Update: The IRS issued FAQ guidance on the COBRA subsidy (FAQs begin on page 6) and related tax credit on May 18, addressing subsidy administration, what forms to use when reconciling the credit and more.
With the signing of the American Rescue Plan Act by President Biden on March 11, 2021, COBRA continuation coverage will be subsidized 100 percent for many individuals who have lost their employer-sponsored health insurance due to involuntary job loss or reduced hours.
The subsidy will be in effect from April 1, to Sept. 30, 2021.
Generally, employers with 20-plus employees who are subject to federal COBRA (generally, 20+ employees) or those who sponsor a self-funded health plan will be required to subsidize the health insurance but will be reimbursed through a payroll tax credit. The health insurance carrier is charged with subsidizing coverage for participants who are covered under state continuation rules (generally, fewer than 20 employees). The subsidy and tax credit present additional complex requirements and considerations for employers.
Who’s Eligible for Subsidized COBRA?
An “Assistance Eligible Individual” (AEI) is defined as an individual who qualifies for COBRA due to involuntary termination (other than for gross misconduct) or reduction in hours that resulted in a loss of employer-sponsored health insurance. To receive subsidized COBRA, an AEI must actively elect coverage.
An AEI whose subsidized COBRA continuation coverage ends on Sept. 30, 2021 might be eligible for a Special Enrollment Period through federal/state marketplaces due to loss of subsidized coverage. Similar to COBRA participants who do not qualify for a COBRA subsidy, AEIs whose coverage ends Sept. 30 may be eligible for an increased premium tax credit.
Employers will need to determine which participants fall under involuntary termination or reduction in hours. The new guidance in the FAQs defines involuntary as “a severance from employment due to the independent exercise of unilateral authority of the employer to terminate the employment, other than that due to the employee’s implicit request.”
The FAQ address several examples of what is considered an involuntary termination, including a COVID-19-specific situation with an example for clarity. If an individual ended employment because their child was unable to attend school due to the COVID-19 pandemic, the termination is considered voluntary. However, if the termination was considered temporary and the employee expected to return to work, the employer may consider is a furlough, which could be considered a reduction in hours that would qualify the individual for premium assistance.
The guidance further went on to confirm that furloughed employees, or employees who lost coverage due to the voluntary reduction in hours, may be considered AEIs.
The guidance on voluntary/involuntary is broad and allows employers to consider situations specific to their business and employees. Employers who are not tracking termination reasons will need to start doing so to determine subsidy eligibility. They will also need to go back and review past employee terminations to determine if they are voluntary or involuntary, as well as note employees/former employees actively on COBRA continuation coverage to determine assistance eligibility.
Which Plans are Eligible?
Any group health plan covered by COBRA continuation coverage or state continuation coverage may be subsidized, except for flexible spending accounts (FSA). This typically includes medical insurance, standalone dental, vision or pharmacy coverage and health reimbursement arrangements (HRA).
AEIs who are active on COBRA for medical may have a new election period for coverage they never enrolled in. For example, when they experienced a COBRA-qualifying event and were eligible for medical, dental and vision continuation, but they only elected medical. This was allowed when a similar COBRA subsidy was in effect in 2009. Additional guidance from DOL will likely address how this situation applies to the American Rescue Plan Act.
Employers can choose to let active COBRA participants switch to a different group health plan, but it must be a lower cost plan. This presents another potential increase in administrative complexity for employers. While it could potentially lower upfront premium costs before the employer claims the subsidy tax credit, there might be little incentive for a participant to switch plans if they are not paying anything for their insurance.
Other Clarifications Related to the COBRA Subsidy
Among the additional clarifications for employers were:
- Federal COBRA requirements apply if the employer was subject to federal COBRA at the time of the qualifying event
- If an employer has already agreed to pay for COBRA continuation coverage as part of a severance package, the amount agreed upon would not be eligible for premium assistance
- Employers may require individuals to self-certify they are eligible due to involuntary termination or reduced hours, and that they are not eligible for other group health coverage or Medicare
The impact to employers relates to recordkeeping, and employers who plan to file for the tax credit should determine a process to retain employee self-certifications, attestation or other record of assistance eligibility.
COBRA Extended Election Period
AEIs who are not actively on COBRA continuation coverage but would have been eligible had they elected at the time of their qualifying event will have a new 60-day election period to enroll in coverage. The election period begins April 1, 2021 and ends 60 days after the notice of the election period is provided. This applies to:
- Individuals who have active COBRA continuation coverage
- Individuals who would still be on COBRA continuation had they elected coverage after experiencing their qualifying event
Under DOL guidance released in April, employers only need to send COBRA extended election notices to AEIs. These AEIs have 60 days from receipt of their notice of the COBRA subsidy to elect subsidized COBRA continuation coverage because the DOL’s one-year COBRA election extension does not apply to subsidy election. IRS guidance released in May clarified that if an AEI qualified for COBRA continuation coverage before April 2021 and chooses to elect the subsidy during the extended election period, the AEI must also choose to waive or elect coverage before April 2021. The AEI will not have another opportunity after the subsidy ends to elect COBRA continuation coverage retroactively before April 2021.
Once elected, subsidized COBRA coverage will begin April 1, 2021 and end Sept. 30, 2021. Additionally, an AEI is no longer eligible for the COBRA subsidy if they become eligible for other employer-sponsored health insurance coverage or Medicare. It’s up to the participant to notify their health plan if they become eligible. If they don’t act, they might be subject to a penalty.
