Freedom Ain’t Free. COBRA, On the Other Hand…

Seyfarth Synopsis:  The latest COVID relief bill, the American Rescue Plan Act (ARPA), provides for a 100% COBRA premium subsidy from April 1, 2021 through September 30, 2021.  ARPA, which was signed into law by President Biden on March 11, 2021, also significantly expands a tax break for dependent care expenses.  This Alert provides an overview of these key welfare benefit provisions and how they may impact plan sponsors.  Please see our companion Client Alert on the other employee benefit items of interest in ARPA here. 

COBRA Subsidy

Most notably, ARPA offers a 100% subsidy to COBRA qualifying beneficiaries for the period commencing April 1, 2021 continuing through September 30, 2021 (the “Subsidy Period”).  The subsidy is available to those who become COBRA eligible during the Subsidy Period as well as those currently enrolled and those who are within their COBRA continuation window but who failed to elect or previously dropped coverage. 

The COBRA subsidy in many ways mirrors the subsidy offered during the American Recovery and Reinvestment Act of 2009 (ARRA), so while ARPA is light on details, we can look to IRS/DOL guidance under ARRA for clues as to how the agencies may implement these provisions.  Key highlights from the bill include the following:

• Who is Eligible? The COBRA subsidy is available to any person who experienced a qualifying event due to termination of employment or reduction in hours (other than a voluntary separation), who is still within their COBRA continuation window (generally 18 months following loss of coverage), even if that person did not timely elect COBRA.  In certain circumstances eligibility can end before the conclusion of the Subsidy Period, as noted below. 
• Calculating the Subsidy. During the Subsidy Period, qualifying individuals are treated as having paid the full amount of COBRA premiums owed (typically, 102% of the cost of coverage.
• Extended Election Period. ARPA gives a qualified beneficiary who (a) is eligible for COBRA but did not elect COBRA as of April 1, 2021, or (b) elected and discontinued COBRA coverage before April 1, 2021 another chance to elect COBRA during the period beginning April l, 2021 and ending 60 days after notice of the extended election period is received.
• Employer Notice Obligations.
  • General Notice. With respect to any person who becomes entitled to elect COBRA during the Subsidy Period, employers must include information in the COBRA election notice regarding the availability of the premium subsidy and (if applicable) the option to enroll in different coverage.
  • Notice of Extended Election Period. With respect to the individuals described above who are entitled to an extended election period, by May 31, 2021, employers must notify those persons of the new 60-day opportunity to elect COBRA prospectively for the Subsidy Period.  ARPA directs the DOL to put out model notices within 30 days of enactment, but it notes that the obligation can be satisfied by modifying existing notices or adding an insert. 
  • Notice of Expiration of Subsidy Period. ARPA also requires notice when premium assistance is expiring, with the notice to be sent no more than 45 days from expiration, and no less than 15 days from expiration. ARPA directs the DOL to issue a model notice within 45 days of passage of the Act.
• New Open-ish Enrollment Window. ARPA allows plans to offer a 90 day “open enrollment” window in which a COBRA-covered (or eligible) individual could (a) enroll in coverage, or (b) switch to another employer benefit plan option other than the one in which the person is currently enrolled (or was enrolled in at the time of the qualifying event).  This opportunity would be at the plan administrator’s discretion and must be limited to coverage that is the same cost or less expensive than the option in which the person was enrolled in as of the qualifying event date (and is not an excepted benefit, a qualified small employer health reimbursement arrangement (QSEHRA) or a health flexible spending account). 
• Early Loss of Eligibility. Any person who has become eligible for other group health coverage or Medicare will no longer be eligible.  ARPA places an obligation on the participant to notify the plan administrator of such loss of eligibility and imposes penalties on the participant for failure to do so.  (Under ARRA, if a person had an election window for other group coverage before the commencement of the subsidy period but that election window had lapsed, the individual would be considered subsidy eligible until the next enrollment window for the other coverage. We would expect the agencies to adopt similar guidelines here.) 
• Tax Credit for Employer/Carrier. Employers (for self-funded plans and fully-insured plans subject to federal COBRA), who cover subsidy-eligible persons are reimbursed for the foregone COBRA premium via an advanced tax credit equal to the value of the subsidy.  While the tax credit is capped at the total payroll taxes owed by the employer (or insurer), it is a refundable tax credit with respect to any excess.  Additional guidance is expected on how the credit is claimed in other scenarios (e.g., multiemployer plans). 
• No Tax on Participant. The COBRA subsidy is not treated as income for purposes of the plan participant. 
• Interaction with Outbreak Period. As described in our Alert, the DOL and IRS previously provided relief by suspending the time period for an individual to elect COBRA until 60 days after the end of the National Emergency, or if earlier, one year after the individual became eligible for the relief (the Outbreak Period).  It is unclear how this relief will be coordinated with the new enrollment and notice rules in ARPA, and whether a single notice could be used to satisfy notice all COBRA-related notice obligations.

Expanded Dependent Care Exclusion for 2021

Current tax rules permit an exclusion from income for up to $5,000 (married filing jointly) or $2,500 (single or married filing separately) for employer-provided dependent care benefits or pre-tax salary deferrals through a Section 125/129 plan. 

ARPA more than doubles this limit for the 2021 tax year, allowing an exclusion of up to $10,500 (married filing jointly) or $5,250 (single or married filing separately). 

Employers may amend their Section 125/129 plan at any point before the end of the 2021 plan year to adopt this provision.  Employers who choose to expand such tax deferral limits should be cognizant of the potential impact on nondiscrimination testing, which is notoriously challenging for certain employers to pass even at existing levels. 

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We will continue to track the regulatory agencies’ implementation of these provisions and keep you apprised of any further developments.