This article was curated and further revised by the Sequoia Compliance Team and posted in partnership with Marathas Barrow Weatherhead Lent LLP, a national law firm with recognized experts on ERISA-governed and non-ERISA-governed retirement and welfare plans, executive compensation and employment law.
On May 18, 2021, the IRS released Notice 2021-31, which contains much anticipated guidance on the American Rescue Plan Act (ARPA) COBRA premium subsidies. We previously discussed the ARPA COBRA subsidies in our prior blog.
Below is an overview of what we deem the most relevant pieces of the guidance in more detail. Please note this summary is not all-encompassing of every FAQ listed in the new guidance.
As many examples in the IRS guidance demonstrate, whether an individual is eligible for the APRA COBRA subsidies (referred to as Assistance Eligible Individuals or “AEIs”) depends on all relevant facts and circumstances and may require employment law guidance. For example, the nature of the employment relationship and the facts leading up to a termination can sway whether a seemingly voluntary termination would be considered involuntary under the ARPA guidance. On the other hand, it is also noteworthy that the newly released guidance states that employers my rely upon an individual’s self-certification or attestation when determining whether the individual qualifies for the subsidy, unless the employer knows the information is not correct.
Finally, the IRS indicated that it is continuing to consider certain issues and may release additional guidance (they specifically noted the concern around which entity should claim the subsidy credit where state mini-COBRA rules require full payment of premiums by the employer).
Eligibility for the ARPA COBRA Subsidy
Which individuals are eligible for the COBRA subsidy?
As set forth in ARPA, an AEI is an individual who:
- Loses eligibility for coverage due to a reduction in hours or involuntary termination of employment (other than by reason of an employee’s gross misconduct);
- Is eligible for COBRA continuation coverage for some or all of the period beginning on April 1, 2021 through September 30, 2021;
- Elects COBRA continuation coverage; and
- Is not eligible for, or enrolled in, other group health plan coverage (excluding excepted benefits, a qualified small employer health reimbursement arrangement (QSEHRA), or a health FSA) or eligible for Medicare.
Are spouses and dependents of AEIs eligible for the COBRA subsidy?
Spouses and/or dependents of employees who experienced a reduction in hours or involuntary termination are also AEIs if they were covered under the group health plan on the day before the reduction in hours or involuntary termination and they lost coverage as a result. This is true even if the spouse or dependent did not elect coverage when first eligible for COBRA, and they may remain AEIs even if the employee should subsequently pass away during the subsidy eligibility period.
Individuals who are not qualified beneficiaries, such as a spouse or dependent (other than a newborn) who were not covered under the group health plan on the day before the reduction in hours or involuntary termination, or domestic partners or other individuals who may meet an expanded definition of qualified beneficiary under state law, but do not meet the definition of a qualified beneficiary under Federal COBRA, are not eligible for the COBRA subsidy.
What is an Involuntary Termination?
Consistent with the IRS’ previous 2009 guidance under the American Recovery and Reinvestment Act (ARRA), for purposes of ARPA, the IRS provides that an involuntary termination is “severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services.” Further, if an employee voluntarily resigns, it may still be an involuntary termination if the employee was constructively discharged or forced to resign due to a material negative change in the employment relationship.
Specifically, the IRS provided the following examples of involuntary terminations:
- Where an employee resigns, but the facts demonstrated the employee was ready and willing to work; however, the employee knew they would have been terminated anyway absent their resignation, then the termination is involuntary. For example, where an employee resigns in lieu of termination (same if employee retires in lieu of termination).
- Where an employee is terminated while they are absent due to illness or injury, but there is a reasonable expectation the employee will return after the illness or injury subsides.
- Termination for cause (unless it is gross misconduct).
- Voluntary resignation due to a material change in the geographic location of employment. For example, if the company required the employee to move from Texas to California.
- Termination as a result of an employee’s participation in a window program meeting the requirements of Treas. Reg. 31.3121(v)(2)-1(b)(4)(v), i.e., where an employer offers severance to an employee if he or she resigns by a specified period of time.
- Resignation due to concerns about workplace safety only if the employer’s actions or inactions result in a material negative change in the employment relationship analogous to a constructive discharge.
