IRS Releases Extensive Guidance on ARPA COBRA Subsidy

Seyfarth Synopsis: On March 11, 2021, President Biden signed into law the American Rescue Plan Act (“ARPA”), which requires plan sponsors to provide free COBRA coverage from April 1, 2021 through September 30, 2021, to individuals who lose coverage due to an involuntary termination of employment or reduction of hours. This is also referred to as the “100% COBRA Subsidy” or “COBRA premium assistance.” On April 7, 2021, the Department of Labor (“DOL”) published additional guidance on the COBRA Subsidy requirements in the form of Frequently Asked Questions (“FAQs”) and model notices. The updated DOL guidance, while helpful, still left many questions unanswered. On May 18, 2021, the Internal Revenue Service (“IRS”) issued additional guidance in IRS Notice 2021-31 (the “Notice”) to provide further clarification for employers, plan administrators, and health insurers regarding the COBRA Subsidy.   

We have summarized the key points from IRS Notice 2021-31 below.

Who is an Assistance Eligible Individual (“AEI”)?

The ARPA  provides for a temporary 100% reduction in COBRA premiums for individuals who: (1) lose healthcare coverage due to an involuntary termination or a reduction in hours; (2) are eligible for COBRA continuation coverage for some or all of the period from April 1, 2021, through September 30, 2021 (the “Subsidy Window”); and (3) elect COBRA continuation coverage. These individuals are referred to Assistance Eligible Individuals (“AEIs”). AEIs also include qualified beneficiaries who are the spouse or dependent child of the employee. A qualified beneficiary is considered an AEI if he or she was covered under the group health plan on the day before the reduction in hours or involuntary termination that caused the loss of coverage.

• Ineligibility. Eligibility for other group health coverage renders an individual ineligible for the 100% Cobra Subsidy, even if that other coverage does not provide “minimum value” or “affordable” coverage as defined under the Affordable Care Act. 
• An individual may become an AEI more than once. If an individual elects free COBRA and then later becomes eligible for (and enrolled in) another group health plan during the Subsidy Window, he or she will no longer qualify as an AEI. If the individual then loses coverage under the other group health plan (within the Subsidy Window), he or she can regain their status as an AEI.
• Self-certification or attestation. An employer may, but is not required to, have individuals self-certify or attest to the fact that they are eligible for free COBRA and/or that they are not eligible for other group health plan coverage or Medicare. While this is not a legal requirement, employers that plan to claim the available tax credit to offset the costs of the COBRA Subsidy will need to retain records substantiating individuals’ eligibility. In addition, an employer may have knowledge of an individual’s initial eligibility for COBRA, but they may not necessarily have knowledge of their ongoing eligibility. For these reasons, obtaining an attestation and/or self-certification of eligibility may be desirable. An employer may also rely on other evidence to substantiate eligibility, such as employment records concerning a reduction in hours or involuntary termination of employment.  
• Eligibility for other coverage. Eligibility for other coverage will only disqualify an individual from the COBRA Subsidy if they have an active, open enrollment period during the Subsidy Window. So, for example, if an individual had an opportunity to enroll in their spouse’s plan during a 30-day window in January 2021, but did not enroll, that person can still qualify for the COBRA Subsidy. But, the IRS guidance notes that, due to the DOL’s Covid-19 “Outbreak Period” relief, most plans are required to extend HIPAA special enrollment windows for up to a year. To the extent an individual’s extended special enrollment window runs into the Subsidy Window, that will disqualify them from receiving COBRA premium assistance.  
• Enrollment in another plan. If an individual enrolls in coverage under another group health plan, they may still qualify for the COBRA Subsidy, provided the individual is no longer covered by the other group health plan coverage as of April 1, 2021.
• Enrollment in Medicare. The Notice clarifies that if an individual is enrolled in Medicare before becoming eligible for COBRA due to a reduction in hours or involuntary termination of employment, they may remain on Medicare but they would not qualify for the COBRA Subsidy. This is because they were enrolled in Medicare first (before COBRA).
• Other qualifying events. Qualifying events other than a reduction in hours or an involuntary termination of employment, are not qualifying events for COBRA premium assistance purposes. Further, if the qualifying event was something other than an involuntary termination of employment or a reduction in hours (such as divorce or a dependent aging out), the individual would not qualify for the COBRA Subsidy even if the person later experiences a reduction in hours or an involuntary termination of employment. 
• Second qualifying event. If the original qualifying event was an involuntary termination of employment or a reduction in hours, and the employee remains covered beyond 18 months due to a disability extension or a second qualifying event (e.g., divorce or a dependent aging out), the employee could qualify for the COBRA Subsidy during the extended (i.e., post-18 month) period, if that extended period overlaps with the Subsidy Window. Contrary to earlier DOL guidance which indicated employers may only need to look back to qualifying events occurring on or after October 2019 to determine who may be an AEI, this guidance could require employers to look back much earlier (potentially as far back as April of 2018). 
• Retiree health coverage. Retiree health coverage only impacts an individual’s eligibility for the COBRA Subsidy if it is provided under a different plan than the plan in which the individual was enrolled when he or she experienced a qualifying event. So, for instance, if a plan permitted persons who terminated at age 55 to elect COBRA or to remain covered under the active plan for a period of time, a person who chose to remain on active coverage could still elect COBRA and qualify for the COBRA Subsidy. 
• New dependents. COBRA premium assistance is limited to AEIs that were enrolled as of the coverage termination date, as well as, a child who is born or adopted by the covered employee during the COBRA continuation coverage period.
• Unpaid premiums. An individual’s eligibility for COBRA premium assistance is not affected by late or unpaid premiums for retroactive COBRA continuation coverage (pre-April 1, 2021).

