The Department of Labor ("DOL") recently issued key guidance in the form of frequently asked questions ("FAQs") about COBRA Premium Assistance under the American Rescue Plan Act of 2021 ("ARPA"). In addition to issuing the FAQs, the DOL issued model notices and announced a new website dedicated to the COBRA premium subsidy under ARPA, which can be found at the following link: https://www.dol.gov/agencies/ebsa/laws-and-regulations/laws/cobra/premium-subsidy.
The COBRA subsidy provisions of ARPA have three major components:
- It provides up to six months of fully subsidized COBRA premiums, along with certain special election rights, for eligible COBRA qualified beneficiaries;
- It imposes two new notice requirements on employers; and
- Importantly, provides for a corresponding tax credit for the company or entity paying for the COBRA premium subsidy.
To start, employers that sponsor group health plans for their employees must pay COBRA premiums for any "Assistance Eligible Individual" (or "AEI" for short), for up to a six-month period that runs from April 1, 2021 through September 30, 2021 (the "Subsidy Period"). AEI is defined as any COBRA qualified beneficiary who lost coverage as a result of an involuntary termination or reduction in hours, but notably the loss of coverage does not have to result from a COVID-related event. Also noteworthy is that this COBRA premium payment is required for any qualified beneficiary who was involuntarily terminated or had a reduction in hours and is eligible for COBRA continuation coverage during the Subsidy Period, not just those who were involuntarily terminated or had a reduction in hours during the Subsidy Period itself. This in turn implicates three groups:
- Qualified beneficiaries who were already enrolled in COBRA and would continue to be enrolled during this six-month window;
- Qualified beneficiaries who are still eligible to enroll in COBRA, but who did not enroll yet; and
- Qualified beneficiaries who were enrolled in COBRA at one time, but let coverage lapse (assuming these individuals still have time remaining under their initial COBRA continuation period – which is up to 18 months following their qualifying event or 36 months in certain states).
However, it should not be overlooked that an individual would no longer be eligible for COBRA, nor this premium subsidy, if the individual becomes eligible for coverage under another group health plan, such as through another employer or Medicare. Therefore, although the premium subsidy requirement is for up to a six-month period, if the AEI becomes eligible for other coverage, the employer's obligation to pay for the AEI's COBRA premiums will end at that time, even if it is prior to the end of the Subsidy Period.
Secondly, ARPA imposes two new notice requirements on employers:
- A general notice to be provided to the AEIs, which includes the election notice and describes the rights to a premium subsidy; and
- A notice of expiration of the subsidy, to be provided 15-45 days prior to the AEI's subsidy expiration.
An employer will meet these notice obligations by following the model notices published by the DOL.
The final component of the COBRA ARPA provisions is that the subsidy paid by the employer is funded through a tax credit against the employer's Medicare tax liability. In general, employers are expected to be able to claim a credit on the employer's quarterly employment tax returns (Form 941), and the credit is refundable if the COBRA subsidy paid by the employer exceeds the employer's Medicare taxes due. Guidance from the IRS is expected in the near future providing additional details about how employers will be able to claim the tax credit, including the possibility of obtaining an advance of the credit.
Below is a helpful timeline of relevant dates associated with COBRA premium subsidies under ARPA:
- April 1, 2021: Premium subsidy period begins
- May 31, 2021: Election notice to AEIs due
- August 1, 2021 – September 15, 2021: Notice of expiration of subsidy due to AEI
- September 30, 2021: Premium subsidy period ends.
We are available to assist employers with navigating issues surrounding the COBRA subsidy provisions of ARPA and the technical aspects of the new FAQs and Model Notices, which were recently published. If you have any questions regarding this information, please contact Michael Chan at (213) 617-5537 or Betsy Luxenberg at (202) 747-1901.
As you are aware, things are changing quickly and the aid measures and interpretations described here may change. This article represents our best understanding and interpretation based on where things currently stand. Furthermore, the information provided herein does not constitute tax advice and may not be relied upon for avoidance of tax penalties or for any other purpose. Sheppard, Mullin, Richter & Hampton LLP expressly disclaims all liability in respect to actions taken or not taken based on the contents of this update.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.