- Resignation due to personal circumstances, such as health condition of the employee or family member or inability to locate childcare only if it is analogous to a constructive discharge (e.g., the employer fails to take a required action or provide a reasonable accommodation).
- Resignation due to an involuntary reduction in hours.
- An employer’s decision not to renew an employment contract if the employee was otherwise willing and able to continue the relationship and willing to execute a contract under similar terms or continue without a contract.
The IRS specified the following are not involuntary terminations:
- Voluntary retirement (i.e., where the employment would have continued absent the employee’s decision to resign).
- Resignation due to concerns about workplace safety if there is no material negative change in the employment relationship analogous to a constructive discharge.
- Resigning because the employee’s child’s school or daycare is closed.
- The employee’s death.
- The end of an employment contract where both parties understood at the time the contract was entered that it was for specific services over a specified term and was not subject to renewal.
What is a Reduction in Hours?
The IRS guidance includes several examples of a “reduction in hours,” including:
- A furlough initiated by the employer or an employee participates in a furlough process analogous to a window program.
- Work stoppage due to a lawful strike or lockout as long as the employer and employee intend to maintain the employment relationship at the time the strike or lockout begins.
- An employee’s voluntary reduction in hours, such as an employee’s request to go part-time.
- Absence from work due to illness or injury (but the employee remains employed).
- Temporary leave of absence (where employee intends to return to work and the employer and employee intend to maintain the employment relationship).
How do employers obtain proof of AEI status?
The IRS guidance provides that employers may rely on employee attestations stating that their loss of coverage was due to a reduction in hours or involuntary termination of employment, unless the employer has actual knowledge they are incorrect.
Further, employees (or their spouse or dependents, as applicable) are responsible for notifying employers whether they are eligible for, or enrolled in, other coverage that would disqualify them from receiving the subsidy. The IRS guidance provides that individuals may still receive the subsidy where they are eligible for other coverage, but not “permitted to enroll” (e.g., an individual is in a waiting period or there are no HIPAA special enrollment rights available that would allow them to enroll). Again, employers must rely on employee attestations in this regard, as long as they do not have actual knowledge they are incorrect.
Employee attestations are included in the model Summary of the COBRA Subsidy Provisions under the American Rescue Plan Act of 2021, which employers should provide to AEIs. For more on the employer notice requirements, see our prior blog.
What are the employer recordkeeping requirements?
Employers must maintain internal records, including any attestations, to support an individual’s eligibility for the COBRA subsidy and the company’s eligibility for the tax credit. Therefore, employers should ensure their reliance on such attestations are reasonable and consistent with any of the employer’s general knowledge and employment records.
Are employers who are no longer subject to federal COBRA, but who were previously subject to federal COBRA (at the time an AEI experienced a reduction in hours or involuntary termination) responsible for providing ARPA COBRA notices and/or subsidies?
Yes, the guidance clarifies that an employer who was previously subject to federal COBRA in the year during which an AEI became eligible for federal COBRA, but is no longer subject to federal COBRA (due to a reduction in force or otherwise), must still offer COBRA to any qualified beneficiaries who were previously eligible for COBRA under ARPA. If the qualified beneficiaries are AEIs, they would be eligible for the COBRA subsidy and the employer would be eligible for the premium credit.
Benefits Eligible for COBRA Subsidies
Which benefits are eligible for the COBRA subsidy?
The IRS guidance confirms subsidy is available for medical, dental, and vision plans. Other benefits for which the subsidy may be available (due to a plan being subject to COBRA) include Health Reimbursement Arrangements (HRA), Individual Coverage HRAs, standalone Employee Assistance Programs (EAP) or certain types of wellness programs.
The subsidy is not available for health FSAs, QSEHRAs, non-group health plan coverage (such as life or disability benefits), or other plans not subject to COBRA continuation coverage as defined under ARPA.
Is the COBRA subsidy available for retiree health coverage?
