COBRA Premium Subsidies Under the American Rescue Plan Act

The American Rescue Plan Act of 2021 (Act) provides “assistance eligible individuals” with premium assistance in the form of a 100% subsidy of the premium (including any administrative fees) for continuation coverage for the six-month period between April 1 and Sept. 30, 2021. While plan sponsors may not elect out of the subsidy, they can recoup the unpaid premiums through a refundable tax credit for the amount of the premium assistance. The subsidy applies not only to federal COBRA coverage but also to state law programs that provide comparable continuation coverage. The Act also requires plan sponsors to refund premiums already paid by individuals for coverage that was eligible for the subsidy, no later than 60 days after the date on which such individual made the premium payment, or, to the extent applicable, provide a credit of such premium payments against future payments. The Department of Labor (DOL) has published FAQs on the premium assistance, which are available here.

Assistance Eligible Individual

An individual is eligible for the COBRA premium assistance if during the applicable period the individual is, or becomes, eligible for and elects COBRA continuation coverage due to: 

• Involuntary termination of employment (other than for gross misconduct); or
• A reduction in hours (for example, due to a change in a business’s hours of operations, a change from full-time to part-time status or taking a temporary leave of absence)

Eligible individuals include not just employees but also their spouses and dependents.

Neither the Act nor the FAQs define when a termination is deemed to be “involuntary.” In 2009, when a partial COBRA premium subsidy was enacted, the Internal Revenue Service (IRS) issued guidance as to what constitutes an “involuntary” termination of employment. In that guidance, the IRS focused on whether the employee was willing and able to continue performing services and whether there were material changes that impacted a resignation, such that it could be viewed as an involuntary termination. For example, the IRS treated as an “involuntary termination” a resignation as the result of a material change in the geographic location of employment of the employee as well as a “good reason” resignation due to employer action that caused a material negative change in the employee’s employment relationship. While the 2009 guidance was specific to the prior COBRA premium subsidy, we expect that there will be additional guidance as to what qualifies as an involuntary termination for purposes of the COBRA premium assistance. Interestingly, the DOL forms included with the recently published DOL model notices, include a section for individuals to request treatment as an assistance eligible individual. The form further provides that the employer or plan is to return a copy of the form to the individual, indicating whether such request is approved or denied and the reason for any denial, which indicates that there may be situations where eligibility for the subsidy is unclear and subject to dispute.

Period of Subsidy

The maximum period for which premium assistance is available is April 1 through Sept. 30, 2021, but in practice the period may be shorter. The premium assistance period ends earlier if the individual reaches the end of the maximum coverage period under COBRA (generally 18 months) or the individual becomes eligible for Medicare or another group health plan (excluding coverage under a health flexible spending account, a qualified small-employer health reimbursement arrangement or coverage only for excepted benefits). Eligibility for coverage under a spouse’s group health plan also ends the premium assistance period. Notably, the individual need not become covered under a group health plan or Medicare for the premium assistance period to end; rather, the premium assistance period ends when the individual becomes eligible for such other coverage. An assistance eligible individual has an obligation to notify the group health plan when the individual is no longer eligible for the subsidy by reason of being eligible for other coverage or Medicare, and may be subject to a $250 penalty (which may increase under certain circumstances) for failing to notify the group health plan.

The Act provides that premium assistance received by an individual is not included in the assistance eligible individual’s gross income.

Upon reaching the end of the applicable COBRA premium assistance period, an individual may be eligible for Medicaid or a special enrollment period to enroll in coverage through the Health Insurance Marketplace or to enroll in individual health insurance coverage outside of the Marketplace. A special enrollment period is also available when individuals reach the end of their maximum COBRA coverage period.

Special Enrollments and Other Rights

The Act also includes a special enrollment period for individuals who would have been eligible for premium assistance had they previously elected COBRA. The special enrollment period thus applies to individuals who had previously experienced an involuntary termination of employment or a reduction in hours and, as of April 1, 2021, either had not elected COBRA or had dropped their COBRA coverage, but who would still be eligible for COBRA coverage had they elected and not dropped such coverage. For example, an individual who experienced a qualifying event in November 2019 but is not currently receiving COBRA coverage may be eligible to elect premium assistance with respect to April 2021 under the special enrollment period. As discussed below, no later than May 31, 2021, plan sponsors must provide such individuals with a notice informing them of this opportunity and provide information on the subsidy. Individuals have 60 days after the notice is provided to elect COBRA or forfeit their right to elect COBRA continuation coverage with premium assistance. This special enrollment period permits coverage to begin April 1, even if elected later, but does not extend the maximum time period for COBRA continuation coverage. Thus, coverage elected under this special enrollment period may be effective prospectively from the date of an individual’s election or retroactively to April 1, 2021, even if the individual receives the notice and elects COBRA after April 1. Such coverage ends at the same time that the individual’s COBRA coverage would have expired had he or she elected COBRA coverage when initially eligible.

