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June 3, 2021 | Payroll Software | Posted by Bob Greene, Senior HR Industry Analyst at Ascentis

COBRA Premium Assistance under the American Rescue Plan Act: The Devil’s in the Details (Part II)

In Part I of this blog, published last week, we began reviewing the ARPA COBRA subsidy guidance offered by DOL/IRS in Internal Revenue Notice 2020-31 (contained in IR News Release 2021-115). In this blog, we’ll complete that analysis, and offer some practical tips on ensuring that employers remain in compliance with this massive, albeit temporary, change in COBRA rules.

We previously summarized the Notice’s categories of Eligibility for COBRA Premium Assistance, Reductions in Hours, Involuntary Terminations, and Coverage Eligible for COBRA Premium Assistance. Here are the remaining categories of guidance.

Beginning, and end, of COBRA Premium Assistance Period

What We Already Knew: The 100% COBRA premium subsidy applied to continuation coverage validly elected for the period April 1 through September 30, 2021, and monthly billed coverage is clear, applying to six months worth of premiums.

What’s Clarified in the New Guidance: Q&A-43 clarifies that, for bi-weekly billed COBRA coverage, the subsidized period begins with the first coverage period on or after April 1. The guidance offers the example of two consecutive bi-weekly COBRA coverage periods running from March 28 through April 10, and April 11 through April 24, 2021. In this case, the premium subsidy would NOT apply to the coverage period from March 28 through April 10, but WOULD apply to the coverage period from April 11 forward.

Q&A-44 reminds us of the “Second Chance” nature of the subsidy provided under the new law. A qualified beneficiary who experienced a qualifying event on October 1, 2020, and who turned down COBRA coverage at that time, instead electing exchange coverage effective November 1, receives their notice of the “second chance” election period for subsidized coverage, on May 1. At that point, assuming the individual does not qualify for Medicare or other group health coverage, they may elect COBRA coverage back to October 1, 2020, back to April 1, 2021, or prospectively only. The example provided goes on to assume that the individual elects prospective coverage only, from June 1, 2021. They are an assistance eligible individual from June 1 forward, and provided they cancel their exchange coverage timely on May 31, they will not be required to repay any advanced premium tax credit they may have received for their exchange coverage.

Q&A-45 addresses the situation where an employer may transition from COBRA-covered status in 2020 (20 or more employees on 50% or more of the business days in the prior year) to small, non-COBRA-covered status in 2021 (19 or fewer employees counted on the same basis for 2020). In this case, where the COBRA-qualifying event occurred in 2020, the employer must still offer the 100% premium subsidy to qualifying individuals whose COBRA qualifying event occurred in 2020, when the employer was covered by COBRA.

Q&A-47 addresses the end of the premium assistance period – normally, September 30, 2021. Similar to the hypothetical offered in Q&A-43, assuming a bi-weekly COBRA billing employer has two consecutive coverage periods of September 19 through October 2, and October 3 through October 16. The mandatory premium subsidy period covers the entire period from September 19 through October 2, even though technically October 1 and 2 would otherwise not be included (e.g., for a monthly or semi-monthly biller). Bottom line: for bi-weekly coverage periods, neither the subsidy for the beginning of the coverage period around April 1, nor the subsidy for the end of the coverage period around September 30, should be pro-rated. The entire billing period is either included, or excluded, from the subsidy period, depending on the dates of coverage involved.

Q&A-49 reinforces what we already knew in the case of an assistance eligible individual who fails to inform a plan sponsor that they are no longer eligible for the COBRA subsidy due to qualifying for coverage under Medicare or another group health plan. The notice reiterates that it is the individual receiving the COBRA subsidy who will be assessed the $250 federal tax penalty, or if the failure to provide notice is determined by the Service to be fraudulent, then the penalty will be the greater of $250 or 110% of the COBRA premium assistance improperly received. The employer, plan or issuer may retain the tax credit they received to offset the subsidy, but has no right to the penalty payment.

In Q&A-50, the notice differentiates between the death of an employee/ex-employee where that death was the qualifying event (previous Q&A-33) and where the result is that the death does NOT qualify the employee’s spouse and/or dependent children for COBRA subsidy assistance, vs. the situation where the death of the (ex-)employee occurs AFTER a qualifying event of involuntary termination or reduction in hours, in which case the (ex-)employee’s death does NOT end the assistance eligibility period for which a spouse and/or dependent children have already qualified.