The IRS clarified that the subsidy is not available for retirees who are on retiree health coverage that is not COBRA continuation coverage and is offered under a separate group health plan other than the plan under which COBRA continuation is offered. However, if retiree coverage is offered under the same group health plan coverage available to similarly situated active employees, even if the retiree pays more than active employees, the COBRA subsidy is available as long as the amount charged to a retiree does not exceed 102%.
How does the COBRA subsidy work for HRAs?
For HRAs, if the individual elects coverage under the ARPA extended election period, then the HRA cannot reimburse expenses incurred between the date coverage was lost and the first period of subsidy assistance beginning on or after April 1, 2021. Individuals will have access to the same level of reimbursements during COBRA continuation as was available immediately before the qualifying event, based on the amount originally available for the HRA plan year and reduced by reimbursements for expenses incurred before the qualifying event and made during the post-termination runout period.
Duration of COBRA Subsidies
When does the COBRA subsidy begin?
Per the IRS guidance, the subsidy is available beginning with the first applicable period of coverage beginning on or after April 1, 2021. A “period of coverage” is generally a monthly or shorter time period during which the plan or issuer normally charges employees or qualified beneficiaries their premiums. This could be after April 1, 2021 if the normal period of coverage that would have been charged did not include April 1, such as for plans with biweekly premium obligations for COBRA and active continuation coverage.
When does the COBRA subsidy end?
The subsidy ends on the earlier of:
- The last day of the last period of coverage beginning on or before September 30, 2021 (even if the period of coverage extends into October);
- The date an individual ceases to be an AEI because they are eligible for certain other group health coverage or Medicare; or
- The last day of the employee’s maximum coverage period (or extended coverage period, where applicable).
Is the COBRA subsidy available for AEIs who are in an extended COBRA period due to a disability determination, second qualifying event, or an extension under state mini-COBRA?
Yes, the guidance affirms that the subsidy is available from April 1, 2021 through September 31, 2021 for AEIs who are in their 18-month maximum COBRA coverage continuation period, as well as those in a disability-related or second qualifying event extension period, or an extension under applicable state continuation, such as extensions applicable to fully insured plans in New York and California.
Are AEIs who are only eligible for state mini-COBRA eligible for the special election period?
If an AEI is only eligible for state mini-COBRA (not federal) and they reside in a state that has not opted to create a similar extended election right to COBRA (similar to the special 60-day election window ARPA creates for federal COBRA), then they are not eligible for an extended election period. In such case, they would only be eligible for the subsidy (if they are an AEI), if they will already have a period of state-related COBRA coverage between April 1, 2021 and September 30, 2021.
Employer Subsidized Continuation Coverage/Certain Severance Arrangements
If the employer subsidizes some or all COBRA premium costs during the ARPA subsidy period (due to a severance agreement), the employer is not eligible for the COBRA subsidy credits for the amount for which the employer would not have charged (or did not charge) the individual.
For example, if the employer subsidizes the COBRA costs for employees who lost coverage due to a reduction in hours by paying 50% of the cost of COBRA, the employer can only claim 50% of the cost of coverage as a COBRA subsidy credit. If the employer subsidizes the cost for former employees at 100% for several months post-employment and that period runs through the subsidy period, the employer cannot claim the COBRA subsidy credit for those months.
On the other hand, if the employer requires the full premium to be paid during the subsidy period (even if they offer COBRA subsidy through severance before or after the subsidy period), the COBRA subsidy will still apply and be available to the employer in the form of a credit. In addition, if an employer offers “taxable cash compensation” instead of a COBRA premium payment as a part of a severance agreement, the COBRA subsidy will also still apply and be available to the employer. See the IRS FAQs #65 and 66 for more examples.
Employer Tax Credits
Who is entitled to ARPA tax credits?
Consistent with the ARPA, the IRS specifies the COBRA subsidy tax credit is payable to:
- The employer maintaining the plan for self-funded or fully insured plans subject to federal COBRA;
- The insurer providing coverage subject to state continuation requirements (e.g., mini-COBRA); or
- The multiemployer plan for group health plans that are multiemployer plans.
Unless additional, future guidance provides otherwise, an entity listed above cannot delegate responsibility for, or receipt of, the subsidy or the tax credit for the subsidy. This means that an employer may not receive a tax credit for a fully insured plan that is only subject to state mini-COBRA, even if the employer pays the full premium to the carrier.
