“Help Is on the Way” – Important Changes to COBRA Under the American Rescue Plan Act

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In an effort to combat the effects of the COVID-19 pandemic, Congress passed and President Biden signed into law the American Rescue Plan Act of 2021 (“ARPA”). Among many other provisions, ARPA contains changes that significantly and immediately impact group health plans.

In particular, ARPA provides (i) a subsidy for certain insurance premiums under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), (ii) an opportunity for certain individuals to enroll or re-enroll in COBRA continuation coverage, and (iii) an option to elect less expensive health coverage. This Newsletter addresses each of these provisions.

Important Note: Some issues under ARPA are not entirely clear and additional guidance from the government is expected to help resolve these uncertainties.

What is the COBRA premium subsidy under ARPA?

ARPA provides a COBRA premium subsidy from April 1, 2021 to September 30, 2021 (the “Subsidy Period”) for each assistance eligible individual (“AEI”). The subsidy covers 100% of any otherwise applicable COBRA premium (including the 2% administrative fee) during the Subsidy Period. The practical effect of this subsidy is that each AEI will receive free COBRA continuation coverage during the Subsidy Period.

Who is eligible for the COBRA premium subsidy?

Only AEIs are eligible for the COBRA premium subsidy. ARPA defines an AEI as any qualified beneficiary who experiences an involuntary termination (other than by reason of gross misconduct) or a reduction of hours and who elects COBRA continuation coverage. At the moment, it is unclear how an employer is to decide whether a termination or reduction of hours is involuntary. More guidance is expected, and the determination is likely to be based on facts and circumstances.

What types of benefits does the COBRA premium subsidy cover?

The COBRA premium subsidy applies to all group health benefits (e.g., medical, dental, and vision coverage). The subsidy does not apply to healthcare flexible spending arrangements (“Health FSA”).

When does the Subsidy Period end?

The Subsidy Period runs from April 1, 2021 to September 30, 2021. The Subsidy Period may end sooner if the AEI becomes eligible for coverage under any other group health plan or Medicare. Likewise, the Subsidy Period will end early if the AEI reaches his or her maximum period of COBRA continuation coverage.

Note that the Subsidy Period will not end early if the AEI is eligible for coverage consisting only of excepted benefits, coverage under a Health FSA, or coverage under a qualified small employer health reimbursement arrangement (“QSEHRA”).

The AEI must notify the group health plan if his or her Subsidy Period should terminate early on account of other coverage and will be subject to penalties for noncompliance.

How is the COBRA premium subsidy administered?

The applicable employer, group health plan, or insurer must fully subsidize the COBRA premium during the Subsidy Period. This expense will be reimbursed via a dollar-for-dollar tax credit. More guidance is expected on the mechanics of applying for and receiving reimbursement for the subsidized coverage.

If an AEI pays a premium for COBRA continuation coverage during the Subsidy Period, such premium must be refunded or reimbursed within 60 days.

Is the COBRA premium subsidy taxable to the individual?

No, the COBRA premium subsidy under ARPA is not taxable to the individual.

Does ARPA extend the COBRA election period?

Yes, ARPA extends the period during which an individual who declined or dropped COBRA continuation coverage may enroll or re-enroll in such coverage. Such individual may elect COBRA during the period beginning April 1, 2021 and ending 60 days after he or she receives notice of the enrollment right. This extended election period does not change the maximum period of COBRA continuation coverage, which would still run from the date of the COBRA qualifying event.

Does ARPA permit an AEI to enroll in different coverage options?

Yes, ARPA allows (but does not require) employers to permit AEIs to enroll in different coverage options if certain requirements are met. In particular, the premium for the alternative coverage may not exceed the premium for the coverage in which the AEI was already enrolled and the alternative coverage must be offered to similarly situated active employees. The alternative coverage may not provide only excepted benefits or be a Health FSA or QSEHRA.

What notice obligations does ARPA impose?

ARPA requires notices be distributed that describe the availability of the COBRA premium subsidy, the extended election period and, if applicable, the option to enroll in different coverage. The government is required to issue a model notice for this purpose no later than April 10, 2021.

In general, the notice must contain: (i) a description of the forms necessary for establishing eligibility for the premium subsidy; (ii) contact information for the plan administrator; (iii) a description of the extended election period; (iv) a summary of the individual’s obligation to notify the plan if the Subsidy Period will end early due to other coverage; (v) a description of the right to receive a subsidized premium; and (vi) an explanation of any right to elect to enroll in alternative coverage options (if offered by the plan).

ARPA also requires that AEIs be notified no later than 15 days and no earlier than 45 days before the expiration of the Subsidy Period. This notice must indicate that unsubsidized coverage may be available. The notice is not required if the Subsidy Period ends because the AEI becomes eligible for other health coverage or Medicare.

What Might I Do Next?

Employers should familiarize themselves with these rules quickly in order to answer employee questions and provide the required notices. While we wait for the agencies to issue the model notices, employers can start to review their COBRA records to determine which groups of qualified beneficiaries might be AEIs that qualify for both the extended enrollment period and a premium subsidy versus qualified beneficiaries who may be able to enroll as of April 1 but who do not qualify for a premium subsidy.

Employers may also consider how these new rules impact any ongoing or planned terminations, including layoffs, furloughs, severance agreements, and buy-outs.

In addition, employers can start to think about how the ARPA COBRA rules intersect with the COBRA extensions under EBSA Disaster Relief Notice 2021-01, which has its own notice requirements.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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