Employers Required to Give Free COBRA Coverage to be Offset by Medicare Tax Credits
Among other things, the American Rescue Plan Act of 2021 (“ARPA”), signed into law on March 11, 2021, provides “assistance eligible individuals” (“AEIs”) who lose their health insurance coverage under an employer’s group health plan due to: (1) an involuntary termination of employment (other than for gross misconduct), or (2) a reduction of hours (both events referred to here as an “ARPA qualifying event”), will be eligible for a 100% subsidy of their COBRA premium for a maximum six month period beginning April 1, 2021 and ending September 30, 2021. Employers subject to federal COBRA requirements (whether self-funded or fully-insured) that have employees who qualify for the subsidy are entitled to a tax credit against their Medicare taxes for the COBRA subsidies paid.
Who is eligible for a COBRA premium subsidy?
Individuals who have lost group health insurance coverage due to an ARPA qualifying event on or after November 1, 2019, and who are enrolled in COBRA continuation coverage for some or all of the time period between April 1, 2021 and September 30, 2021 will be “AEIs” eligible for the COBRA premium subsidy. Qualified beneficiaries (such as a spouse or dependent child) whose coverage was attributable to a covered employee that experienced an ARPA qualifying event will also be AEIs.
In addition, ARPA provides a second opportunity for certain individuals to enroll in COBRA continuation coverage and qualify for the subsidy. Any individual who experienced an ARPA qualifying event on or after November 1, 2019 and prior to April 1, 2021 but declined or discontinued COBRA coverage must be offered a second chance to elect COBRA during a special enrollment period that runs from April 1 through the 60th day following receipt of the required COBRA notice informing the individual of the premium subsidy (described below). Alternatively, an employer may choose to, but is not required to, offer AEIs the opportunity for up to 90 days following receipt of the required COBRA notice to elect a coverage option under the health plan other than the one they participated in during employment (provided the other coverage option does not have a higher premium than the premium for their current option).
The ARPA’s COBRA subsidy is not available to employees who voluntarily terminate employment or who are eligible for coverage under another employer’s group health plan or Medicare. Furthermore, an individual who becomes eligible for coverage under another employer’s group health plan (or Medicare) is required to notify their former employer of their eligibility under that plan and will be subject to penalties for failing to provide such notice. Of course, this is going to be a very difficult requirement to track.
What notices regarding the subsidy must be provided?
As part of the ARPA, the Department of Labor (in conjunction with the Departments of Treasury and Health and Human Services) is required to create model COBRA notices that will address COBRA subsidy questions, and it is expected that those notices will be issued shortly. In the meantime, notice requirements include:
Notifying individuals who become entitled to elect COBRA during the period beginning April 1, 2021 and ending September 30, 2021, of the right to obtain the subsidy and, if applicable, the chance to enroll in a lower priced plan, among other content requirements.
- Notifying AEIs who elected COBRA continuation coverage prior to April 1, 2021 (including individuals who previously declined or discontinued COBRA continuation coverage but who would be an AEI if an election were in effect) of their new COBRA election rights and the period in which they can elect them. This notice must be provided by May 31, 2021.
- Notifying all AEIs of when their subsidies will expire and that they may then continue COBRA coverage without the subsidy. This notice must be provided no more than 45, but no less than 15, days before the subsidy expires.
How will the cost of providing the subsidy be offset?
Employers who sponsor group health plans subject the federal COBRA requirements (whether self-funded or fully-insured) and have employees and former employees that qualify for the subsidy are entitled to take a credit against their Medicare taxes for the COBRA subsidies paid. If the credit exceeds the amount of the employer’s Medicare taxes, the credit is refundable when the employer submits its quarterly Form 941. For fully-insured group health plans that are not subject to federal COBRA requirements (for example, governmental plans, church plans, and plans sponsored by entities that employed an average of less than 20 employees during the previous year) the insurer for the group health plan will be eligible for the tax credit. We are eagerly awaiting guidance from the IRS regarding additional details about how employers and others will be able to claim the tax credit.
Because the new COBRA subsidy benefits become effective April 1, 2021, employers need to move quickly to ensure compliance with the new notification requirements and any administrative changes. It is recommended that all employers communicate with their third-party administrators, COBRA administrators, and insurance carriers to ensure compliance with the ARPA requirements.