The DOL and the IRS previously issued guidance extending notice and election periods under COBRA, as well as several other time periods relating to benefit plans (see our discussion here and here). The recent DOL FAQs make clear that the notice and election periods related to COBRA premium assistance under the Act are not subject to these extended periods, but the extended time periods still apply to an individual’s preexisting rights to elect COBRA continuation coverage. For example, a potential assistance eligible individual who becomes eligible for COBRA in April will only have 60 days in which to elect the premium subsidy, but could elect COBRA (without the subsidy) even after the 60-day period to the extent permitted under the earlier guidance. Similarly, an individual with a qualifying event more than 60 days before April 1 may be able to elect COBRA continuation coverage (including retroactively to the date of the qualifying event), but the premium subsidy only would be effective from April 1 and only if elected within the 60-day window.

In addition to the special enrollment period, the Act permits employers to provide assistance eligible individuals with the ability to elect coverage under a lower-cost medical plan rather than continue the same coverage as when an active employee. Unlike the premium subsidy, this election is optional; employers have discretion whether to permit assistance eligible individuals to make such an election. In order to qualify, the lower-cost medical option must be one that is offered to similarly situated active employees of the employer at the time the election is made. Further, the lower-cost medical option cannot only provide for excepted benefits or be a qualified small-employer health reimbursement arrangement or a flexible spending arrangement. If allowed by the employer, the election to change coverage must be made no later than 90 days after the date of notice of the plan enrollment option.

The DOL FAQs clarify that the Act does not change any requirement of a state continuation coverage program; the Act only provides that assistance eligible individuals who elect continuation coverage under state insurance law are to receive premium assistance from April 1, 2021, through Sept. 30, 2021, and (if permitted by the plan) have the ability to switch to less expensive coverage, as discussed above.

Notices

Assistance eligible individuals must be provided the following notices related to the premium assistance:

• Notice of the premium assistance must be provided to all qualified beneficiaries who have a qualifying event that is an involuntary termination of employment or a reduction in hours between April 1 and Sept. 30, 2021. This notice may be provided separately or with the COBRA election notice following a COBRA qualifying event.
• Notice of the special enrollment period must be provided by May 31, 2021, to eligible individuals who had a qualifying event before April 1, 2021, and who would be assistance eligible individuals if COBRA continuation coverage were in effect.
• The Act is unclear as to whether notice is required to be sent to individuals who are currently receiving COBRA continuation coverage. However, the model notice for the special enrollment period includes language that would apply to individuals who have previously elected COBRA coverage and may be eligible for COBRA premium assistance. Since failure to provide COBRA notices can result in penalties, we recommend providing notice to any individuals who may be eligible for premium assistance, even if they are already receiving COBRA coverage.
• Notice of the different enrollment options, to the extent the employer permits individuals to enroll in lower-cost coverage.
• Notice must be provided between 45 days and 15 days before the end of each individual’s subsidy period alerting the premium subsidy recipient of when the subsidy will expire. This notice must also explain that the individual may continue to be eligible for COBRA continuation coverage without premium assistance, coverage under a group health plan, Medicaid or the Health Insurance Marketplace, if applicable.

The notices must include the following information:

• The forms necessary for establishing eligibility for the premium assistance
• Contact information for the plan administrator or other person maintaining relevant information in connection with the premium assistance
• A description of the special enrollment period, if applicable to the individual
• A description of the right to receive the premium assistance and the conditions for entitlement
• A description of the requirement that individuals notify the plan when they become eligible for coverage under another group health plan or for Medicare, and the potential penalty for failing to do so
• If offered by the plan, a description of any option to enroll in a different (lower-cost) coverage option available under the plan

Failure to timely provide these notices will be treated as a failure to meet the COBRA notice deadlines, which can result in an excise tax up to $100 per qualified beneficiary, but not more than $200 per family, for each day that the taxpayer is in violation of the COBRA rules.

The DOL has developed model notices for individuals that are available here. The model notices include an updated general COBRA notice and COBRA election form, notice in connection with the extended election period, an alternative notice (for use by insured coverage subject to state continuation requirements), and notice of expiration of premium assistance. In addition, the model notices include a "Summary of COBRA Premium Assistance Provisions Under the American Rescue Act," which is to be sent together with the COBRA notice and includes the form for individuals to request treatment as assistance eligible individuals, as well as a form to notify plans when they are no longer eligible for premium assistance. 

Tax Credit

The Act provides that the entity to whom the COBRA premiums are payable is entitled to receive a payroll tax credit for the second and third calendar quarters of 2021, equal to the premiums not paid by assistance eligible individuals by reason of the premium assistance. Similarly, a tax credit can be claimed for premiums paid by, and subsequently refunded to, individuals for subsidy-eligible coverage. The credit is applied to the 1.45% Medicare payroll tax, and any premium subsidy amounts in excess of the payroll tax may be claimed as a refund. While the Act includes provisions related to advancement of these amounts, further guidance is needed from the IRS regarding the advancement.

The credit may be claimed by the entity to whom the COBRA premiums are payable. The Act provides that, generally, this would be the employer with respect to plans subject to federal COBRA or that are self-insured; the plan with respect to multiemployer plans; and the insurer with respect to small, fully insured plans not subject to federal COBRA or other plans subject to state continuation coverage.

Next Steps

Employers and plan administrators should identify individuals eligible for the premium assistance and the special enrollment period and, if they use a third-party COBRA administrator, should coordinate with those administrators. In addition, employers and administrators will need to update their COBRA notices (in alignment with the model notices available from the DOL) and be mindful of the deadlines for sending these new notices.

If you have any questions, please contact a member of the Kramer Levin Employee Benefits and Executive Compensation department.