Q&A: COBRA Subsidies Under the American Rescue Plan

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The U.S. Department of Labor issued guidance on April 7 about the new COBRA subsidy rules under the American Rescue Plan (ARP). However, the DOL left some significant questions unanswered.

More guidance on the COBRA provisions in ARP are expected. But until then, we address the most common questions below in an effort to provide some clarity.

What is the COBRA subsidy?

COBRA requires employers to offer employees, their spouses, and their dependent children the opportunity to continue coverage under a group health plan for a limited period when that coverage would otherwise terminate because of certain events. Employees may generally be charged the full cost of that coverage plus an additional 2%. ARP provides that employers must subsidize the full cost of COBRA coverage for certain individuals between April 1, 2021 and September 30, 2021. Employers may recover the amount of the subsidy through a refundable credit against payroll taxes for health insurance.

Who qualifies for the subsidy?

The subsidy applies to individuals who continue coverage under COBRA (or under state mini-COBRA laws) on account of a reduction of hours or involuntary termination of employment. The subsidy applies to all group health plans other than health flexible spending arrangements (health FSAs). The subsidy does not extend the duration of COBRA coverage. If an individual’s COBRA coverage ends, the COBRA subsidy ends. The subsidy will also end at the end of the month in which the individual becomes eligible for Medicare or other group health coverage (not including certain limited health benefit plans such as health FSAs, qualified small employer health reimbursement arrangements, and dental and vision plans).

Employers must also offer certain individuals an additional COBRA election opportunity. This offer must be extended to individuals who would have qualified for the subsidy for federal COBRA coverage as of April 1 if they had elected COBRA coverage when it was offered or maintained COBRA coverage (and not discontinued it after an election). They must be allowed to start COBRA coverage as of April 1.

How do employees find out about the ARP rules?

Employers must provide written notice to applicable individuals of the right to COBRA subsidies, the date subsidized COBRA coverage will expire (this notice must be provided 15 to 45 days before expiration), and the right to the additional COBRA election (this notice must be provided by May 31). The Department of Labor has issued model notices that may be used for these purposes.

What steps should employers take?

Although there are still unanswered questions about the new COBRA subsidies (and more guidance is expected), employers should act quickly to comply with the new requirements. Their compliance efforts should include:

  • the identification of individuals entitled to an additional COBRA election;
  • the development, production, and delivery of appropriate notices;
  • consultation with the plan’s COBRA administrator (if any) and implementation of programming and procedures for individuals to participate in the subsidy program and make new elections for COBRA coverage;
  • coordination with appropriate personnel or consultants about the filing for the payroll tax credit; and
  • review of any existing COBRA subsidy arrangements, such as severance programs, to maximize the ability to recover any subsidies through the payroll tax credit.

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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