April 5, 2021 | HR Compliance | Posted by Bob Greene, Senior HR Industry Analyst at Ascentis
COBRA Subsidy Provisions of the American Rescue Plan Act of 2021 (ARPA): What Employers Must Know!
On March 11, 2021, President Biden signed into law the $1.9 trillion American Rescue Plan Act ("ARPA"). While most mainstream information consumers know this by its most popular taxpayer features (a third round of stimulus checks, extensions on unemployment insurance, and major enhancements to the Earned Income Credit and the Children's Tax Credit), there are several very important provisions impacting HR, Benefits and Payroll as well. In this first blog examining the impact of ARPA on human capital management, we focus on one of the biggest changes it's bringing to almost every HR department in America: the 100% subsidy to eligible individuals for the cost of COBRA coverage for the next six months. These provisions actually took effect last week, on April 1. We've structured this blog post into a question-and-answer format, focusing on the top 20 questions to which every impacted employer will want to know the answers!
PLEASE NOTE: We have answered these questions based on the current state of the COBRA Subsidy Provisions put in place for ARPA. This may be subject to change. The materials available at this web site are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.
Who is Impacted?Q1: Which employers are impacted by this new provision of ARPA?
A1: Any employer covered by the health insurance continuation provisions of the original COBRA law (which became law April 7, 1986) is covered by the new 100% subsidy. There are no exceptions for size or industry. As a reminder, you are covered by COBRA as a private-sector employer if you sponsor one or more group health plans and had at least 20 employees on more than 50% of your typical business days in the previous calendar year. Both full- and part-time employees are counted “equally” to determine whether a plan is subject to COBRA; there is no proration for FTEs.
Q2: My company is too small to be covered by COBRA continuation rules. We are in the clear on offering subsidized coverage too, right?
A2: Not necessarily! The law specifically also applies to employers subject to state health insurance continuation laws that broaden employer eligibility requirements beyond federal requirements. These so-called “mini-COBRA” laws apply in more than 40 states. As an example, California’s “Cal-COBRA” law expands employer eligibility to include employers with 2-19 employees and expands beneficiary entitlement from 18 to 36 months. Always check the state requirements where you do business.
Q3: If I outsource my entire COBRA processing to a third-party, am I still impacted by the new provisions?
A3: Yes! While your agreement with your third-party administration COBRA processor may cover certain required actions on your part (e.g., contractually change who is responsible for beneficiary notifications, accounting for premiums billed and paid, etc.), the IRS considers the plan sponsor to be the responsible party for compliance. Additionally, certain key requirements (like tracking available tax credits to be taken against the employer portion of Medicare tax owed) will likely require the employer to be notified of COBRA covered headcount and plan election information by month for the covered period, even if that information was previously maintained only by the TPA.
Q4: Which employees and ex-employees are impacted by this new provision of ARPA?
A4: The law applies only to some COBRA-qualifying events. Specifically, it applies to involuntary terminations (firing, layoff, “furlough”) and reductions in hours that end coverage under a health plan. It does NOT apply to voluntary terminations (resignation).
Further, the law designates two classes of “assistance eligible individuals” (“AEIs”): AEI-1 is the class of individuals who are currently on COBRA continuation coverage or experience certain COBRA-qualifying events beginning April 1 and ending September 30, 2021. AEI-2 is the class of individuals who experienced certain COBRA-qualifying events prior to April 1, and who previously declined coverage or elected and voluntarily ended their coverage early, but still have time remaining in their 18-month COBRA entitlement period.
Example: Ex-employee Adam was terminated by Acme Manufacturing on December 20, 2019 and became eligible for COBRA coverage on January 1, 2020. He declined the coverage at that time. Acme is unaware of his health insurance status since that date. Nevertheless, since Adam’s COBRA entitlement period ran from January 1, 2020 through June 30, 2021, he is automatically a member of Acme’s AEI-2 entitlement class for the period April 1 through June 30, 2021 and Acme is required to notify him of his new COBRA rights and an available “special enrollment period” on April 1 (or as soon after as is practicable).
Q5: Since this new COBRA subsidy originated in a COVID-relief law, are eligible individual rights restricted only to the period of the COVID pandemic?
A5: NO! This part of the American Rescue Plan Act makes no reference to dates on which the pandemic was recognized or a national health emergency was declared. Certain eligible individuals (AEI-2 class) who experienced their COBRA-qualifying event prior to the start of the pandemic may still be entitled to free COBRA coverage for one or more months of the subsidy period. See the example in the Q&A above.
