The American Rescue Plan Act of 2021 (ARPA) became law in March. The $1.9 trillion stimulus package contains a mix of benefits, tax credits, programs, and subsidies in response to the continuing COVID-19 pandemic. Among the ARPA’s provisions are several related to COBRA. Let’s take a closer look.
How COBRA Premium Subsidy Works
The ARPA’s rules for a 100% COBRA premium subsidy apply to all group health plans subject to the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code, or the Public Health Service Act, whether fully or self-insured. Church plans, although not subject to those laws, may nevertheless have to comply with some of the rules detailed below to the extent they’re subject to state continuation coverage (or “mini-COBRA”) laws.
Most important, the ARPA’s COBRA premium subsidy provisions don’t apply to healthcare flexible spending accounts (FSAs), qualified small employer health reimbursement arrangements, or “excepted benefits” coverage.
Under the ARPA, employers must subsidize 100% of COBRA (or mini-COBRA) premiums for certain individuals from April 1 through September 30, 2021. Employers will be able to recoup the costs via a tax credit on their quarterly payroll tax returns.
The ARPA generally provides that only “assistance eligible individuals” are entitled to the subsidy. They include any qualified beneficiary (e.g., employee, spouse, or child) who:
- Is eligible for COBRA continuation coverage by virtue of the covered employee’s reduction in hours or an other than gross misconduct; and
- Elects COBRA coverage.
With the above definition, Congress seems focused on helping qualified beneficiaries who lost job-based health coverage because of COVID-19 layoffs and reductions in hours. Covered employees who voluntarily terminated or retired and their covered dependents who are qualified beneficiaries would not be eligible for assistance. The U.S. Department of Labor (DOL) and the IRS are expected to issue guidance on what types of involuntary terminations would allow someone to qualify for the subsidy.
Who Isn’t Qualified for Subsidy?
There are two instances when someone who would otherwise qualify as an assistance-eligible individual would not be entitled to the subsidy:
- The person becomes eligible for Medicare or coverage under another group health plan; or
- The individual’s maximum COBRA coverage period has ended.
For example, the normal maximum COBRA coverage period is 18 months. So, if a covered employee was involuntarily terminated in September 2019 because of a reduction in force, she won’t be eligible for the subsidy because her maximum COBRA coverage period ended March 31, 2021 (before the subsidy period beginning April 1). Generally, if a qualified beneficiary became eligible for COBRA on or after November 1, 2019, she may be eligible for the subsidy.
More Challenges for Employers
Earlier in the pandemic, the DOL and the IRS issued guidance that extended certain employee benefit plan deadlines, including those for a qualified beneficiary to elect and pay for COBRA. The deadlines were extended until the end of the “Outbreak Period,” or the period from March 1, 2020, through 60 days after the end of the declared COVID-19 national emergency. Unfortunately, the national emergency has yet to end, so the Outbreak Period has continued. Thus, COBRA premiums and elections technically aren’t yet due in most cases.
To further complicate matters, ERISA and the Internal Revenue Code, under which the earlier guidance was issued, allow only the DOL and the IRS to provide relief for up to one year. Practitioners had begun to question how the one-year limitation would apply in the context of the COVID-19 extension:
- Would the one-year limitation mean the relief would end as of March 1, 2021 (i.e., one year from the beginning of the Outbreak Period)?
- Or would the one-year limitation apply on an individual basis? For example, if a qualified beneficiary became eligible for COBRA in July 2020, would the relief extend to July 2021?
In a recent notice, the DOL and the IRS clarified the one-year period should be applied on an individual basis. The rule makes administering employee benefit plan deadlines somewhat difficult moving forward. After all, plan administrators will have to look at each plan participant or beneficiary who had a deadline that expired on or after March 1, 2020, and see when that individual’s one-year period ends.
Second Opportunity to Elect COBRA
In case administering the one-year rule wasn’t enough, the ARPA gives employers and COBRA administrators even more to contend with: a second opportunity to elect COBRA. The ARPA provides that if an assistance-eligible individual previously elected COBRA but wasn’t enrolled as of April 1, 2021, or previously declined or hasn’t elected COBRA, she must be given a second opportunity to elect it for any time during the subsidy period, provided she is within the maximum coverage period.
The requirement ensures qualified beneficiaries can take advantage of what is essentially free COBRA coverage. To that end, the ARPA requires administrators to give certain notices to those and other assistance-eligible individuals.
Best Practices for Employers
With all of the changes, you have much to address with regard to COBRA obligations. Some things you should do to ensure compliance include:
- Begin identifying assistance-eligible individuals. We recommend first identifying individuals who are currently on COBRA coverage because of a reduction in hours or involuntary termination. Next, look at who lost coverage because a reduction in hours or involuntary termination of employment but who rejected, haven’t yet elected, or otherwise terminated COBRA coverage.
- Refund any COBRA premiums already paid by assistance-eligible individuals for the subsidy period within 60 days of their payment.
- Update COBRA election notices to describe the premium subsidy. The ARPA required the DOL to issue a new model election notice to capture the required subsidy information. The updated election notices are intended to satisfy the premium subsidy notice requirement for assistance-eligible individuals who become entitled to COBRA during the subsidy period.
- Prepare notices of the premium subsidy and special election period for assistance-eligible individuals who became entitled to COBRA or mini-COBRA coverage before April 1, 2021. Again, the DOL has published a model notice for the purpose. Plan administrators must provide the notices within 60 days of April 1, 2021.
- Prepare notices of expiration of the premium subsidy period. The ARPA requires plan administrators to inform assistance-eligible individuals when the subsidy will expire (between 15 and 45 days before the end of the subsidy period). The DOL will put out model notices for this requirement, too.
- Coordinate with plan insurers or third-party administrators. Among other items, employers will want to clarify who is responsible for providing the required notices and how the COBRA administrator, if applicable, will collect any COBRA administrative fee (normally 2%).
- Review the model notices, and be on the lookout for guidance from the DOL and the IRS.
This article was contributed by The Kullman Firm Attorneys Dwayne Littauer and Malerie Bulot. For questions, you may reach Martin J. Regimbal, a shareholder of The Kullman Firm, at firstname.lastname@example.org.