The Internal Revenue Service (IRS) recently published IRS Notice 2021-31, which provides additional guidance on the COBRA premium subsidy established under the American Rescue Plan Act (ARPA) between April 1 and September 30, 2021. Through an extensive series of questions and answers, the IRS’ guidance clarifies eligibility criteria such as involuntary termination and reduction of hours, what types of coverage are eligible for the subsidy, how employers can calculate and receive their associated tax credits, and other procedural elements of the subsidy. Below we summarize key points of the notice.
You can also review our previous guidance on ARPA’s COBRA premium subsidy, and our summary of the Department of Labor’s guidance on the COBRA premium subsidy.
Employers can require self-certification/attestation
Employers may require individuals to complete a self-certification or attestation regarding their eligibility for the COBRA premium subsidy due to an involuntary termination or a reduction of hours. In addition, employers may require individuals to attest or complete a self-certification regarding eligibility under other group health plans or under Medicare. While the law does not require employers to establish a self-certification/attest procedure as part of administering the COBRA premium subsidy, employers who do so are entitled to rely on such self-certifications to substantiate their own eligibility for the premium assistance credit. Importantly, any employer who uses a self-certification component for the COBRA premium subsidy should be prepared to maintain records of these documents.
Recipients face penalties for failure to notify employer of other coverage
An Assistance Eligible Individual (AEI) who becomes eligible for other group health plan coverage or Medicare while receiving the COBRA premium subsidy has a duty to provide notice that he/she is no longer an AEI. Each failure to provide this notice will result in a federal tax penalty against the individual for $250. If the failure to notify was fraudulent, the penalty will be the greater of $250 or 110% of the COBRA premium assistance that was improperly received. The penalty will not apply if the failure was due to reasonable cause.
Possible coordination with disability or a second qualifying event
If an individual receives COBRA coverage following an individual qualifying event other than a reduction in hours or an involuntary termination and subsequently experiences a reduction in hours or an involuntary termination, that individual is not an Assistance Eligible Individual. However, if an individual receives COBRA coverage due to a reduction of hours or an involuntary termination and subsequently experiences a second qualifying event or disability, that individual is an AEI and entitled to the subsidy between April 1 and September 30.
What qualifies as a reduction in hours?
The Notice clarifies that a reduction in hours for purposes of the subsidy includes a voluntary reduction in hours, as well as a reduction due to a furlough, lawful strike or lockout. For purposes of the subsidy, a furlough is defined as “a temporary loss of employment or complete reduction in hours with a reasonable expectation of return to employment or resumption of hours…such that the employer and employee intend to maintain the employment relationship.”
What qualifies as an involuntary termination?
The IRS defines involuntary termination for purposes of qualifying as an AEI as “a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services.”
We created this table to help illustrate the definition of an involuntary termination for purposes of the COBRA premium subsidy, as detailed by the IRS:
Coverage eligible for COBRA premium subsidy
The subsidy is available for COBRA continuation of any group health plan, including dental-only and vision-only plans, other than a health FSA. It includes HRAs and individual coverage HRAs, as well as retiree health coverage if coverage is offered under the same group health plan as the coverage made available to similarly situated active employees (even if more expensive than that offered to employees).
Extended election period for spouses and dependent children
If an employee had a reduction in hours or involuntary termination of employment prior to April 1, 2021, and elected self-only COBRA continuation coverage, a spouse or dependent child that was covered under the employer’s plan prior to the reduction in hours or involuntary termination must be extended an opportunity to elect COBRA continuation coverage in accordance with the ARPA extended election period and will receive the COBRA premium subsidy if COBRA continuation coverage is elected.
Coordination with emergency relief notices
The extension of COBRA coverage timeframes under the Emergency Relief Notices do not apply to the employer’s required furnishing of a notice of the ARPA extended election period or the AEI’s extended election period under ARPA. If an AEI electing COBRA coverage during the subsidy period also elects retroactive COBRA coverage prior to April 1, the extension of timeframes under the Emergency Relief Notices remain available for premium payments for the retroactive period of coverage prior to April 1, 2021.
If the AEI fails to provide payment for the retroactive period of coverage by the deadline under the Emergency Relief Notices, the employer may treat the AEI as beginning coverage on April 1, 2021. If the AEI provides only partial payment, the employer may use the payment to cover the earliest months first.
Calculation of COBRA premium assistance credit
If the employer does not subsidize COBRA coverage, then the premium assistance credit is equal to the amount of premiums not paid by the AEIs for COBRA coverage. Here, the premium amount is considered to be the cost for premiums charged for COBRA coverage to other similarly situated covered employees and qualified beneficiaries, including allowable administrative costs (up to 102% of the cost of coverage).
If the employer subsidizes COBRA costs, the credit is the premium amount that would have been charged to the AEI in absence of the premium assistance; therefore, it would not include amounts generally subsidized by the employer. However, if a plan that previously charged less than the maximum premium allowed under COBRA increases the premium for similarly situated covered employees and beneficiaries, the premium assistance credit will apply to the increased premium amount. Additionally, if the employer pays AEIs a separate taxable payment, that payment does not affect the premium assistance credit.
Claiming the COBRA premium assistance credit
Once an employer receives an AEI’s election of COBRA continuation coverage, the employer is entitled to the credit for any premiums not paid by the AEI for any periods of coverage beginning on or after April 1, 2021. The employer is then entitled to the premium assistance credit for each subsequent period of coverage as of the beginning of each period of coverage that the AES does not pay the premiums.
Employers should report the credit (both nonrefundable and refundable portions) and the number of individuals receiving COBRA premium assistance on the designated lines of its federal employment tax returns, typically IRS Form 941, Employer’s Quarterly Federal Tax Return. In anticipation of the credit, the employer may either: (1) reduce the deposits of federal employment taxes that it would otherwise be required to deposit up to the amount of the anticipated credit, or (2) request an advance of the amount of the anticipated credit that exceeds the federal employment tax deposits available, filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.