This presents additional administrative work for employers, who will need to determine which employees/former employees are eligible for the new COBRA election period. In addition to determining who is eligible based on involuntary termination or reduction in hours, employers will have to go back nearly 18 months to pull data on COBRA-eligible employees who may be AEIs.
COBRA Special Election Examples
- Bob was laid off due to company downsizing in December 2019. He became eligible for COBRA on Jan. 1, 2020. Bob never elected COBRA. He may be eligible for subsidized COBRA between April 1, 2021 through June 30, 2021. If he had elected COBRA beginning Jan. 1, 2020, he would reach the 18 months maximum coverage at the end of June. However, if Bob already found another job and was eligible for health insurance through his new employer, he would not qualify for subsidized COBRA.
- Bea lost eligibility for health insurance through her job after her hours were reduced due to COVID-19. She became eligible for COBRA on July 1, 2020. Bea never elected COBRA and is still working part-time. Bea may be eligible for subsidized COBRA between April 1, 2021 through Sept. 30, 2021. If she had elected COBRA beginning July 1, 2020, she would reach the18 months maximum coverage on Dec. 31, 2021. The DOL’s one-year COBRA election extension also applies to Bea, so she also has the option elect COBRA back to July 1, 2020 if she pays the premiums owed.
What Are the New Notice Requirements for COBRA?
In addition to the COBRA general notice and election notice already required, employers will have additional notice requirements to AEIs and new language to include as part of the COBRA election notice for newly eligible participants. On April 7, 2021, the DOL provided model language for new notices.
- Individuals who are AEIs who are active on COBRA continuation coverage (extended election notice)
- Individuals who qualify for the new 60-day election period
- Updated model election notice for individuals who are newly eligible for COBRA
- Alternative notice for state continuation, but states might amend this notice
- A form for AEIs to complete subsidy enrollment, which is also included with other notices to AEIs, that has attestation that the individual:
- Lost coverage due to reduced hours or involuntary termination
- Is not eligible for other employer-sponsored health coverage
- Is not eligible for Medicare
- Individuals who are receiving the subsidy, to let them know when the subsidy will end
As noted above, it may be challenging to determine who is eligible to receive the new notices. Model notices might not be available immediately from DOL, giving employers little time to prepare and send them. There is substantial incentive for participants to elect COBRA continuation, adding additional administration for the employer in working with their health insurance carriers and tracking participants.
Failure to provide the new required notices also could subject the employer to penalties. There are additional administrative challenges presented by the temporary extension of COBRA election periods and premium grace periods, which apply on a participant-by-participant basis.
COBRA Subsidy Payroll Tax Credit
The cost of the COBRA premium is claimed as an advanceable/refundable tax credit by the employer or health insurance carrier, depending on the size of the employer and type of group health coverage offered. Tax credits are claimed by:
- The employer (as the health plan sponsor) for:
- Group health plans subject to federal COBRA (generally, 20+ employees), self-insured or partially self-insured plans, including HRAs
- The health insurance carrier for continuation coverage that is not noted above. This includes coverage that is subject to state-level continuation coverage rules (generally, employers with fewer than 20 employees, fully insured plans). There is currently no state continuation in Alabama, Alaska, Hawaii, Idaho, Indiana, Michigan, Montana and Nevada.
- Employers may not claim the COBRA tax credit on the same allocable healthcare costs as the Families First Coronavirus Response Act (FFCRA) paid leave credits or Employee Retention Tax Credit. Additionally, premiums claimed through the COBRA tax credit may not be included in Paycheck Protection Program (PPP) loan forgiveness. Check out our PPP loan forgiveness estimator and FAQs.
The additional tax credit will lead to changes in IRS forms, making the employer’s tax filing process more complex. The updated FAQs confirm that tax credits will be reconciled on Form 941, with advances requested through Form 7200. It has been confirmed that the health insurance carrier will claim the tax credit for state continuation coverage and the employer may not claim the credit for such coverage. Note that the final Form 941 and instructions have not been issued as of this article’s publication date.
COBRA Subsidy Impact on Employer Shared Responsibility (ESR) Affordability
When an employer reduces an employee’s hours, the employee might no longer meet a health plan’s eligibility requirements. Loss of employer-sponsored coverage due to reduced hours is a COBRA qualifying event that could make a part-time employee an AEI.
In general, Applicable Large Employers (ALEs) are employers with an average of at least 50 full-time employees, including full time equivalents, during the prior calendar year. When an ALE reduces to part-time the hours of an employee who is considered full-time under an ESR look-back period, the ALE is still at risk of an ESR penalty if it doesn’t offer the employee affordable and adequate health insurance coverage and the employee receives a premium tax credit (PTC).
With the full COBRA subsidy, an ALE’s offer of COBRA coverage would be affordable for ESR purposes since the employee doesn’t contribute toward the premium. However, the COBRA coverage is not likely to be affordable when the subsidy expires as the employee pays the entire premium. Consequently, beginning October these individuals might put the employees at risk for an assessment if they obtain a PTC to purchase coverage on a government marketplace.
Oasis Can Help
You might still have questions about how this might impact your business. You also might be concerned about the demand on your current resources to handle the increased requirements or the risk of financial penalty. It might be a good time to reevaluate your HR solution and consider how improving your HR technology could better prepare you to respond during the COVID-19 pandemic and beyond.