IRS Issues COBRA Subsidy Guidance for Employers
May 21, 2021
On May 18, 2021, the IRS issued Notice 2021-31, a 41-page document that contains guidance on the COBRA subsidies available through the American Rescue Plan Act (ARPA). ARPA provides a 100% subsidy for COBRA coverage for individuals whose coverage terminated due to a reduction in hours or an involuntary termination of employment. The subsidy applies from April 1 through September 30, 2021.
The IRS Notice
The Notice discusses the background of the subsidy and includes 86 questions and answers (Q&As) about its application. Questions are organized into the below categories:
- Eligibility for COBRA premium assistance beginning on page 6
- Reduction in hours beginning on page 13
- Involuntary termination of employment beginning on page 14
- Coverage eligible for COBRA premium assistance beginning on page 17
- Beginning of COBRA premium assistance period beginning on page 20
- End of COBRA premium assistance period beginning on page 22
- Extended election period beginning on page 23
- Extensions under the Emergency Relief Notices beginning on page 25
- Payments to insurers under federal COBRA beginning on page 27
- Comparable state continuation coverage beginning on page 27
- Calculation of COBRA premium assistance credit beginning on page 28
- Claiming the COBRA premium assistance credit beginning on page 33
The items that will generally be of most interest to employers include the following:
- Eligibility for other group health coverage makes an individual ineligible for COBRA premium assistance, even if that coverage does not provide minimum value or is not affordable (as those terms are defined under the Affordable Care Act).
- Employers must maintain documentation on individuals’ eligibility for COBRA premium assistance in order to claim the credit. This includes a record of an individual’s attestation regarding ineligibility for other disqualifying coverage.
- The subsidy is available to individuals who have elected and remained on COBRA for an extended period due to a disability determination, second qualifying event, or an extension under State mini-COBRA, if the original qualifying event was a reduction in hours or an involuntary termination.
- Whether a termination is considered involuntary will need to be evaluated based on the facts and circumstances. Several examples of what is considered an involuntary termination are provided in the Notice, including:
- Involuntary termination of employment for cause, other than for gross misconduct (which would make the individual ineligible for COBRA regardless)
- Resignation as the result of a material change in the geographic location of employment for the employee
- An employee-initiated termination of employment in response to an involuntary material reduction in hours
- If an employer allows an individual to enroll in other, more expensive coverage than the coverage the individual was enrolled in at the time of the qualifying event, the individual will generally lose eligibility for the subsidy entirely (unless the coverage in which the individual was enrolled in is no longer available).
- Despite the Outbreak Period that gives qualified beneficiaries an extended time period to elect COBRA, the guidance states that an individual who elects COBRA coverage with the COBRA subsidy must also elect or decline COBRA coverage retroactive to the loss of coverage date (if prior to April 1, 2021), if eligible, within 60 days of receiving the notice of the ARPA extended election period. Individuals who elect retroactive COBRA coverage may be required to pay COBRA premiums for periods of coverage before April 1, 2021, subject to the normal timeframes and Outbreak Period extensions. Whether or not these individuals pay for this time period does not impact their eligibility for the COBRA subsidy period beginning on April 1, 2021. However, the employer may treat the individual as not having elected COBRA coverage until April 1, 2021, if the retroactive premium is not paid.
- Employers can only claim the tax credit in the amount equal to the amount the qualified beneficiary would have been required to pay in the absence of the ARPA subsidy. If the employer typically charges less than 102% of the premium or has offered the employee a premium subsidy pursuant to a severance agreement, the amount the employer can claim would be reduced accordingly.
- If additional individuals are covered who are not assistance eligible individuals (AEIs), the employer can only receive a premium tax credit for the incremental cost of coverage for the AEIs. If there is no additional cost for adding non-AEIs, then the employer can claim the full cost as a tax credit. (Non-AEIs would include family members added to COBRA during open enrollment who are not qualified beneficiaries, generally meaning they were not covered by the plan the day before the qualifying event.)
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The above information does not constitute advice. Always contact your employee benefits broker or trusted adviser for insurance-related questions.