IRS Releases Guidance on Premium Subsidies for Continuation Coverage under COBRA

Stinson - Benefits Notes Blog

On May 18, 2021, the Internal Revenue Service (IRS) released much-anticipated guidance on premium subsidies for continuation coverage under Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) provided by the American Rescue Plan Act of 2021 (ARPA).  For more information about the ARPA and COBRA subsidies, see Stinson’s previous blog: American Rescue Plan Act Contains Many Employee Benefit Related Provisions.

In addition to providing premium subsidies, the ARPA requires group health plans to provide notice to Assistance Eligible Individuals by May 31, 2021.  Although the Department of Labor (DOL) issued model notices and FAQs regarding premium subsidies and notice requirements, many questions remained. For more information about DOL’s model notices and guidance, see Stinson’s previous blog: DOL’s ARPA COBRA Subsidy Notices and FAQs: Stay Tuned for More. The latest guidance, IRS Notice 2021-31 (the “Notice”), addresses many of those remaining questions in the form of 86 questions and answers.  However, certain questions still remain, and more guidance is expected.  In this blog post, we provide a summary of those portions of Notice 2021-31 that address which qualified beneficiaries for purposes of COBRA are Assistance Eligible Individuals entitled to premium assistance under the ARPA (the “subsidy”), how employers can ascertain whether a qualified beneficiary is an Assistance Eligible Individual, when an Assistance Eligible Individual may elect COBRA continuation coverage, and a few other items of note or where questions remain under Notice 2021-31.  The Notice addresses many other questions, including how to calculate and claim the tax credit.

Who qualifies as an Assistance Eligible Individual

The COBRA subsidy is only available to individuals who qualify as an “Assistance Eligible Individual” under section 9501(a)(3) of the ARPA.  An individual qualifies as an Assistance Eligible Individual if such a person is a qualified beneficiary entitled to COBRA continuation coverage as a result of a covered employee’s reduction of hours or involuntary termination of employment for a reason other than gross misconduct.  Notice 2021-31 provides extensive guidance on what constitutes a reduction of hours or involuntary termination of a covered employee for purposes of determining if an employee and the employee’s spouse and/or dependents qualify as Assistance Eligible Individuals. The table below summarizes the guidance provided in Notice 2021-31.


Is the event a qualifying reduction in hours or involuntary termination?

Employee experiences a reduction in hours or involuntary termination following an earlier qualifying event. (Q&A-14)

No, because the previous event, not the reduction in hours or involuntary termination, caused loss of coverage.

The Notice provides as an example the case of an employee who is divorced and later is involuntary terminated.  The employee's spouse is not an Assistance Eligible Individual because the spouse became a qualified beneficiary as a result of the divorce, not the employee's involuntary termination.

Employee voluntarily reduces hours. (Q&A-21)


Employee takes a leave of absence for illness/disability or injury, inability to secure childcare, school closures, etc. and loses health coverage because of a reduction in hours. (Q&A-31)


Employer reduces hours. (Q&A-21)


Employee is furloughed. (Q&A-22)


Employee voluntarily participates in a window furlough program. (Q&A-22)


Employee’s hours are reduced because of a lawful strike. (Q&A-23)

Yes, if at the time of the strike, the employer and employee intend to maintain the employment relationship.

Employee’s hours are reduced because of an employer lockout. (Q&A-23)

Yes, if at the time of the stoppage, the employer and employee intend to maintain the employment relationship.

Employee terminated employment for good reason. (Q&A-24, 28, 30, and 32)

Yes, if due to employer action resulting in a material negative change in the employment relationship analogous to constructive discharge (e.g., significant change in pay, material change in location of work, material reduction in hours).

Note: This is a facts and circumstances test.

Employee voluntarily resigns (without evidence of constructive discharge). (Q&A-24)


Employee is terminated while on a leave of absence for illness or disability. (Q&A-25)

Yes, if there was a reasonable expectation the employee would return to work after the illness or disability.

Employee retires. (Q&A-26)

Generally, no, unless absent retirement, the employer would have terminated the employee, the employee was willing and able to continue employment, and the employee knew the employee would be terminated absent retirement.

Employee is terminated for cause. (Q&A-27)

Yes, unless termination was for gross misconduct.

Employee’s work location changes. (Q&A-28)

Yes, if the geographic change is material.

No, if the geographic change is immaterial.

Employee volunteers to participate in a voluntary severance or reduction in force program (“window benefits”) (Q&A-29)

Yes, if the window severance program meets the requirements of Treas. Reg. § 31.3121(v)(2)-1(b)(4)(v).

Employee terminates employment because of concerns about workplace safety due to a health condition of employee or employee’s family. (Q&A-30)

No, unless the employee can demonstrate that the employer’s actions or inactions resulted in a material negative change in the employment relationship analogous to constructive discharge.

Employee terminates employment for personal circumstances (health condition, inability to find childcare, school closures, etc.). (Q&A-31)

No, unless the employee can demonstrate the employer failed to take a required action or provide a reasonable accommodation.

