No Fooling Around: New Six-Month COBRA Subsidy Starts April 1, Requires Immediate Action
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No Fooling Around: New Six-Month COBRA Subsidy Starts April 1, Requires Immediate Action

Brownstein Client Alert, March 30, 2021 (Updated April 14, 2021)

Note: This alert has been updated to clarify that, based on current guidance, a qualifying event due to a reduction of hours for any reason, not just an involuntary reductions of hours, may result in eligibility for the ARPA COBRA subsidy.  

The American Rescue Plan Act of 2021 (“ARPA”) includes a temporary 100% subsidy for COBRA health care continuation coverage (including under state mini-COBRA statutes) to “assistance eligible individuals” (“AEIs”). This subsidy is not elective but is required to be provided to AEIs, and employers, multiemployer trustees and insurers (collectively, the “plan sponsor”) may be surprised by the financial commitment they must make and the degree to which they must be involved to ensure this COBRA subsidy is provided to AEIs. See our separate ARPA COBRA subsidy implementation plan (attached) for an outline of the preliminary actions that plan sponsors should consider taking to meet the ARPA COBRA subsidy requirements. These preliminary actions may need to be supplemented as guidance is released.

Under the ARPA COBRA subsidy, AEIs (including covered family members) pay nothing—zip, zero, zilch—of their COBRA premium from April 1, 2021, through Sept. 30, 2021, or until eligibility for the subsidy ends, if earlier. In addition, the subsidy is not included in the AEI’s gross income for federal tax purposes. The COBRA premium (including the 2% administrative fee if applicable) for the subsidy period must be advanced by the employer (or by the plan in the case of a multiemployer plan, or the insurer in the case of very small fully insured plans not subject to federal COBRA). To obtain reimbursement for the COBRA premium advanced by the plan sponsor for this period, the plan sponsor may receive a refundable credit against payroll taxes, provided the plan sponsor takes steps to procure these credits. Also, any COBRA premiums paid by an AEI for coverage during the applicable subsidy eligibility period must be refunded to the AEI within 60 days of the date of payment.

It should be noted that only the portion of the COBRA premium otherwise payable by an AEI is eligible for the subsidy. This means that any additional subsidy voluntarily provided by a plan sponsor is ignored (e.g.,, if a plan sponsor normally subsidizes 10% of the COBRA costs, then the plan sponsor would be entitled to a refundable credit against payroll taxes for the 90% of the COBRA costs—that is, solely the portion the AEI otherwise would have been obligated to pay). Given the short duration of the ARPA COBRA subsidy period, plan sponsors will need to consider whether any design changes to their severance programs, through which a voluntary subsidy is often provided, will be worth the effort and to make certain that there otherwise is adequate consideration for any applicable separation agreements entered into by a terminating employee. It may be worth a discussion with the plan sponsor’s financial and tax advisors, as well as with employment counsel.

Recommended First Step – Identify the AEIs

One of the preliminary actions required is identifying who are the AEIs. An AEI is a “qualified beneficiary” (“QB”) who is eligible for COBRA continuation coverage during the subsidy period due to involuntary termination from employment (other than for gross misconduct) or reduction of work hours and who elects COBRA coverage. An AEI includes not only individuals who have COBRA coverage actually in effect at any time during the subsidy period, but also includes individuals who would have COBRA coverage in effect at any time during the subsidy period if (i) they had chosen to elect COBRA coverage or (ii) their COBRA coverage had not been discontinued earlier in time. Brownstein Comment: At a minimum, any individual who became a QB on or after Nov. 1, 2019, must be examined to determine if they are an AEI. Guidance is needed as to what constitutes involuntary termination for purposes of the ARPA COBRA subsidy. It also is unclear whether reduction of hours must be involuntary. Guidance also is needed to clarify whether an AEI would include a QB who has COBRA coverage during the subsidy period as a result of a second qualifying event (e.g., covered employee involuntarily terminated prior to Nov. 1, 2019, but there was a subsequent divorce giving the spouse up to 36 months of coverage, which extended period includes the subsidy period). See our separate ARPA COBRA subsidy implementation plan (attached) for the specific steps we suggest you should take.

Some AEIs May Be Ineligible for the Subsidy, or Their Eligibility May Terminate Early

An AEI’s eligibility for the subsidy ends before Sept. 30, 2021, if the AEI is (i) eligible for Medicare, (ii) eligible for another group health plan (even if the AEI is not actually covered by that plan), or (iii) at the end of the AEI’s maximum COBRA coverage period. “Other group health plan coverage” does not include, among others, FSAs, QSEHRAs, excepted benefits under Code §9831(d)(2), limited scope benefits.

AEI Must Give Notice of Eligibility for Other Plan Coverage. The AEI is required to notify the plan of the AEI’s eligibility for “other plan coverage.” An AEI’s failure to notify the plan could result in the AEI being assessed a $250 penalty. That penalty increases, in the event the failure is fraudulent, to the greater of (i) $250 or (ii) 110% of the subsidy provided after termination of eligibility. The penalty may be waived if the failure by the AEI to give this notice was due to reasonable cause and not due to willful neglect.

More Guidance and Model Notices

ARPA requires the DOL, IRS and HHS to provide model notices and guidance on the ARPA COBRA subsidy. The first guidance is due within 30 days after enactment of ARPA—April 11, 2021. We expect the content of the model notices and the guidance will be partially based on the model notices and guidance previously issued in connection with the COBRA subsidy that had been enacted under the American Recovery and Reinvestment Act of 2009, but revised to reflect the current subsidy provisions.

How We Can Help

Please contact one of us or your regular Brownstein attorney for answers to your questions about this new COBRA subsidy.

Click here for the full alert, including an immediate action plan. 

This document is intended to provide you with general information regarding employee benefits issues. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions.

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