The Department of Labor recently published model notices plan sponsors and plan administrators may use to meet their disclosure obligations under the temporary COBRA subsidy added by the American Rescue Plan Act of 2021 effective April 1, 2021 ( discussed here). At the same time, the DOL issued a series of Frequently Asked Questions about the temporary subsidy. While the FAQs are directed primarily to individuals, they clear up some questions about administration that were unclear from the statute. In this Benefits Brief, we will summarize the key clarifications from the DOL and highlight the key areas where further guidance is needed.
Reduction in Hours. A termination of employment that results in a loss of coverage must be "involuntary" to qualify for the subsidy; in contrast, a reduction in hours resulting in a loss of coverage will qualify whether the reduction is voluntary or involuntary.
Non-Federal COBRA Plans. The FAQs confirm that the new rules do not change any state law requirements for plans subject to state "mini-COBRA" provisions. They also confirm the new special enrollment period does not apply to plans subject to state "mini- COBRA" laws unless state law permits a special enrollment. In addition, a qualified beneficiary under a state "mini-COBRA" law can elect a less expensive option if the plan offers it. The model notices issued by the DOL include a notice for plans subject to a state "mini-COBRA" law.
60-Day Election Period. Unlike current law, the 60-day election period for subsidized federal COBRA runs from receipt of the notice, not mailing according to the model notices and the DOL's summary of the new law. This means plan sponsors and administrators will have to document receipt, for example, by using certified mail, return receipt.
Cessation on Eligibility for Another Group Health Plan/Medicare. Eligibility for the subsidy will terminate upon eligibility for coverage under another group health plan or Medicare, even if the individual does not enroll in that coverage. For this purpose, another group health plan includes a group health plan of another employer or the individual's spouse's employer's group health plan.
COVID-19 Extended Deadlines Not Applicable. The extended deadlines allowed under the Department of Labor's COVID-19 relief ( discussed here) do not apply to elections for the COBRA subsidy. This does not, however, affect the individual's rights under the extended deadlines to elect coverage on a non-subsidized basis.
Election Rights. Consistent with current law, each qualified beneficiary can make an independent election for subsidized COBRA without regard to elections made by another qualified beneficiary.
Penalties. A failure to comply with the COBRA subsidy rules could subject the plan sponsor to an excise tax penalty of up to $100 per day per qualified beneficiary (not exceeding $200 per day per family).
"Involuntary" Terminations. The biggest disappointment of the DOL guidance is its failure to clarify the meaning of "involuntary" termination of employment to be eligible for the subsidy. For example, does a termination occurring at the mutual consent of the parties or a termination is for good reason, attainment of a mandatory retirement age, or a voluntary incentive program qualify? Likewise, does an employee who terminates after being notified that layoffs are imminent qualify? The DOL did confirm an employee terminated for "gross misconduct" (and his/her qualified beneficiaries) would be ineligible for the subsidy, however, very few employers are willing to classify a termination as due to "gross misconduct" because the high threshold to establish "gross misconduct."
Application to Dental and Vision Plans. The DOL guidance fails to clarify whether the subsidy applies to stand-alone dental and vision plans or just major medical plans. The statute refers to "group health plans" with certain exclusions not including dental and vision plans, therefore qualified beneficiaries under stand-alone dental and vision plans are likely eligible for subsidized coverage.
Employer's Reliance on Employee's Representations. The FAQs do not indicate whether an employer can rely on a qualified beneficiary's representation that he/she is eligible for the subsidy without risk of liability. Seldom will an employer know what options an employee or former employee (or other qualified beneficiary) has for coverage so logic would suggest an employer has no risk of liability if a qualified beneficiary is determined to be ineligible absent actual knowledge to the contrary.
Impact on Sale of Business Transactions. The FAQs do not address how responsibility is assigned in connection with a sale of a business. Presumably, the existing COBRA regulations govern this.
OBSERVATIONS AND ACTION ITEMS
This guidance was issued by the Department of Labor rather than being jointly issued by the DOL and the Internal Revenue Service. This suggests that additional guidance from the IRS may be forthcoming.
Plan sponsors and administrators need to be diligent in identifying persons required to be notified, getting the required notices distributed, and documenting when and how the notifications were made. Even if a COBRA administrator has been engaged, the plan sponsor remains responsible for legal compliance (even though the plan sponsor may have a contractual claim against the COBRA administrator if it fails to meet its contractual obligations).
The IRS excise tax penalties in many cases will not be the greatest liability. A greater risk to the plan sponsor could be having to provide coverage retroactively, perhaps on a self-funded basis, for failing to provide the proper notifications.
At the present time, qualified beneficiaries who obtain coverage eligible for the subsidy may be unable to drop that coverage upon expiration of the subsidy and obtain coverage under a Marketplace policy (which will often be less expensive than COBRA coverage) without a break in coverage. The FAQs, however, hint that the Marketplace rules may be revised to adopt a special enrollment period at the expiration of the subsidy period to allow replacement without a gap in coverage.
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.