IRS Issues ARPA COBRA Subsidy Q&As
Senior Compliance Attorney
On May 18, 2021, the Internal Revenue Service (IRS) issued IRS Notice 2021-31 providing additional guidance on COBRA subsidies included in the American Rescue Plan Act (ARPA) signed into law in March 2021.
The ARPA provides 100% COBRA/state continuation subsidies for “Assistance Eligible Individuals” (AEIs) who are qualified beneficiaries with respect to a COBRA coverage period of April 1, 2021 and September 30, 2021 and are eligible for COBRA due to an involuntary termination of employment or a reduction in hours. Subsidies are not available if the AEI is eligible for coverage under any other group health plan or Medicare. Subsidies are refundable as a tax credit against Medicare payroll taxes. Below is a summary of the clarifications provided in this guidance.
- Individuals can become an AEI more than once.
- Example: If an employee loses coverage and is an AEI with their own employers plan and subsequently enrolls in a spouse’s plan, they would lose the subsidy. However, if the spouse is then involuntarily terminated or has a reduction in hours the former employee could again become assistance eligible under the spouse’s plan.
- Employers should note the following for documentation purposes:
- Employers may, but are not required to, seek a self-certification or attestation that an individual is eligible for the premium assistance due to a reduction in hours or involuntary termination. Employers who claim the credit must have a self-certification, attestation or some other documentation to substantiate the COBRA subsidy eligibility in their records;
- Employers may also require self-certification or attestation regarding other group health plan coverage or Medicare eligibility.
- Potential AEIs only include individuals that are qualified beneficiaries under federal law. This includes the employee and the employee’s spouse and dependent children. It would NOT include domestic partners or any other qualified individual under state law.
- If retroactive COBRA coverage is elected under the Emergency Relief rules (extended election time periods) the fact that an individual owes COBRA premium payments for retroactive COBRA does not make them ineligible to receive the COBRA subsidy. However, they may lose the COBRA coverage for those months that they do not pay the required COBRA premium.
- Extended election periods under Emergency Relief are only applicable to Federal COBRA (not state continuation).
- Individuals with COBRA qualifying events pre-April 1, 2021 may elect COBRA retroactively to original qualifying event, retroactively to April 1, 2021 or prospectively.
- COBRA continuation coverage automatically continues and the payment for the first period of coverage after September 30, 2021 will be timely if paid according to the terms of the plan or coverage, subject to the applicable COBRA continuation coverage requirements taking into account the Emergency Relief deadline extensions.
AEIs Whom Are “Eligible for Other Coverage”
- Potential AEIs that were eligible for other group health plan coverage before April 1, 2021 but on and after April 1, 2021 were not permitted to enroll in the other coverage are eligible for the COBRA subsidy. The subsidies are available until the AEI is actually able to enroll in other coverage.
- Potential AEIs that are still able to enroll in other coverage due to the Emergency Relief extending special enrollment deadlines would NOT be eligible for the COBRA subsidies.
- Example: An individual’s employment was involuntarily terminated and as a result the individual lost health coverage on October 1, 2020. The individual received a COBRA notice on October 1, 2020. The individual qualified for a special enrollment period for loss of coverage under the group health plan of the spouse’s employer. Under the Emergency Relief Notices, the individual remains eligible to elect COBRA continuation coverage or enroll in the spouse’s plan. Additionally, on November 1, 2020, the individual was eligible to enroll in the spouse’s plan under that plan’s annual open enrollment period. The open enrollment period for the spouse’s plan ended December 1, 2020. However, the individual remains eligible to enroll in coverage under the spouse’s plan under the loss of coverage special enrollment period due to the Emergency Relief Notices. Under these facts, the individual is considered eligible for coverage under the plan of the spouse’s employer due to the special enrollment period for loss of coverage as extended by the Emergency Relief Notices. Therefore, while the individual could elect COBRA continuation coverage from the former employer’s plan, the individual may not receive COBRA premium assistance as an Assistance Eligible Individual under the plan of the individual’s former employer.
- Potential AEIs that are eligible for other coverage or Medicare after April 1, 2021, but do not enroll in that coverage are NOT eligible for the subsidies.
- Individuals that are currently enrolled in Exchange coverage are eligible for the subsidies if otherwise qualified, but then are NOT eligible for the premium tax credit for the Exchange coverage. Individuals that receive both may be required to repay for overlapping months.
Other COBRA Qualifying Events
- The only COBRA qualifying events that would qualify an individual for the COBRA subsidy would be involuntary termination or reduction in hours.
- A reduction in hours or involuntary termination that follows a previous qualifying event such as a divorce does not make the qualified beneficiary from the first qualifying event a potential AEI.
- COBRA premium assistance available to individuals who have elected and remained on COBRA for an extended period due to disability determination, second qualifying event or an extension under state continuation to the extent those periods of coverage fall between April 1 and September 30 are eligible for the subsidies if the original qualifying event was involuntary termination or reduction in hours.
Reduction in Hours
- Individuals qualify as AEIs regardless of whether the reduction in hours is voluntary or involuntary.
- Individuals qualify as AEIs due to furloughs, which are defined as a temporary loss of employment or a complete reduction in hours with a reasonable expectation of a return to employment or resumption in hours.
- The guidance defines an “involuntary” termination as a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate employment other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services. Determinations of whether a termination is “involuntary” are based on the facts and circumstances of each case.
- “Involuntary termination” does NOT include:
- Voluntary termination due to concerns about workplace safety. However, if the employee can demonstrate that an employer’s actions resulted in a material negative change in the employment relationship, then it may be “involuntary”.
- Death of employee
- Expiring contract, if the parties understood at the time of contract that the contract was only for specified services over a set term and could not be renewed.
- “Involuntary termination” DOES include:
- Resignation as a result of a material change in geographic location of employment
- Termination initiated by the employee in response to an involuntary material reduction in hours that did not cause a loss of group health plan coverage.
- Employer’s decision to not renew a contract if the employee was otherwise willing and able to continue the employment relationship and was willing to execute a contract with terms similar to the expiring contract or continue employment without a contract.
Applicable Group Health Plans
- Vision Insurance
- Dental Insurance
- Health Reimbursement Arrangements
- Individual Coverage HRA (ICHRA itself and not underlying individual coverage)
- NOT available for Qualified Small Employer HRAs
Medicare Payroll Tax Credits
- Premium assistance credits are available to the “person to whom premiums are payable for continuation coverage”. The “person” would be:
- The multiemployer plan in the case of a group health plan that is a multiemployer plan;
- The employer in the case of a group health plan subject to federal COBRA, OR
- The insurer providing the coverage in the case of any other group health plan subject to state continuation requirements.
- Credit amounts are amounts equal to the premiums not paid by AEIs and includes any administrative costs.
- Credit amounts are the premiums that would have been charged to the AEI and does not include any amount of employer subsidy that would have otherwise provided. If the premium that the employer would have charged to the AEI is less that the maximum COBRA premium, the credit is equal to the amount that the employer actually would have charged to the AEI.
- Governmental entities are eligible for the premium assistance credit.
- The premium assistance credit is included in the gross income of the premium payee (employer, insurer, multiemployer plan).
Employers who sponsor group health benefits should review these Q&As from the Internal Revenue Service to understand their eligibility for subsidy payroll tax credits and their compliance obligations.
Organization would be well-served to discuss these Q&As with their legal counsel and/or insurance carriers or third party administrator to make sure they are compliant with IRS rules.