Mechanics of the New SubsidyQ6: What is this new “special election period” I am hearing about?
A6: The new COBRA subsidy provisions provide for a special election period for AEI-2 beneficiaries (those who were previously offered COBRA coverage and either declined it or elected it and later terminated the coverage with available time remaining in their coverage period – e.g., for nonpayment of premium), provided that there is still time left in their 18-month continuation period. (See the example in Q&A4, above). This special election period begins on April 1, 2021 and ends the later of May 31, 2021 or 60 days from delivery of the beneficiary’s special election period notice.
Q7: How much of my beneficiaries’ COBRA premium is covered by the new subsidy?
A7: 100% of the COBRA premium for the period April 1 through September 30, 2021 (unless their entitlement ends early) is covered by the new law. Employees/Ex-employees pay nothing for COBRA coverage for these 6 months.
Q8: How is the COBRA premium calculated for these six months?
A8: Exactly as it was prior to the subsidy. So, unless and until we receive guidance from DOL and/or IRS that indicates otherwise, the COBRA premium calculated as [employee share of cost PLUS employer share of cost PLUS 2% administrative fee] is the premium subject to 100% subsidy.
Q9: How is the subsidy paid for?
A9: The employer or plan sponsor must “front” the money for the subsidy and seek reimbursement for the full amount from their Medicare tax obligation. (More about this in the “Tax Credits” section, below.)
Q10: Well, this caught us by surprise! What if we already billed and collected the April premiums in advance?
A10: This issue will likely apply to many employers. Any premiums collected from the COBRA beneficiaries for periods from April 1 to September 30, 2021 will have to be refunded within 60 days, to the beneficiary who made the payment.
Q11: When does the subsidy end?
A11: For any beneficiary whose 18-month COBRA coverage entitlement period ends September 30, 2021 or later, the end date for the subsidy, as of now, is September 30, 2021. The new subsidy does NOT extend COBRA rights beyond the 18 months of entitlement in effect before ARPA became law; it only impacts the cost to the beneficiary for the designated six-month period. For some beneficiaries, the coverage entitlement period will end earlier than September 30, 2021. This will happen when their 18 months of COBRA coverage entitlement ends prior to September 30, 2021. Their subsidy ends with their entitlement end date.
Q12: Are there other reasons the subsidy will end for an individual?
A12: Yes. The subsidy also ends when COBRA entitlement ends because a beneficiary becomes eligible for another group health plan or Medicare coverage.
Q13: Since this is free coverage to the beneficiary, what if one or more of my beneficiaries fail to inform me that they qualify for other group health coverage or Medicare?
A13: The law provides for a new penalty, administered by the IRS against the individual, for failure to inform the plan sponsor or administrator of disqualification. That penalty is $250, but can escalate up to 110% of the subsidized COBRA premiums received if the IRS determines that the failure to inform by the beneficiary was fraudulent. In any event, the employer or plan sponsor is still entitled to the tax credit for the premium – the fact that the beneficiary may have received some amount of free COBRA coverage to which they were not entitled remains an issue to be resolved between the individual and the IRS.
Q14: Does the subsidy apply if the beneficiary wants different coverage than they had as an active employee?
A14: Yes. But only if the employer/sponsor allows this. AEIs can be permitted to enroll in subsidized COBRA coverage in a different plan option than they had while they were an active employee. Restrictions on this option include:
(a.) The premium for the elected coverage must be less than or equal to (i.e., not greater than) the premium for the coverage the AEI was enrolled in at the time of the qualifying COBRA event.
(b.) The alternative coverage must not be an “excepted benefit” (e.g., standalone dental or vision coverage).
(c.) The alternative coverage offered to the AEI is also offered to similarly situated active employees.
Tax CreditsQ15: How do we, as employer and plan sponsor, get reimbursed for this new subsidy?
A15: Reimbursement for the full amount of the subsidized premium occurs through tax credits, very similar to what you may have experienced last year with tax credits for Emergency Paid Sick Leave and Paid Health Emergency Leave under the Families First Coronavirus Response Act and/or the Employee Retention Tax Credit under the CARES Act. For this subsidy, the offset is specifically against the employer share of Medicare Tax, but that is largely an accounting categorization issue, because the credit is fully refundable, meaning that the total COBRA subsidy credit can exceed the total employer Medicare tax paid for a given period. Furthermore:
(a.) Employers may take the tax credit immediately, from their next employment tax deposit due (possibly as soon as within three days for a semi-weekly depositor).
