We posted on April 6th about the COBRA subsidy that was made available through the American Rescue Plan Act of 2021 (ARPA). In short, the law gives certain individuals who are entitled to COBRA due to a reduction of hours or involuntary termination of employment a 100% subsidy for health coverage that is continued under COBRA or equivalent state laws.
On May 18th, the IRS and Treasury Department issued much anticipated guidance on the COBRA subsidy under Notice 2021-31. The guidance largely follows guidance that was issued response to a similar COBRA subsidy under the American Recovery and Reinvestment Act of 2009. Below are some highlights from the guidance:
- Protection for Employers. As expected, the guidance clarifies that employers can rely on an individual’s self-certification of eligibility for the subsidy (e.g., that an individual is not eligible for coverage under other group health coverage or Medicare) unless the employer has actual knowledge that the self-certification is incorrect. The employer must, however, retain records of the self-certification to substantiate eligibility for the tax credit. If an individual claiming the subsidy is determined to be ineligible later, the individual faces certain penalties from the IRS but the employer generally will not need to repay tax credits claimed for the subsidy.
- Voluntary Reduction of Hours Covered. Although employment terminations must be involuntary for an individual to be eligible for the subsidy, the Notice clarifies that an individual who voluntarily reduces hours (to the point group health coverage is lost) is eligible for the subsidy.
- Involuntary Termination and Reduction of Hours Clarifications. The guidance, as expected, includes clarifications on what constitutes an involuntary termination of employment and reduction of hours. Clarifications include:
- The guidance identifies situations where a resigning employee should be treated as having incurred an involuntary termination of employment, such as “good reason” resignations that resulted from material negative changes in the employment relationship. For example, the Notice states that an involuntary termination of employment occurs where an employee resigns after the employer materially reduces the employee’s hours (but where the reduced hours do not independently cause a loss of coverage). Employers should review these clarifications carefully to ensure all subsidy eligible individuals are identified.
- The guidance also clarifies when losses of coverage after absences from work due to illness or disability qualify for the subsidy (whether or not in connection with a termination of employment).
- Claiming the Tax Credit. Entities that are required to advance the COBRA premium subsidy (premium payees) are entitled to a Medicare tax credit. Premium payees claim the tax credit via the quarterly-filed Form 941 or, more quickly, using Form 7200. The guidance provides additional clarifications on when tax credits can be claimed.