Part II: The American Rescue Plan Act Requires Employers to Fully Subsidize COBRA for Six Months

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The American Rescue Plan Act of 2021, signed on March 11, 2021, requires employers to fully subsidize COBRA for certain eligible individuals. Eligible individuals consist of employees and their spouses and dependents who lost coverage in November 2019 or later due to the employee’s involuntary termination of employment (other than for gross misconduct) or reduction of hours. No subsidy is required for employees who voluntarily terminate employment or those who become eligible for Medicare or other employer’s group health plan.

Employers must notify eligible individuals about the new COBRA subsidy by May 31, 2021. Model notices are expected to be published by the Department of Labor by mid-April. Eligible individuals who did not previously elect COBRA, and those who elected COBRA but stopped paying the premiums, must be given a second election to participate. If they elect to participate, coverage begins April 1, 2021.

The period when employers are required to subsidize COBRA is from April 1, 2021, through September 30, 2021. The subsidy period does not lengthen or shorten the required COBRA period. For example, if a former employee’s 18-month COBRA period covers the full six-month period from April 1, 2021, through September 30, 2021, they are entitled to the full subsidy. By contrast, an employee whose COBRA period is scheduled to end on June 30, 2021, is only entitled to a subsidy from April 1, 2021, through June 30, 2021.

Because employers are required to fully subsidize COBRA, they are entitled to a tax credit against their future Medicare tax liability. The credit is refundable, meaning that if the cost of the COBRA subsidies exceeds the employer’s Medicare tax liability, they don’t need to repay the excess amount. The credit is also advanceable, meaning employers can claim a credit before quarterly taxes are due.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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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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