COBRA Premium Subsidy Under the American Rescue Plan Act of 2021

The American Rescue Plan Act of 2021 (ARPA) was signed into law on March 11, 2021. Among many provisions, the law stipulates that the federal government will pay COBRA health insurance premiums (premium assistance) for individuals who meet certain requirements. We will refer to the premium assistance as a premium “subsidy” throughout this article. Below are the details about the subsidy, but as usual, additional guidance by the Department of Labor (DOL), IRS and Health and Human Services (HHS) is needed to administer the subsidy. Hopefully, the guidance will be forthcoming soon.

Eligibility for the Subsidy (Assistance Eligible Individual)

The law defines those eligible for the subsidy as an “assistance eligible individual,” who during the period of coverage of April 1, 2021 – September 30, 2021:

  1. is eligible for COBRA continuation coverage by reason of “involuntary” termination of employment or reduction of hours (spouses and dependents who are qualified beneficiaries at the time of the loss of health coverage are also eligible for the subsidy); and
  2. elects COBRA coverage.

The law also extends a special COBRA election period to take advantage of the subsidy for those who:

  1. have not elected COBRA as of April 1, 2021 but would be an assistance eligible individual had they elected COBRA; and
  2. elected COBRA but discontinued coverage before April 1, 2021.

These special election individuals may enroll in COBRA to obtain the subsidy no later than 60 days after a notice is provided to them (see the Notification section below).

Assistance eligible individuals will lose eligibility for the subsidy earlier than September 30, 2021 if they become eligible under Medicare or any other group health plan (excluding excepted benefits such as dental, vision, health FSA, etc.), or their COBRA maximum coverage period expires, e.g., 18 months.  If these events occur, they must notify the plan administrator.  The timing of such notification will be prescribed by the DOL Secretary.  Failure to notify the plan will result in a $250 penalty for each failure and if the failure was intentional, the penalty will increase to 110% of the subsidy paid after eligibility terminated.

Amount of Subsidy

The subsidy is effective for six months, April 1, 2021 – September 30, 2021. The federal government will pay for 100% of the required COBRA premiums, including the COBRA administrative fee, for individuals who are eligible. The subsidy is not included in their gross income. The subsidy will cover premiums for most COBRA-covered benefits except health flexible spending account COBRA premiums. Comparable continuation coverage under a State program is eligible for the subsidy, as well.

Tax Credits to Pay for the Subsidy

Assistance eligible individuals do not pay any premiums between April 1, 2021 and September 30, 2021.   Employers of fully insured plans and self-insured plans are responsible to pay for the premiums and recover the premium costs from the federal government by reducing their quarterly payroll taxes. The employer will receive a credit for the subsidy on their quarterly payroll tax return, Form 941, and if the subsidy is higher than the payroll taxes, they will receive a refund.

Assistance eligible individuals who continue to pay premiums on or after April 1, 2021 will need to be reimbursed. The payment should be reimbursed no later than 60 days after the premium payment was paid. This reimbursement may be reported as a credit on the employer’s quarterly payroll tax return.

Employers May Allow Medical Plan Changes

Under COBRA law, the qualified beneficiary is only eligible for the health plans they are participating in at the time of the qualifying event. Under ARPA, employers may allow assistance eligible individuals to enroll in a different “medical plan.” This change does not apply to excepted benefit plans such as dental, vision, EAP, etc. Assistance eligible individuals may change their medical plan no later than 90 days after the general notice is provided if the:

  1. employer allows such a change;
  2. premium for the different coverage does not exceed the premium the individual was paying for under prior coverage;
  3. coverage offered is also offered to similarly-situated active employees of the employer; and
  4. coverage that the individual elects to enroll in is not coverage that provides only excepted benefits (e.g., dental, vision, EAP), is not a qualified small employer health reimbursement arrangement or a flexible spending arrangement.