Extended Election Period

Q&A-51 clarifies that it is not ONLY the individual who experienced a qualifying event prior to April 1 who receives a “second-chance” offer of premium assistance, but in addition any spouse and/or dependent children who had been covered by the plan on the event date. So, for example, assume an employee with family coverage in a health plan was involuntarily terminated on August 12, 2020 but enrolled in self-only COBRA coverage beginning September 1, 2020; the spouse and dependent children declined coverage. The ex-employee is still covered as of April 1, 2021. We already know that the ex-employee’s COBRA premium is fully subsidized for the six-month period. What the new guidance reminds us is that the spouse and dependent children, previously covered when the employee was active, but not covered when the employee elected single-only COBRA continuation at employment termination, are also entitled to separate “second-chance” offers to enroll and received COBRA premium assistance for the period April 1 through September 30, 2021 (since their 18-month eligibility period for COBRA coverage overall doesn’t end until February 28, 2022.)

Q&A-52 clarifies that the extended election period for assistance eligible individuals (aka the second-chance offer) is mandated only under federal COBRA, NOT state mini-COBRA laws – unlike the premium assistance provision itself, which is applicable both to federal AND state mini-COBRA laws.

Q&A-53 explains that employers/plan sponsors may not condition a beneficiary’s election of fully subsidized COBRA coverage from April 1 forward, on electing COBRA retroactively under an offer that might still be available due to the previously issued pandemic Emergency Relief Notices. This can result in situations where the ex-employee or other beneficiary has a gap in coverage after the qualifying event date, but up to April 1, 2021, and then (fully subsidized) COBRA coverage from April 1 forward. Q&A-54 extends this line of thought to HRA reimbursements where the HRA COBRA coverage is only elected from April 1 forward; in this situation, expenses incurred after active coverage ends, and prior to the April 1 election taking effect may not be reimbursed from the HRA.

Q&A-55 clarifies that qualifying beneficiaries have extended eligibility (second-chance offers) for each COBRA-qualified plan independently of any others offered by the sponsor. So, for example, if the qualifying beneficiary elected COBRA continuation period to April 1 for medical only and declined free-standing dental and/or vision coverage, then that person now has an extended election period applicable to dental and to vision, for subsidized coverage beginning April 1.

Q&A-56 through 59 further explain the coordination of the new ARPA election rights with rights previously granted to qualified beneficiaries under the pandemic Emergency Relief Notices, expanding on the guidance in Q&A-53 and 54.

Calculation of COBRA Premium Assistance Credit

Q&A-63 through 66 address the calculation of the premium assistance credit amount. Q&A-63 starts with the basic presumption that the entire premium the employer would otherwise charge similarly situated non-assistance eligible individuals (102 percent of the total employer and employee premium for similarly situated active employees) is the eligible tax credit amount.

Q&A-64 through 66 address the situation where an employer has a severance plan or other assistance in place (applicable to similarly situated non-assistance eligible COBRA continuees) for employees transitioning to COBRA, and this plan discounted the premium due from new COBRA continuees. An example would be a severance arrangement in place prior to the new COBRA subsidy that reduced the first two months of COBRA coverage from a monthly premium of $1,000 to $200. In this case, the employer is entitled only to a tax credit of $200 for these two months. But Q&A-65 and 66 goes on to say that if the employer, in response to the new subsidy program, decides to cancel this severance provision, and for the period April 1 through September 30, 2021, discontinue the $800 discount for the first two months of COBRA, for all similarly situation COBRA continuees whether entitled to premium assistance or not, then the employer may seek a tax credit of the full $1,000 per month for that period of time.

Q&A-67 clarifies that where a state “mini-COBRA” law requires coverage of beneficiaries beyond those required by federal law (which only applies to a spouse and dependent children), the portion of the premium attributable to non-federally recognized beneficiaries is NOT eligible for the subsidy. Q&A-68 then gives guidance on how to “pro-rate” premiums where state mini-COBRA laws might require coverage of non-federally recognized beneficiaries, to ensure that employers take only the allowable federal tax credit.

