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COBRA Continuation Coverage to be Subsidized 100% for Qualified Individuals Under American Rescue Plan

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Under the American Rescue Plan Act, eligible individuals who have lost employer-sponsored health insurance after involuntary job loss or because of reduced hours will have COBRA continuation coverage subsidized 100 percent for a specified time period.

COBRA continuation under COVID-19

The following was originally posted on the Paychex Worx site. 

Update: On April 7, 2021, the U.S. Department of Labor issued model language for COBRA subsidy notice requirements and additional information to help employers with notification efforts about the subsidy. 

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.

Additional information from the IRS/Treasury must still be provided to clarify the following: the form and manner for employers to claim the COBRA subsidy tax credit and what’s considered an involuntary termination for the purpose of assistance eligibility. Additionally, state-level guidance on state continuation requirements is needed, such as if the carrier or employer sends the subsidy notice and if the special election period applies.          

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.

Under guidance released April 7, 2021, employers only need to send COBRA special election notice 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.  

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. With the COVID-19 pandemic, it’s unclear whether some situations are involuntary or not. For example, if an employee quits a job or reduces hours to help care for their family, is it considered voluntary or involuntary for the purpose of the subsidy? In general, there is no need to differentiate voluntary or involuntary termination when determining COBRA eligibility, except for gross misconduct. Employers that 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.

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.

COBRA Special 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

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.

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 a 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 currently is 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 likely lead to changes in IRS forms, making the employer’s tax filing process more complex. Most likely, the tax credits will be included on Form 941, with advances requested through Form 7200. Employers have already been tasked with understanding several other new tax credits stemming from COVID-19 stimulus packages.

Employers who are struggling financially may face challenges in covering premium costs for former employees while waiting for reimbursement. While the credit is advanceable, the IRS needs to provide guidance, and have the capacity to process advanced credits.

COBRA Subsidy Impact on 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.

SurePayroll Can Help

While waiting for further guidance and updates to tax forms, you might 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.

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