On March 11, 2021, President Biden signed the American Rescue Plan Act (the Act), which includes some notable changes and relief for employers and workers. This legal alert summarizes the key issues relating to the Act’s temporary COBRA subsidy provisions. For our legal alert on the other changes that apply to employee benefit plans, see our previous legal alert.

• Premium assistance. An assistance eligible individual (AEI) will be treated as having paid 100% of any premium required for COBRA coverage for the period of group health plan coverage between April 1, 2021 and September 30, 2021 (the assistance period). The effective subsidy is referred to as “premium assistance.” The premium assistance is similar to, though not the same as, the program provided under the American Recovery and Reinvestment Act of 2009 (ARRA). Some of the interpretations and procedures established in connection with that program may also apply to the premium assistance under the Act.
• Eligible individuals. An AEI is any qualified beneficiary who, during the assistance period, (1) is eligible for COBRA coverage due to termination of the covered employee’s employment (except for a voluntary termination) or reduction of the employee’s hours, and (2) elects COBRA coverage.

• Unlike the COBRA subsidy offered under ARRA, eligibility is not directly tied to the date of a covered employee’s qualifying event.

• Special enrollment option. A group health plan may, but is not required to, offer AEIs a special enrollment option that would allow the AEI to change coverage options under the plan in conjunction with electing COBRA.
  • Typically, a plan will require a qualified beneficiary to enroll in the plan option covering the beneficiary before the qualifying event. This special enrollment option would allow an AEI to enroll in a different, less costly coverage option within 90 days of the date of notice of the special enrollment option. If the AEI elects a different coverage option, it must be continued for the entire 18 or 36 month eligibility period, although the premium assistance will only apply through September 30, 2021.
• Tax treatment and reimbursement for AEIs. Premium assistance is excludible from the AEI’s gross income under new Internal Revenue Code (IRC) section 139I. If the AEI pays all or part of any COBRA premium that is eligible for premium assistance, the AEI must be reimbursed no later than 60 days after the date that the individual elects assistance-eligible COBRA coverage.

• Special election periods. A COBRA qualified beneficiary must be allowed a 60 day special COBRA election period if the individual: (1) does not have an election of COBRA continuation coverage in effect on April 1, 2021, but would be an AEI were such an election in effect, or (2) elected but discontinued COBRA coverage before April 1, 2021. The special election period begins on April 1, 2021 and ends 60 days after the plan notifies the qualified beneficiary of the availability of premium assistance. COBRA coverage elected during this special election period must start with the first period of coverage beginning on or after April 1, 2021, and cannot extend beyond the end of the period of COBRA coverage that would have applied had the individual elected coverage under the COBRA rules (and not discontinued COBRA coverage).

• Termination of premium assistance. An AEI’s premium assistance generally terminates with the first month beginning on or after the earliest of: (1) September 30, 2021, (2) the expiration of the the maximum required COBRA period for the AEI, or (3) the date that the AEI becomes eligible for coverage under another group health plan or for Medicare benefits.     
  • AEIs must receive a written notice regarding the expiration of the premium assistance period no earlier than 45 days before the date of expiration and no later than 15 days before such date. The Secretary of Labor is directed to prescribe model language for such notice within 45 days of the date of enactment.
  • An AEI who becomes eligible for coverage under another group health plan or Medicare must notify the group health plan providing the COBRA coverage of such eligibility, or risk a monetary penalty imposed by the Department of Labor.
• COBRA notices. The provision requires health plans to issue certain new or revised COBRA notices.
  • Individuals who become entitled to elect COBRA between April 1, 2021 and September 30, 2021: Existing COBRA notices must be modified to include (1) information about premium assistance and any conditions; (2) a description of the option to enroll in different coverage, if permitted; and (3) a description of the individual’s obligation to notify the group health plan of eligibility under another group health plan or Medicare.
  • AEIs and individuals entitled to elect a new coverage option who were entitled to COBRA prior to April 1, 2021: Within 60 days of April 1, 2021, the plan must issue new notices that contain the information described above. The Secretary of Labor is directed prescribe model language for such notice within 30 days of the date of enactment.
  • Failure to provide such new or modified notice will be treated as a failure to satisfy the notice rules under COBRA.

• Payroll credit. In the case of a self-insured health plan, the employer maintaining the plan offering COBRA coverage will be allowed a credit against the Medicare tax portion of FICA taxes, or the equivalent amount of RRTA tax for each quarter. The credit equals the amount of premiums not paid by AEIs for COBRA for that quarter.  In the case of a fully-insured plan, the insurer providing coverage will be allowed the credit.
  • To the extent that the premium assistance credit exceeds the employer’s Medicare or RRTA tax liability, the excess is treated as a refundable overpayment under IRC sections 6402(a) and 6413(b), and in the same manner as a refund due from a credit provision.
  • For self-insured employers, the credit will increase gross income for the taxable year that includes the last day of any calendar quarter in which credit is allowed. The credit cannot be taken into account as qualified wages for purposes of the employee retention credit, or as qualified health plan expenses for purposes of credits against payroll taxes under the Families First Coronavirus Response Act.

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