Q&A-70 explains that premium assistance credits for HRAs are calculated at 102 percent of the aggregate actual plan reimbursements for the covered individuals for the applicable period of coverage.

Claiming the COBRA Premium Assistance Credit

Q&A-72 confirms that the premium payee (i.e., the entity entitled to the premium assistance credit) under this special COBRA subsidy program is either:
  1. The multi-employer plan providing health coverage, OR
  2. The common law employer in the case of plans subject to federal COBRA regulations OR is self-funded in whole or in part, OR
  3. The insurer providing the coverage, in the case of fully insured plans subject to state mini-COBRA but not federal COBRA regulations.
Q&A-73 confirms that governmental entities ARE premium payees and therefore eligible for premium assistance. Q&A-74 explains the timing of assistance eligibility by the premium payee by use of a common example. Assume that an employer, in response to a notice to eligible individuals of subsidy availability, receives an election form on June 17, 2021 with retroactive election back to April 1, 2021. The employer bills COBRA continuees on the first of the month with payments due on the 10th of each month. Upon receipt of the validated election form, the employer is entitled to an immediate tax credit equal to the amounts for the elected coverage option for April, 2021, May, 2021 and June, 2021. Assuming the employer receives no notification from the continuee of and end to eligibility prior to the end of the subsidy period, that employer is also entitled to a tax credit for the July coverage period on July 1, the August coverage period on August 1, and the September coverage period on September 1.

Q&A-75 through 77 confirm what we already knew about how the tax credit is taken by employers. Employers are entitled to reduce their monthly or semi-weekly employment tax deposits by the amount of the credit to which they are entitled immediately upon recognition of that credit. Credits taken are then reconciled on the quarterly Form 941, a draft of which was released during the week of May 24. This new version of Form 941, applicable to the second and third quarters of 2021, include new lines 11e, 11f and 13f for reconciling COBRA premium tax credits. The guidance also confirms that Form 7200, which has, during 2020, been used to request advance payment of tax credits for the Employee Retention Tax Credit and the Paid Sick and Family provisions of the FFCRA, may also be used to request advanced payments of COBRA tax credits by employers anticipating that their assistance eligible premiums for a period will exceed their total withheld employment tax liability for that same period.

Finally, Q&A-78 reaffirms that employers will not be held liable for assistance eligible individuals’ failure to inform the employer of the termination of their eligibility for assistance (as in the case where they qualify for Medicare or another group health plan), and that the IRS will pursue penalty recourse against the individual taxpayer. The employer is still, in such circumstances, entitled to the tax credit for the premium. Q&A-79 reminds employers that the premium subsidy is INCLUDABLE in the employer’s gross income, effectively prohibiting a “double-dip” tax benefit by including plan premiums that have been reimbursed in business operating expenses. Q&A-80 clarifies more double-dip prohibitions by disallowing claims for COBRA premiums that have been reimbursed by subsidy from being included in the Employee Retention Tax Credit, PPP loan eligible expenses, and/or FFCRA expenses related to emergency paid sick leave or extended family/medical leave. And Q&A-81 clarifies that where an employer/plan sponsor uses a reporting agent, payroll service provider, PEO, or certified PEO, the tax credit belongs to the premium payee as defined in Q&A-72 – generally, the employer or plan sponsor, NOT the PEO or third-party service provider.

NOTE: Where the third-party service provider actually maintains and is the sponsor of a group health plan rather than the worksite employer, exceptions apply; see Q&A-82 for a detailed explanation.

We hope this blog has provided you with clarity on some of the intricacies of the new COBRA subsidy program under ARPA, and the guidance contained in Notice 2021-31. Please be sure to check the notice itself for further details, and to be sure that the rules as articulated in that Notice apply to your group health plans and specific COBRA continuee situations.

Bob Greene currently serves as Senior HR Industry Analyst at Ascentis. Bob’s 40 years in the human capital management industry have been spent in practitioner, consultant and vendor/partner roles. As practitioner, he managed payroll for a 5,000-person bank in New Jersey. As consultant, he spent 8 years advising customers in HRMS, and payroll and benefits system design as well as acquisition strategies. Bob also built a strategic HCM advisory practice for Xcelicor (later acquired by Deloitte Consulting.)