No Fooling: Employers Required to Give COBRA Subsidies Beginning April 1, 2021PDF
The American Rescue Plan Act of 2021 (ARPA), signed into law by President Joe Biden on March 11, makes meaningful changes to COBRA coverage for certain employees, former employees and their families. Most notably, beginning April 1, 2021, ARPA creates a six-month window where “assistance-eligible individuals” are entitled to a 100% subsidy of health insurance premiums under COBRA. Under ARPA, assistance-eligible individuals must be given the opportunity to opt in to subsidized COBRA coverage, and employers must pay the COBRA premiums for assistance-eligible individuals from April 1 to Sept. 30, 2021, with recoupment of costs available through a federal dollar-for-dollar Medicare tax credit. ARPA will require considerable diligence on the part of employers in the coming months to comply with its notice and other requirements.
“Assistance-eligible individuals” are employees or former employees (and their eligible dependents) who have lost coverage under an employer’s group health plan due to a reduction in hours or an involuntary termination for reasons other than gross misconduct. ARPA does not extend the maximum applicable COBRA continuation period, but the legislation does allow assistance-eligible individuals to take a second bite of the apple if they are not currently participating in the group plan through COBRA. The ARPA subsidy is open not only to assistance-eligible individuals with existing COBRA coverage, but also to those who did not initially elect COBRA coverage, declined COBRA coverage or discontinued COBRA coverage if they are within the initial maximum applicable COBRA continuation period (usually 18 months) from the involuntary termination or reduction in hours. Thus, employees who were terminated or had their hours reduced as far back as late 2019 (and their eligible dependents) would potentially be eligible for the subsidized coverage. The reductions in hours or involuntary terminations need not be related to the COVID-19 pandemic.
ARPA will affect almost all employers, regardless of size or type of group health plan. The subsidy under ARPA applies to both federal-level “COBRA continuation coverage” (for employers with 20 or more employees) as well as a “State program that provides comparable continuation coverage” (for smaller employers). Accordingly, employers of all sizes that offer group health plans will have to prepare for the changes that ARPA requires. The subsidy also applies to self-funded and fully insured plans, multiemployer plans and governmental employer plans. The subsidy applies to group health, dental and vision plans, but does not include health care flexible spending accounts.
ARPA creates new notice requirements for plan administrators. Importantly, any assistance-eligible individual must receive notice no later than May 31, 2021, that they are eligible for the subsidized coverage, as well as notice of the period for electing the coverage. Employers must identify all former employees who suffered involuntary termination (and all employees or former employees who experienced a reduction in hours) who are still in their initial COBRA coverage period and provide them and their eligible dependents with adequate notice by May 31 (or work with their plan administrators to ensure such notice is timely given). Employees and their dependents who become assistance-eligible individuals on or after April 1 must also receive notice of their eligibility for subsidized coverage under ARPA.
The Department of Labor will provide model notices by mid- to late April. Notices should include: (1) the forms necessary for establishing eligibility for the subsidy; (2) the plan administrator’s contact information; (3) a description of the extended period to elect coverage for individuals who declined or discontinued COBRA coverage initially; (4) a description of the individual’s obligation to notify the group health plan if the individual becomes ineligible for the subsidy; and (5) a description of the individual’s right to the subsidy and the individual’s right to potentially enroll in different coverage.
Separation agreements for employees who are involuntarily terminated will also be impacted. Employers will need to take into account the six-month ARPA subsidy period when designing separation packages. For example, an employer who usually includes some period of COBRA coverage in a separation package may decide to provide COBRA coverage for a longer period of time (adding its usual offer to the up-to-six-months subsidized by ARPA). Note that the ARPA subsidy from April 1 to Sept. 30 is available to all assistance-eligible individuals, even those who are not offered or do not agree to a separation package. Additionally, employers should consider including updated COBRA notices with their separation package information (rather than providing notice at a later date) so that individuals can clearly understand the ARPA subsidy in the context of their separation package and final pay.
Accountants and payroll departments will play a large role in ensuring employers properly track the costs of paying for the premiums. Employers who cover the cost of premiums are eligible for a tax credit against Medicare taxes equal to 100% of the cost of the premiums. Further, the credit is refundable, so employers can recover the entire value of the credit even if it exceeds their Medicare tax obligations. COBRA enrollment likely will increase dramatically during the ARPA subsidy period, which could impact the cost of future premiums.
Members of Robinson Bradshaw’s Employment and Labor and Employee Benefits and Executive Compensation practice groups are available to partner with clients to navigate the impact of ARPA and the changed COBRA landscape.