Beginning April 1, the recently passed American Rescue Plan Act of 2021 (“ARPA”) implements temporary, but significant changes to COBRA, including new notices, government subsidies, and second election windows. Additional guidance, including revised model forms, is expected soon.
A quick refresher on COBRA
COBRA generally provides that when an individual (employee, spouse, or dependent) loses group health plan coverage from an employer with 20 or more employees, they can elect to continue coverage for themselves and other qualified beneficiaries (normally for 18 months) at their own expense. This allows health benefits to continue when there may otherwise be a gap. Compliance requires providing timely notices of COBRA rights and allowing those who become eligible (most often due to termination or reduction in hours, although those are not the only qualifying events), to elect and pay for continuation coverage.
What ARPA changes
Under ARPA individuals who, between April 1 and September 30 are eligible for or are receiving COBRA continuation coverage will receive a 100% subsidy of the cost of COBRA coverage (including the 2% administration fee), provided COBRA eligibility is due to involuntary termination (other than for gross misconduct) or reduction in hours. In ARPA, the individuals eligible for the subsidy are referred to as Assistance Eligible Individuals or AEIs.
There are new notice and associated election requirements with respect to the ARPA COBRA subsidy. A new notice will need to be provided no later than May 31. And individuals previously offered COBRA and who declined the coverage, if they are otherwise still eligible, they will have a new 60-day window beginning on the date the individuals receive the newly required notice to elect COBRA coverage. If they elect coverage, it will retroactive to April 1.
For example, if an employee was involuntarily terminated in November of 2020, lost their group health coverage beginning December of 2020, and either did not elect COBRA coverage or elected and dropped COBRA coverage prior to April 1, 2021, then effective April 1, 2021, they may again elect COBRA coverage for the remainder of the 18-month continuation coverage period that began on December 1 for them. However, if the former employee was terminated in July of 2019, they would not be sent a notice about the subsidy or be eligible to re-elect COBRA coverage beginning April 1, 2021, because that individual is beyond the 18-month period for which COBRA was available to them. The U.S. Department of Labor (“DOL”) is supposed to issue new model notices to facilitate employers providing notice of the subsidy to eligible individuals.
The COBRA subsidy runs from April 1 through September 30. Regardless of the availability of the subsidy, COBRA will end whenever eligibility ends, whether because the individual has reached 18 months of coverage, the individual becomes eligible for other employer-provided coverage, or otherwise. Employers must offer the subsidy whether they are public, private, or governmental entities and whether the health benefits are fully-insured or self-insured.
We are still awaiting guidance for some of the mechanics of the subsidy, but here is a summary of the two steps involved with the subsidy. The first step is for the employer to pay the COBRA continuation coverage cost (the premium) directly to the insurer or third-party administrator, as applicable (there is no reimbursement to the participant involved). The second step is for the employer to request a refund against its FUTA employment taxes in the amount of COBRA premiums paid.
To the extent the COBRA premiums exceed the FUTA employment taxes due, the credit is refundable. One of the more significant components still outstanding is whether the credit is filed quarterly with the employment tax returns or if a more expedited process will be developed by Treasury and the IRS.
There is also a requirement to provide notice as to when the COBRA subsidy will be terminating. The notice will need to be sent to the COBRA recipient at least 15 days and not more than 45 days before the COBRA subsidy will terminate. We expect the DOL will publish a model notice.
Employers should update their notices and election forms as soon as practicable following the release of the updated model forms from the government. Coordinating the provision of notices and implementing the subsidy (and its duration) with their COBRA administrators and/or record keeper is also important. If COBRA is administered internally, ensure those responsible for COBRA compliance will know when the new notices and forms are available and make sure they are sent out timely. They must also properly implement the subsidy and employers should make sure they timely apply for the tax credit.