Notification Requirements

General Notice

By May 31, 2021, employers and plan administrators must provide written notification to assistance eligible individuals in clear and understandable language.  The notice may be added to existing COBRA notice forms or be provided as a separate document.  The notices must include:

  1. the availability of the subsidy and the forms to establish eligibility for the subsidy;
  2. the name, address, and telephone number of the plan administrator;
  3. a description of the extended election period;
  4. a description of the qualified beneficiary’s obligation to notify when they are no longer eligible for the subsidy and applicable penalties;
  5. a description of the qualified beneficiary’s right to the subsidy and any conditions of entitlement; and
  6. a description of the option of the qualified beneficiary to enroll in different coverage (if applicable).

The law requires the DOL Secretary to provide a model general notice no later than 30 days after the bill is signed by the President, or by April 10, 2021.

Notice of Subsidy Expiration

No more than 45 days and no less than 15 days before the subsidy expiration date, plan administrators must provide notice to assistance eligible individuals informing them the subsidy will expire. This notice is not required for COBRA participants who are no longer eligible for COBRA because they obtained coverage under other group health plans/Medicare. The notice must be written in clear and understandable language, and must explain that the:

  1. subsidy for the individual will expire soon and prominently identify the date of such expiration; and
  2. individual may be eligible for coverage without the subsidy under COBRA or under another group health plan.

The law requires the DOL Secretary to provide a model subsidy expiration notice no later than 45 days after the bill is signed by the President, or by April 25, 2021. 

COBRA and Subsidy Effective Dates for Assistance Eligible Individuals

COBRA administrators must determine the ramifications of ARPA on several categories of COBRA-eligible individuals.  There are individuals who 1) will incur a qualifying event on or after April 1, 2021, 2) are enrolled in COBRA and paying premiums, and 3) incurred a qualifying event as far back as the end of 2019 and either did not enroll or stopped making payments. For this last category of employees (#3), there is added complexity due to the existing extended COBRA deadlines afforded to these individuals.

In April 2020, the IRS and DOL issued a final rule which delays the time that individuals may enroll or pay for COBRA. Specifically, the time-period between March 1, 2020 through the end of the Outbreak Period must be disregarded (not to exceed one year from the original deadlines) for purposes of enrolling or paying for COBRA. We will refer to this deadline delay as a “tolling” period.  See our prior blog about the delay. 

Most individuals who are within their tolling period are still eligible to elect COBRA or start to make payments until the deadlines discussed above. Under the April 2020 guidance, if they elect COBRA and/or start making COBRA payments, the COBRA coverage must be retroactive to their effective dates of coverage and/or payments. 

Under ARPA, if these affected individuals are assistance eligible individuals, they may elect COBRA prospectively on April 1, 2021 and are not required to retroactively elect COBRA during their tolling period. If someone elects COBRA prospectively, what happens to their ability to still elect retroactive coverage under the April 2020 DOL/IRS final rule? We do not believe that ARPA eliminates this right to elect COBRA or make payments retroactively. Hopefully, guidance will address this issue.

TRI-AD Commentary

Service providers will need time to assess the law and make changes to their administrative processes and systems.  Although service providers administered a subsidy provided under the Affordable Care Act eleven years ago, there are significant differences in the laws.  Also, these new subsidy rules layer complexity upon the existing COBRA extended deadlines mentioned above. The DOL, IRS and HHS should work quickly to provide guidance to ensure compliance with ARPA. Employers should speak with their service providers, consultants, and benefits attorneys to work through the details. 

TRI-AD is working diligently to assess the law and implement these changes.

In addition to these COBRA changes, ARPA increases the dependent care flexible spending account annual election to $10,500 ($5,250 for individuals who are married, filing separately). This change is effective only for calendar year 2021. Look for information from TRI-AD about this change soon.

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TRI-AD and our Associates’ suggestions or recommendations shall not constitute legal advice. No content on our website can be construed as tax or legal advice and TRI-AD may not be considered your legal counsel or tax advisor. Clients are encouraged to consult with their tax advisor and/or attorney to determine their legal rights, responsibilities, and liabilities. This includes the interpretation of any statute or regulation, federal, state or local; and/or its application to the clients’ business activities.