New federal law (Section 9501 of the American Rescue Plan Act of 2021 – ARP Act, PL 117-2) provides a temporary, full subsidy of some premiums that individuals would have to pay for COBRA coverage following a reduction in hours or an involuntary termination of employment. On May 18, 2021, the IRS issued guidance regarding the many unanswered questions of this new law, which subsidizes the cost of COBRA for the period from April 1, 2021, to September 30, 2021. Under the new law, COBRA premiums are subsidized with tax credits for employers, multiemployers and insurers that maintain the group health plans.
If an individual did not have a COBRA election in place on April 1, 2021, he or she may now elect subsidized COBRA for a period ending on September 20, 2021, provided that proper notification is given to him or her.
Employers are obligated to issue a notice to employees and former employees eligible for COBRA by May 31, 2021 regarding this subsidy. The U.S. Department of Labor has a model notice to address regular COBRA elections as well as those eligible for the subsidy.
Who Is Eligible for Subsidized COBRA?
An employee, spouse and dependent children are eligible for subsidized COBRA if:
(1) the employee lost health coverage because work hours have been reduced, or the employee was involuntarily terminated and is not eligible for Medicare or another group health plan;
(2) the individual is eligible for COBRA during some or all of the period beginning on April 1, 2021, through September 30, 2021; and
(3) the eligible individual timely elected the COBRA continuation coverage.
How Is the Subsidy Claimed?
The employer may claim a tax credit to subsidize the COBRA costs by reducing its liability on the Form 941, the Employer’s Quarterly Federal Tax Return, for the months for which the subsidy has applied. If the cost of the premiums exceeds the amount of tax due on Form 941, the employer can file for a refund on Form 7200.
The employer may claim a subsidy only for the portion of the premium which the employee is obligated to pay (up to 102% of the premium). Any amount of the COBRA premium that the employer pays for the employee is not subject to a credit. Employers entering into severance agreements may consider designing those agreements to take advantage of these tax credits.
What Are the Documentation Requirements?
To get the COBRA tax credit, an employer must ask employees and their family members to certify in writing that they meet the qualifications for subsidized COBRA and keep a record of that certification.
When Is the Subsidized COBRA Period?
The subsidized period begins on or after the date of the qualifying event, if that event occurs on or after April 1, 2021, and before September 30, 2021. The subsidized premiums end on September 30, 2021.
When May Qualified Individuals Elect Subsidized COBRA?
Any former employee who was involuntarily terminated or whose hours were reduced before April 1, 2021, and who has not elected COBRA but whose election period is still open may elect subsidized COBRA.
Any former employee who was involuntarily terminated or whose hours were reduced on or after April 1, 2021, and before September 30, 2021, may elect subsidized COBRA within 60 days after receiving notice from the employer. The employer must provide the employee the notice of the extended election period to elect COBRA by May 31, 2021. Subsidized COBRA may apply to any medical, vision or dental plan or HRA in which the employee participated before termination of employment.
If the former employee declines or does not pay for COBRA during the non-subsidized period, there is no COBRA coverage during that time, but the employee may still get the subsidy between April and September if the election is timely made and the COBRA period covers the subsidy period.
If the individual makes the COBRA election after September 30, 2021, but within the applicable 60-day period, then the individual is entitled to COBRA premium assistance through the earlier of September 30, 2021, or the date that COBRA continuation coverage expires.
During What Period Are the Premiums Subsidized?
Subsidized COBRA starts with the latest of the first period of coverage beginning on or after April 1, the date of the qualifying event, or the date the qualified beneficiary elects to begin COBRA continuation coverage.
The subsidized COBRA period ends on the earliest of (1) the first day the eligible individual is eligible for another group health plan or Medicare, (2) the date on which the COBRA period otherwise ends, or (3) September 30, 2021.
What if the COBRA Period Continues After September 30, 2021?
Once the subsidized COBRA period ends on September 30, 2021, a COBRA beneficiary may continue the coverage by paying premiums timely.
What if an Individual’s Qualification for COBRA ends before September 30, 2021?
Former employees and their family members who qualified for subsidized COBRA but then become disqualified (because, for example, they are covered under new insurance) must report that to the former employer. Failure to do so subjects the former employee to a federal fine.
What Elections Apply to Families?
If an employee was terminated involuntarily before April 1, 2020, and elected COBRA for him- or herself only, the spouse and dependent children have an opportunity to elect subsidized COBRA beginning April 1, 2020.
What Medical Plans Are Allowed Subsidized COBRA?
A qualified employee may elect COBRA under the employer’s group health, vision and dental plans and be eligible for the subsidy. In addition, subsidized COBRA elections may be made for health reimbursement accounts (HRAs).
How Does Subsidized COBRA Apply to Health Reimbursement Accounts (HRAs)?
If COBRA is elected for an HRA, the individual will have access to the same level of reimbursements as was available immediately before the involuntary termination (or reduction in hours that caused a loss in health insurance). The HRA benefit is that amount originally available for the year and reimbursements for expenses incurred before the qualifying event, reduced by the amount of any reimbursements made after the qualifying event.
How Does the Election Period Work?
A qualified individual may elect subsidized COBRA retroactive to the loss of coverage, if eligible, within 60 days of receiving the notice of the extended election period. If the qualified beneficiary elects retroactive COBRA continuation coverage, he or she may be required to pay COBRA premiums for periods of coverage beginning before April 1, 2021. The qualified individual may also elect subsidized COBRA coverage separately for the period between April and September. No coverage is available for months before April 1, 2021, if the premium for that month is not paid.
When Must Employers Provide the COBRA Election Notice for Subsidy?
The notice of the extended election period must be furnished by May 31, 2021 (60 days after April 1, 2021). An individual receiving the notice must elect COBRA continuation coverage no later than 60 days after the notice is provided in order to receive COBRA premium assistance. An individual receiving the notice must elect COBRA continuation coverage no later than 60 days after the notice is provided in order to receive COBRA premium assistance.