COBRA Subsidy to Ease Pandemic Impact But Consider the Cost to Employers

Bressler, Amery & Ross, P.C.
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THE COBRA SUBSIDY

On March 11, President Biden signed the American Rescue Plan Act of 2021 (ARPA) into law. Among other provisions, ARPA provides for a 100 percent COBRA subsidy for up to 6 months for anyone who lost health coverage because of an involuntary termination or involuntary reduction in hours.  There is no income cap for the subsidy. Additionally, ARPA provides a “second” election for those who did not initially elect COBRA or who let their COBRA coverage lapse.  The subsidy created by ARPA is equal to 100% of COBRA premiums for assistance eligible individuals, beginning the first day of the first month after the date of enactment of ARPA (April 1) and ending Sept. 30, 2021. The employer or insurer will offset the cost by claiming a credit against Medicare payroll taxes. Importantly, COBRA subsidies paid pursuant to ARPA are not included in gross income for assistance eligible individuals.

ARPA also imposes a number of additional notice requirements on the plan administrator, including, but not limited to, notices that must be provided to individuals who became eligible for COBRA before the beginning of the subsidy period, and notices to assistance eligible individuals of an upcoming termination of COBRA premium subsidies within specified timeframes. While employers must send a notice to each of these employees (and their covered family members) within 60 days, the Department of Labor has not yet issued model notices.  They are expected within 30 days (by May 10).

Employees and family members who lost coverage because of an involuntary termination or reduction in hours after November 1, 2019, but who did not elect COBRA or let their COBRA lapse, will have until 60 days after receipt of the notice to elect COBRA. Any election for these participants would be prospective only, and not retroactive to the date coverage was lost. It is unclear whether these election deadlines will supersede the previous Department of Labor extension for COBRA elections.

The ARPA subsidy does not extend COBRA coverage—coverage will still expire 18 months after coverage was lost, even if that is in the middle of the subsidy period. Coverage can be extended for a second qualifying event (up to a total of 36 months), but it is unclear if the subsidy could apply during that period.

There are limitations on eligibility for the subsidy.  For instance, any employee or family member who is or becomes eligible for other group health coverage or Medicare is not eligible for the subsidy. The individual has the obligation to notify the employer if he or she is not eligible or loses eligibility.

Employers can allow employees to enroll in other health plan options offered by the employer (rather than the option the employee was enrolled in prior to the loss of coverage) but only if that other option is less expensive.

CONSIDERATIONS FOR EMPLOYERS

If an employer’s severance package includes paying a lump sum amount as a COBRA subsidy, consider reducing that amount for any months that would be included in the federal COBRA subsidy.

If an employer is a COBRA administrator, it might confirm that the COBRA administrator will send the new required notices and provide the employer with the information required to support the payroll tax credit.

In 2009, Congress adopted a COBRA subsidy that was originally scheduled to last for 9 months, and was later extended to 15 months. This history strongly implies the possibility that the ARPA COBRA subsidy may be extended if economic conditions do not improve.

Finally, if a plan sponsor included any of these amounts for purposes of utilizing the employee retention tax credit under the CARES Act or the required paid leave provisions of the FFCRA, they may not be included for purposes of claiming the tax credit under ARPA.

ARPA specifies that additional agency guidance is forthcoming. The operation of the COBRA premium subsidy under ARPA, coupled with the COBRA extensions announced by the Employee Benefits Security Administration, will be complex and difficult to navigate.

This subsidy will make it much more likely that employees will elect COBRA for the subsidy period, potentially leading to higher claims. There may be an impact on employer insurance or stop-loss insurance renewal. Employers, thus, might consider plan design changes to offset any increased costs. Between the hidden costs and administrative burden on employers or administrators, and the increased public burden on the Medicare system due to the offset on Medicare payroll tax, it does appear that the COBRA Subsidy merely shifts the financial burden from a limited population to a much larger sector.

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