Employee initiates termination in response to an involuntary material reduction in hours. (Q&A-32)

Yes, even if reduction in hours would not have resulted in loss of health coverage.

Employee dies. (Q&A-33)


Employer does not renew employment contract (including for an employee whose employer is a staffing agency) (Q&A-34)

Generally, yes if the employee was willing and able to continue the employment relationship and was willing to either execute a contract with similar terms or continue employment without a contract.

No, if the parties understood at the time they entered into the expiring contract, and at all times when services were being performed, that the contract was for specified services over a set term and would not be renewed.

How an Employer Determines who is an Assistance Eligible Individual

As mentioned above, in order to qualify for the COBRA subsidy, qualified beneficiaries must be Assistance Eligible Individuals.  However, the COBRA subsidy is not available to qualified beneficiaries who are eligible for coverage under another group health plan or Medicare. Notice 2021-31 states that an employer may require each individual to provide a self-certification or attestation regarding the individual’s eligibility status (i.e., reduction in hours, involuntary termination, and eligibility for Medicare or other disqualifying group health plan coverage).  While an employer is not obligated to require self-certification or attestation regarding the individual’s eligibility status, an employer who claims a tax credit must retain records that substantiate an individual’s eligibility for the COBRA subsidy, which may include the self-certification or attestation. Notice 2021-31 allows an employer to rely on an individual’s self-certification or attestation for such proof of eligibility, unless the employer has actual knowledge that the self-certification or attestation is incorrect.  An employer may also rely on other evidence to substantiate eligibility (e.g., employer’s records regarding a reduction in hours or involuntary termination of employment).

When Assistance Eligible Individuals may elect COBRA 

An Assistance Eligible Individual must elect COBRA coverage with the subsidy within 60 days of receiving an extended election period notice and may elect coverage retroactive to the loss of coverage, if eligible, effective as of April 1, 2021, or prospectively.  However, the COBRA subsidy only applies for coverage beginning on or after April 1, 2021.

Any qualified beneficiary (including a spouse or dependent) who does not have a COBRA election in effect on April 1, 2021, but who would be an Assistance Eligible Individual if such an election were in effect, is eligible for the extended election period under the ARPA.  Even if an individual elected self-only COBRA coverage, a spouse or dependent, who is a qualified beneficiary with respect to a reduction in hours or involuntary termination, must receive a second opportunity to elect COBRA coverage under the ARPA.

A qualified beneficiary who elected some health coverage (for example, dental-only coverage, or health but not dental or vision coverage) upon a reduction of hours or involuntary termination is eligible for a second opportunity to elect coverage that the qualified beneficiary was enrolled in prior to the qualifying event and initially rejected at the time of the qualifying event.

Notice 2021-31 makes clear that the extended election period under the ARPA only applies to group health plans subject to COBRA and does not apply to State mini-COBRA laws, unless the State law specifically provides a similar extended election period.

Other Items of Note

COBRA subsidy election may truncate the Outbreak-related extension:  Q&A-56 of the Notice appears to require that an individual, who received a COBRA notice prior to April 1, 2021 and elects the COBRA subsidy, also elect, by the same deadline, retroactive coverage to the date coverage was lost, or lose the right to that retroactive coverage, cutting short the extended time period for that election that might otherwise be available under the coronavirus outbreak extension.  This impact on the ability to elect retroactive coverage was not addressed in the DOL’s model ARPA COBRA subsidy notice.

Extended second event/disability coverage period eligible for subsidy:  Q&A-17 of the Notice provides that coverage initially triggered by an involuntary termination of employment or reduction in hours, but which is extended by a second event or a disability determination (or state mini-COBRA), so that it extends into the subsidy period is potentially eligible for the COBRA subsidy.  It appears that the individual must have actually elected and remained on COBRA coverage throughout the extended period to be eligible, but it is not clear.  More guidance is expected.

Dental only/vision only COBRA coverage:  Q&A-35 of the Notice makes it clear that dental and/or vision only coverage is eligible for the subsidy.  However, the Notice does not address whether Medicare or medical coverage available through another employer’s plan would prevent the subsidy from being available for dental and/or vision coverage.  However, the statutory language providing for the subsidy seems to prevent an individual who is eligible for Medicare or coverage under an employer’s plan from being eligible for the subsidy, and the attestation in the DOL model COBRA subsidy notices requires the individual to affirm that they are not eligible for Medicare or another employer’s plan to be eligible for any kind of subsidy.  More guidance is expected.

Amount of tax credit:  Q&A-64 of the Notice clarifies that the amount of the credit is limited to the premiums that would have been charged to an individual in the absence of the COBRA subsidy and does not include any amount that the employer would have otherwise provided.  For example, if the applicable premium is $1,000 per month and absent the COBRA subsidy the employer requires individuals electing COBRA coverage to pay $500 per month, then the amount of credit the employer may receive is $500 per month.

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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