ARPA’s COBRA Subsidies Require Employer Action
If you are wondering why you have begun receiving calls from former employees referencing COBRA – wonder no more! The American Rescue Plan Act of 2021 (ARPA) includes a number of provisions requiring immediate action by employers.
One provision in particular offers a 100% federal subsidy for COBRA premiums (including the up to 2% administrative fees) from April 1 through September 30, 2021. The subsidy applies to group health coverage typically subject to COBRA, except for health flexible spending accounts.
Please continue to our blog for an update summarizing the provisions and flagging key implementation considerations to assist employers and plans with planning as we await critical additional guidance from the U.S. Department of Labor (DOL) and the IRS.
ARPA Offering 100% COBRA Subsidy Through September 2021
Identifying Assistance-Eligible Individuals
The ARPA’s COBRA subsidy is available to “assistance-eligible individuals” (AEIs), generally defined as employees who were involuntarily terminated or experienced a reduction in hours, as well as their covered dependents. We anticipate agency guidance will clarify the scope of the beneficiaries who qualify as AEIs, including the meaning of “involuntary” for terminated workers.
The AEIs may qualify for the six-month subsidy window in two ways:
- They are entitled to COBRA any time after April 1, 2021, and before September 30, 2021, and they (1) timely elected COBRA continuation coverage and (2) have been paying COBRA premiums per the plan’s terms.
- They were entitled to COBRA but (1) failed to elect the continuation coverage or (2) timely elected but dropped the coverage before April 1, 2021 (Group (2) AEIs).
Group (2) AEIs are entitled to a COBRA subsidy if they make an election within a new 60-day period required under the ARPA. We expect to see model language for the “Group (2) AEI special election period” from the DOL sometime soon.
Also, while the subsidy cannot apply for periods of coverage prior to April 1, 2021, Group (2) AEIs likely include individuals who had been enjoying “outbreak period” relief under joint agency guidance issued in 2020. A few weeks before the ARPA was enacted, the DOL’s Employee Benefits Security Administration (EBSA) issued EBSA Disaster Relief Notice 2021-01, explaining how to apply the one-year statutory period under the Employee Retirement Income Security Act (ERISA) for purposes of that relief.
Employers and plans had only just begun to strategize how to implement the EBSA’s new notice guidance before the ARPA was enacted. The federal agencies have been asked to provide additional guidance on how to identify Group (2) AEIs and ensure plan compliance with both sets of relief.
From the AEIs’ perspective, they should not receive invoices for COBRA premiums applicable to coverage to which their subsidy applies. If they do pay a COBRA premium when eligible for the subsidy, they should receive a refund within 60 days of the plan receiving their premium payment.
AEIs cannot receive the subsidy once they become eligible for other employer coverage or Medicare (or beyond their maximum COBRA coverage period). They must notify their plan if they become eligible for other coverage or be subject to statutory penalties.
Plan Notice Requirements
Under the ARPA, plans must modify their election notice packets to ensure individuals are informed about the new subsidies. Specifically, for any individuals who first become eligible for COBRA during the six-month subsidy period (regardless of whether they are AEIs), the plan’s COBRA election notice must include the following additional information:
- The procedure, including any necessary paperwork, for establishing eligibility for the COBRA subsidy;
- Contact information for the individual responsible for providing additional information about the premium subsidy;
- Description of the Group (2) AEI special election period described above;
- An explanation that qualified beneficiaries are obligated to notify the plan if they’re disqualified from receiving the COBRA subsidy because of eligibility for other group health plan or Medicare coverage;
- Description of the penalty for failure to notify the plan of disqualification; and
- An explanation of a qualified beneficiary’s right to subsidized COBRA coverage, as well as any conditions on eligibility to the subsidy.
Also, if the employer chooses to permit it, the election notice should describe the option to enroll in a different, less expensive coverage option available under the plan. The plan could do so by either (1) amending its standard COBRA election notice for the six-month subsidy period or (2) preparing a separate document or “insert” to be distributed along with the standard COBRA election packet. While plans can draft their own version (provided it satisfies the content requirements), we expect to see model notice language from the DOL sometime in April.
As previously noted, the ARPA also requires the plan to issue an election notice for the Group (2) AEI special election period described above. The notice must be provided by May 31, 2021, and we similarly expect to see model language from the DOL.
Finally, the plan also must notify AEIs in writing when their COBRA subsidized coverage is set to expire. The notice must be issued no more than 45 days and no fewer than 14 days before the subsidy expiration date.
Claiming a Credit or Refund
Much like the coverage provided in the Coronavirus Aid, Relief, and Economic Security (CARES) Act for paid family leave, the COBRA subsidy in ARPA is funded through tax credits and refunds. The entity responsible for covering COBRA premium costs upfront depends on the type of plan and how the plan is funded. For self-insured plans, the employer is the responsible entity. For fully insured plans, the insurer is the responsible entity. For other plans, the entity to whom the premium is due is the responsible entity.
There are outstanding questions about how this should work in certain scenarios, such as when COBRA is handled by a third-party administrator or when the coverage is provided under a multiple-employer welfare arrangement or association health plan. The IRS has been directed to provide additional guidance on the credit and refund process, which may address some of these questions.
The responsible entity will be eligible to claim a credit against taxes otherwise imposed under Internal Revenue Code Section 3111(b) (commonly referred to as the Medicare tax, generally equal to 1.45% of an employee’s wages). The credit is claimed on the responsible entity’s quarterly payroll tax filing. If the COBRA premium costs that the responsible entity covered upfront exceed its liability under Code Section 3111(b), it can request an additional refund. The IRS hasn’t yet outlined how the refund will be processed, but additional guidance is expected on this point.
Potential Planning and Action Items
While we await clarifying guidance on the ARPA’s COBRA provisions, employers and plans can start planning now:
First, contact the employer’s or the plan’s vendor partners that currently provide support for payroll, eligibility or enrollment, and/or COBRA administration to discuss how they can assist with ARPA compliance.
Second, start identifying the population likely to be “AEIs.” It may be possible to leverage payroll or COBRA vendor data reports for the information. Generally, though, the list would include individuals who experienced a qualifying event because of involuntary termination or a reduction in hours in the past 18 months (which is the maximum COBRA coverage period required by law). For plans with group health coverage continuing through the last day of the month, the list should include qualifying events at least as early as October 1, 2019.
Third, begin to pull employment or payroll records needed to determine whether a termination was voluntary or involuntary. Flag cases that may be unclear (e.g., voluntary layoffs, early retirements, severance agreements) to revisit once additional clarifying agency guidance is available.
Fourth, confirm how the plan will ensure AEIs who receive subsidized coverage during the six-month window don’t get dropped from coverage except as permitted by the ARPA (e.g., upon eligibility for other employer coverage or Medicare or the expiration of maximum COBRA period). You may need to coordinate with a COBRA vendor and/or the insurance carrier or third-party administrator for the group health coverage.
Fifth, if you provide multiple coverage options under the plan, determine whether to permit AEIs to switch to a different, less expensive option than the one in which they were enrolled at their qualifying event.
Finally, review the plan’s COBRA communications, particularly the election notice packet and any special notifications being issued as part of federal or state relief during the pandemic. Begin coordinating with COBRA vendors and HR personnel to ensure the communications are updated and provided as needed.
Article courtesy of content partner BLR. The authors, Kiran Griffith and Maggie E. Hayes, are attorneys with Perkins Coie LLP in Seattle, Washington.