(b.) The 941 return, starting with the second quarter (due July 31, 2021), is expected to be modified to include lines to reconcile COBRA subsidy credits taken against total credits calculated.
(c.) Employers are even authorized to draw an advance against current tax deposits for expected future (same-quarter) COBRA premiums not yet incurred.
Q16: Is there any written guidance, implementing regulations and/or a Q&A from the IRS or DOL to help us understand the tax credits available under this provision?
A16: As of April 2nd, no. However, we are expecting implementing regulations for this part of the law in the near future from the IRS and DOL.
Notices and NotificationsQ17: How does the new COBRA subsidy impact our responsibilities as an employer regarding required COBRA notices?
A17: Under the new regulations, there are significant changes to the required content of one existing notice (the General Election Notice of COBRA Rights), and there are also two new notices. The law instructs the DOL/IRS to provide model language to all employers for these new notices; the timing for those model notices is indicated below.
Q18: What are the changes required of the General Election Notice of COBRA Rights?
A18: The General Election Notice of COBRA Rights issued for qualifying events (remember, that includes involuntary terminations and reductions in hours but NOT voluntary terminations) occurring between April 1, 2021 and September 30, 2021 must include the following details, in addition to the information these notices previously required:
- The procedure, including any necessary paperwork, for establishing eligibility for the COBRA subsidy.
- Contact information for the individual responsible for providing additional information about the premium subsidy.
- Description of any right by the beneficiary to switch to a lower-cost coverage option, if the plan allows for such switch (see Q&A 14, above).
- An explanation that a qualified beneficiary is required to notify the plan if they lose eligibility to receive the COBRA subsidy due to eligibility for another group health plan or Medicare coverage.
- A description of the penalty for failure to notify the plan of disqualification.
- An explanation of a qualified beneficiary’s right to subsidized COBRA coverage, and any conditions on eligibility for the subsidy.
Since the above details will only apply to some of a company’s COBRA beneficiaries over the next six months, employers are permitted to satisfy this requirement by either a newly modified “overall” notice, or an “insert” included with the regular notice but only for applicable AEIs. The DOL must issue model language for this notice by April 10, 2021.
Q19: What are the new notices required under the ARPA COBRA subsidy provisions?
A19: There are two:
(a.) A new Special COBRA Election Notice to AEIs who became eligible for COBRA prior to April 1, 2021 (whether they elected coverage or not), as well as those who previously elected coverage but who dropped COBRA for any reason, and who are eligible for the new 60-day special enrollment period (AEI-2s). This notice must include the same special content described in Q&A 17, above and must be provided by May 31, 2021. The DOL must issue model language for this notice by April 10, 2021.
(b.) A new Expiration of Subsidy COBRA Notice informing certain AEIs of the date on which their COBRA premium subsidy will expire (if expiring before the end of the COBRA subsidy period). This notice must be provided within the 30-day period that begins 45 days before the subsidy expiration date. This notice requirement:
- Does not apply if the subsidy is expiring due to the AEI becoming eligible for disqualifying coverage.
- Does not apply to AEIs covered only by virtue of state mini-COBRA laws.
It is not clear at this time whether this subsidy expiration notice applies to all AEIs whose subsidy is expiring at the end of the regular subsidy provision period (September 30, 2021); hopefully the expected DOL/IRS guidance and model notice language will clarify this point. The DOL must issue model language for this notice by April 25, 2021.
PenaltiesQ20: Are there new employer penalties for violations of the new COBRA subsidy requirements?
A20: No, at this point, the law itself contains no special penalty provisions aimed at employers or plan sponsors. It DOES, however, impose new requirements, including two new notices, that are covered by the standing COBRA penalties, which can be draconian:
- Violations of any COBRA provision can incur a penalty of $100 per day, per affected individual. This is a non-deductible excise tax.
- Additionally, ERISA includes special notice penalties (COBRA notices would be included in this category) of $110 per day of the compliance failure. [ERISA § 502(c)(1)]
- The IRS conducts examinations of COBRA compliance, and their taxes levied for COBRA non-compliance after these exams range from $2,500 minimum to a maximum of 10% of the premiums paid by the employer during the preceding tax year for all group health plans, or $500,000, whichever is less.
- Finally, COBRA administrators can be held personally liable for these violations under certain circumstances.
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.)