COBRA Subsidy Imposes New Obligations on Employers and Health Plans

The recently enacted American Rescue Plan Act of 2021 provides eligible workers with a subsidy to pay for health care (e.g., medical, dental, and vision, but not health FSA coverage) continuation coverage for themselves and their covered children and spouses following a loss of coverage. The subsidy applies to both continuation coverage provided under federal COBRA as well as under state “mini-COBRA” laws.

The structure of this COBRA subsidy is similar to the COBRA subsidy that Congress enacted in 2009 in connection with the financial crisis, but contains some nuances and several unanswered questions that the Department of Labor and the IRS will have to address.

The Act provides that an “assistance eligible individual” is entitled to receive a subsidy equal to the full monthly cost for continuation coverage from April 1, 2021, through September 30, 2021 (the “subsidy period”).

An “assistance eligible individual” is an individual who:

  • Is eligible for COBRA continuation coverage due to an involuntary termination or reduction in hours (i.e., there is no subsidy for a voluntary termination of employment or for other COBRA qualifying events such as divorce or a dependent “aging out”);
  • Incurs the termination of employment or reduction in hours:
    • during the subsidy period;
    • prior to the subsidy period and has elected continuation coverage and the remaining continuation coverage period extends into the subsidy period; or
    • prior to the subsidy period and has not elected continuation coverage (but would have remaining coverage extending into the subsidy period if the individual had elected to continue coverage), including someone who elected and subsequently dropped COBRA coverage; and
  • Elects continuation coverage for some or all of subsidy period.

An assistance-eligible individual’s subsidy will continue until the earlier of:

  • The end of subsidy period,
  • The end of the individual’s maximum COBRA continuation period (i.e., 18 months), or
  • The individual becoming eligible for other group health coverage or for Medicare.

An individual who receives the subsidy must provide notice to the plan if the individual does become eligible for other coverage. The penalty to individuals for not complying with this notice requirement is $250 (though more if the failure to notify is deemed fraudulent, but $0 if the failure to comply is due to reasonable cause).

Employers and plans, as applicable, must update COBRA continuation coverage notices that it sends to all potential assistance-eligible individuals. Employers and plans also must notify participants if their coverage will end before September 30, 2021 (unless the coverage would end due to the participant obtaining other coverage).

An individual who is an assistance-eligible individual because the individual already had a termination of employment or reduction in hours within the last 18 months and who did not elect COBRA at that time or who subsequently dropped COBRA will have a new 60-day election period to elect continuation coverage.

An assistance-eligible individual does not pay the premiums for coverage during the subsidy period; rather, employers and multiemployer plans subject to COBRA will take the credit and that, in the case of other plans, such as fully insured small employer plans subject to mini-COBRA, the plans’ insurers will take the tax credit.

Open Questions

There are a number of open questions on these COBRA provisions for which the Department of Labor or the IRS hopefully will provide guidance, including:

  • What types of terminations of employment are “involuntary?” The IRS is likely to adopt a similar definition as it applied with respect to the 2009 COBRA subsidy but we will have to wait and see.
  • How will the Act’s provisions affect plan administrators’ and employees’ responsibilities with respect to the previous Administration’s tolling of COBRA election, notice, and premium payment obligations?
  • How does the subsidy apply in the case of severance or other arrangements that provide for alternative forms of continuation coverage?
  • Will there be any different obligations with respect to continuation coverage under state “mini-COBRA” laws?
  • How will MEWAs and third party plan sponsors such as PEOs take the tax credit?
  • Will the subsidy apply to health reimbursement arrangements? (By the Act’s terms, the answer is “yes.”)
  • How extensive must an employer’s efforts be with respect to former employees who may be assistance-eligible employees but who the employer has difficulty locating?
  • What sorts of documentation must an employer maintain in order to substantiate eligibility for tax credits?

Action Items

You should immediately begin the process of complying with the Act’s COBRA provisions:

  • Coordinate with your payroll provider, COBRA administrator, and other vendors to make sure their applicable systems are capable and ready to apply for and receive the tax credit payments and to send the required notices.
  • Determine who will track COBRA subsidy payments to ensure that all payments are submitted for the tax credit.
  • Coordinate with any applicable insurers to make sure they will continue coverage for assistance-eligible employees in the absence of receiving premiums.
  • Start identifying individuals who are currently enrolled in COBRA coverage in preparation for sending them notices regarding the subsidy.
  • Start identifying individuals who involuntarily terminated employment or incurred a reduction of hours within the past 18 months who have not elected COBRA in preparation for providing a new 60-day election period for these individuals.
  • Keep an eye out for the new notices that you must send to assistance-eligible individuals.

For any questions about the COBRA subsidy, contact Charles Scheim or the Stevens & Lee attorney with whom you work.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.