The American Rescue Plan Act (ARPA) provides a 100 percent COBRA subsidy to eligible individuals from April 1, 2021, through September 30, 2021 (Assistance Period). Eligible individuals pay nothing, and employers receive a tax credit through quarterly payroll tax returns. There are no financial restrictions regarding eligibility.
Employers subject to COBRA must act soon to compile lists of eligible individuals and comply with notice requirements to inform those eligible of the right to the subsidy (by May 31, 2021) and later that the subsidy is coming to an end. In addition, employers must understand the interplay of COBRA tolling relief (see our previous advisory).
Eligibility for COBRA subsidy
Any individual who is on COBRA continuation coverage during the Assistance Period because of an employee's involuntary termination of employment or reduction of hours for any reason (i.e., it does not have to be COVID-related) gets free COBRA during that time. Voluntary terminations of employment are not covered, and neither are other COBRA qualifying events (e.g., death or dependent aging out of coverage).
There are two additional situations giving individuals the chance to elect coverage where they could otherwise have been covered by COBRA during the Assistance Period because of the employee's involuntary termination of employment or reduction of hours:
- 1. If the qualified beneficiary did not elect COBRA, the employer must give them a second chance to elect it now (this might have limited impact because of the tolling relief, but it does mean qualified beneficiaries who declined COBRA in, say, November or December 2019 could elect it now, even though they do not benefit from the tolling relief).
- 2. If the qualified beneficiary elected COBRA but discontinued it, they can elect it again now.
These qualified beneficiaries must elect COBRA no earlier than April 1, 2021, and no later than 60 days after the employer provides the notice. The COBRA coverage is prospective (unless the individual elects it retroactively and pays for coverage, subject to tolling relief), and the COBRA coverage period will not extend beyond what would have been a qualified beneficiary's regular COBRA period.
Example: An employee was laid off and lost coverage May 31, 2020. The employee could elect and pay for COBRA retroactively, but that could be burdensome. The new law gives the employee the option to enroll from April 1, 2021, with a 100 percent subsidy. After the subsidy ends on September 30, 2021, the employee could continue to pay for coverage until November 30, 2021 (the end of the original COBRA 18-month period).
Early Termination of Subsidy
An individual will lose the subsidy (i.e., need to pay the full cost of COBRA) for months of coverage beginning on or after the earlier of:
- 1. Eligibility for coverage under any other group health plan (GHP) (other than a plan consisting of only excepted benefits, a qualified small employer health reimbursement arrangement (QSEHRA) or flexible spending arrangement (FSA));
- 2. Eligibility for Medicare; or
- 3. End of the COBRA maximum coverage period applicable to the individual.
The individual must notify the plan administrator if he or she loses subsidy eligibility because of eligibility for coverage under a GHP or Medicare and may face a $250 penalty for failure to notify. The penalty can increase to 110 percent of the subsidy received if the failure to notify was fraudulent. There are penalty exceptions for reasonable cause.
Option to Allow Change in Medical Plan
Plan sponsors may also offer those who lose coverage because of the employee's involuntary termination of employment or reduction of hours the chance to enroll in an alternative medical plan option not later than 90 days after the date of the notice from the employer. The premium for the alternative coverage cannot exceed the premium for the coverage in which the individual was enrolled at the time of the COBRA qualifying event.
In addition, the alternative coverage must also be available to similarly situated active employees at the time the election is made, cannot provide only excepted benefits, and cannot be a QSEHRA or FSA. In effect, this allows the option of a new open enrollment period for those eligible for the subsidy.
Plan Administrators Must Amend COBRA Notices and Send by May 31
Plan administrators must amend their COBRA notices to explain subsidy availability and the option to enroll in alternative coverage (if applicable), and distribute that notice no later than May 31, 2021. Failure to meet the deadline is treated as a failure to meet COBRA notice deadlines. DOL will provide model notices within 30 days of ARPA's enactment.
In practice, to determine who should be sent the notice, employers need to go back to November 2019 (because the 18-month period for such individuals would end April 30, 2021, allowing one month of subsidized coverage).
The notice must also include:
- The forms necessary for establishing subsidy eligibility;
- Name, address and telephone number for the plan administrator or COBRA administrator;
- A description of the extended election period;
- A description of the qualified beneficiary's obligation to notify the plan administrator if he or she becomes eligible under another GHP or Medicare, and the penalties for failing to comply;
- A prominent explanation of the qualified beneficiary's right to a subsidized premium and any conditions on entitlement; and
- A description of the option to enroll in alternative coverage, if permitted by the employer.
It's Not Over Yet – Employers Also Required to Send Notice When Subsidy Expires
The plan administrator must also provide a clear and understandable notice explaining that the subsidy will end soon (including prominent identification of the expiry date), but that coverage may continue without the subsidy through COBRA or a GHP. However, the notice is not required if the individual loses subsidy eligibility because he or she became eligible for another GHP or Medicare.
This notice must be furnished no earlier than 45 days but no later than 15 days before the subsidy expires. DOL will provide model notices within 45 days of ARPA's enactment.
Employers Are Paid the Subsidy Through a Payroll Tax Credit
Employers decide who is eligible and if self-insured claim a tax credit against their quarterly payroll tax returns (insurance carriers receive the subsidy directly). The credit is refundable if it exceeds payroll taxes and may even be advanced. If a qualified beneficiary inadvertently pays when eligible for a subsidy, the employer must refund the premium.
Summary of Action Items for Employers
- ☐ Identify all potential COBRA qualified beneficiaries who might benefit from the subsidy and send them a notice no later than May 31, 2021.
- ☐ Decide whether to offer alternative coverage.
- ☐ Amend COBRA notices. COBRA notices are already required to note that the individual Marketplace is an alternative, for which open enrollment is again available through May 15, 2021.
- ☐ Notify those receiving the subsidy when it will end.