What are the COBRA subsidy tax credits?
For any coverage not subsidized by the employer, as discussed in the previous section, the credit for a quarter is the amount equal to the premiums not paid by AEIs for COBRA continuation coverage, as well as administrative costs which, in sum, is 102% of the applicable premium. For Individual Coverage HRAs (ICHRA), the COBRA subsidy is equal to 102% of the amount actually reimbursed with respect to an AEI.
The plan can increase the COBRA premium amount (if it previously charged less than the maximum 100%) in accordance with Section 54.4980B-8, Q&A-2(b)(1), and the applicable notice requirements, and receive the COBRA subsidy tax credit. Moreover, as stated above, if the plan provides a taxable severance payment to AEIs, it does not reduce the COBRA subsidy tax credit available to the employer. However, as set forth above, the employer may not receive the subsidy tax credit for employer-subsidized coverage.
How much is the tax credit when both AEIs and non-AEIs are enrolled under the same plan?
Because only qualified beneficiaries as defined under federal law can be AEIs, if non-qualified beneficiaries are covered by continuation coverage, then subsidy is only available for the AEIs. For example, if the employee and one child are the only AEIs, but there is another individual covered under continuation coverage who is a non-AEI, then if the cost of COBRA is $800 for Employee+1 coverage and $1,000 for family coverage, only $800 would be eligible for COBRA subsidy, and the employee would be required to pay the $200 difference.
How much is the tax credit when AEIs enroll in plans that they were not covered under at the time of the reduction in hours or involuntary termination?
If the plan allows individuals to change coverage to a different benefit, then the different benefit package cannot cost more than the premium for coverage that the individual was enrolled in at the time of the qualifying event; however, this does not apply in situations where changes are made at open enrollment or when the former plan is no longer available and the AEI must be offered a plan available to similarly situated active employees that is “most similar” to the plan the AEI was previously covered under but it costs more than the prior plan.
Can employers receive a COBRA subsidy tax credit with respect to amounts that are taken into account for purposes of a tax credit under the CARES Act or FFCRA?
If an employer is receiving tax credits pursuant to the CARES Act or FFCRA, such as the employee retention credit, among others, for any period during April 1, 2021 and September 30, 2021, then it cannot also claim a subsidy credit under ARPA for the same amounts.
How do entities request the COBRA subsidy credits?
The COBRA subsidy credit is claimed by reporting the refundable and any non-refundable portions of the credit, as applicable, and the number of persons receiving subsidy on the designated lines of its federal employment tax return (usually Form 941). Entities may reduce their deposits of federal employment taxes in anticipation of the credit for which the entity has become entitled with regard to a period of coverage.
If the anticipated credit exceeds federal employment tax deposits available for reduction, then the entity can file a Form 7200 after the end of the payroll period in which they become entitled to the credit to request an advance; however, an advance cannot be requested for any credit period that has not yet begun. Form 7200 must be filed before the earlier of (1) the day the employment tax return for the quarter in which the premium payee is entitled to the credit is filed, or (2) the last day of the month following that quarter. Form 7200 and IRS Notice 2021-24 provide more information about the advance.
COBRA Subsidy Taxation
Any COBRA subsidy tax credit is included in the gross income of the entity claiming the credit for the taxable year, including the last day of any quarter with respect to which the credit is allowed. The amount of any COBRA subsidy is excluded from an individual’s gross income.
- Employers should ensure they work with their COBRA vendors to send all required notices by the applicable deadlines, as further explained in our blog article.
- If employers have not coordinated with their carriers (if they offer a fully insured plan and are only subject to state mini-COBRA versus federal COBRA), they should do so to ensure processes are in place to comply with ARPA.
- Employers should familiarize themselves with the guidance related to what constitutes an involuntary termination or reduction in hours to ensure all potential AEIs receive the required Notices and an opportunity to be treated as an AEI.
- Finally, employers should be prepared to file Form 941 (or Form 7200 if an advance subsidy credit is required) to receive their COBRA subsidy tax credits.