Presidentially declared National Emergency.
For questions, please reach out to:
Timothy S. Klimpl
(203) 252-2683; firstname.lastname@example.org
Mark F. Williams
(203) 575-2618; email@example.com
This information is for educational purposes only to provide general information and a general understanding of the law. It does not constitute legal advice and does not establish any attorney-client relationship.