Reduction in hours

The Notice confirms that a reduction in hours constitutes a qualifying event for purposes of the subsidy, regardless of whether the reduction in hours was involuntary or voluntary. This includes furloughs and work stoppages resulting from a lawful strike initiated by employees (or their representatives) or a lockout initiated by the employer.  

What is an “involuntary” termination?

The Notice confirms that the determination of whether a termination is “involuntary” is based on facts and circumstances surrounding the event.  The following are examples of events that may qualify as involuntary terminations:

• Voluntary termination for good reason. Where the termination is due to employer action that results in a material negative change in the employment relationship analogous to a constructive discharge. This includes terminations designated as voluntary or as a resignation if the employee is willing and able to continue working.
• Termination while absent due to illness or disability. Only if there was an expectation that the employee would return to work following the illness or disability.
• Retirement. Only if the employee would have been terminated, absent the retirement, and the employee had knowledge of the impending involuntary termination.
• Resignation. If due to a material change in geographic location of employment.
• Voluntary separation programs. The Notice provides that involuntary terminations include employee participation in a voluntary severance program that constitutes a window arrangement, where the employee was facing an impending termination. This leaves open the question of whether participation in a VSP would qualify where there is no stated (or unstated) risk of impending termination. Similarly, it does not address whether a VSP qualifies if not structured as a "window program." Notably, in 2009 the IRS indicated that any form of “buy-out” program could qualify if there was a suggestion that some employees may be terminated after the program concluded. Other FAQs within the notice make clear that circumstantial evidence can always lead to the conclusion that a termination labeled “voluntary” could still be considered involuntary, but employers would have certainly welcomed more direct guidance addressing these types of programs. 
• Resignation for safety. If due to concerns about workplace safety, but only if the employee can demonstrate the employer’s actions or inactions resulted in a material negative change in the employment relationship analogous to a constructive discharge.

• Involuntary reduction in hours. An employee-initiated termination of employment in response to an involuntary material reduction in hours is treated as a termination for good reason.
• Non-renewal of employment contract. If the employee was willing and able to continue the employment relationship and execute another contract. This does not qualify, however, if the parties never intended a renewal to be executed.

The following examples do not constitute involuntary terminations:

• Termination due to gross misconduct. Presumably, this event is carved out because COBRA is not required for terminations resulting from gross misconduct. Many employers still extend COBRA when there is not overwhelming support for concluding the behavior was gross misconduct. Employers could likely apply the same rationale in treating such individuals as AEIs, if COBRA was extended.  Family members employees terminated for gross misconduct are also ineligible for the COBRA subsidy.
• Terminations for personal reasons. Examples include health conditions of employee or family member, childcare issues, or other similar issues.
• Death of the employee. If the individual died following a reduction in hours or involuntary termination, the dependents would remain eligible for COBRA continuation coverage.

What coverage is eligible for COBRA premium assistance?

Dental, vision, and HRAs qualify for premium assistance. Retiree coverage also qualifies, but only if it is offered under the same group health plan as the coverage made available to active employees. The notice does not explicitly discuss other COBRA-eligible benefits such as EAPs or onsite clinics, but we presume that to the extent an employer has determined those benefits are subject to COBRA, they should also qualify for the subsidy. 

If an AEI enrolls in other, more expensive coverage than the coverage in which the individual was enrolled as of the qualifying event date, the individual loses eligibility for the subsidy entirely, unless the coverage in which the individual was enrolled in is no longer available. If the plan in which the individual was enrolled is no longer available, the individual must be offered the most similar plan available. In that case, the individual will be eligible for the subsidy even if the plan of benefits is more expensive. 

For example, an AEI was enrolled in a plan with an $800 per month COBRA premium. The employer also offers coverages that are $700, $750, or $1,000 per month. The individual can enroll in the $700 or $750 per month options with premium assistance. The AEI will not be eligible for premium assistance if he or she enrolls in the $1,000 per month option. 

When does the COBRA Subsidy period begin and end?

The COBRA Subsidy period begins with the first period of coverage a premium is charged beginning on or after April 1, 2021. AEIs must be allowed to elect coverage prospectively or retroactively to April 1, 2021, provided the qualifying event date was on or before that date.

The subsidy period ends at the earliest of: (1) the first day the AEI becomes eligible for other group health plan coverage or Medicare; (2) the day the individual ceases to be eligible for COBRA continuation coverage; or (3) the end of the last period of coverage beginning on or before September 30, 2021.

ARPA extended election period

A qualified beneficiary who does not have COBRA continuation coverage in effect on April 1, 2021, but who would have been an AEI if the election were in effect, may elect COBRA continuation coverage under the ARPA extended election period. This includes an individual who has an open COBRA election period as of April 1, 2021. So, for example, if an employee elected COBRA as of the qualifying event date but the spouse did not, the spouse would be entitled to an extended election right to take advantage of the ARPA subsidy. 

Additionally, an individual who, as of his or her original qualifying event date, only elected certain of the coverages in which that person was enrolled (i.e., dental-only or vision-only) can still elect the remaining coverages under the extended election period. 

How does this interact with the Outbreak Period Guidance?

Within 60 days from receiving the election notice, an AEI  may elect subsidized COBRA. If the AEI elects subsidized COBRA, within the same 60 day period, the AEI must also elect or decline COBRA continuation coverage retroactive to the loss of coverage. If the qualified beneficiary elects retroactive COBRA continuation coverage, the qualified beneficiary may be required to pay COBRA premiums for periods of coverage beginning before April 1, 2021. 

If an election is not made during the 60 day period, a qualified beneficiary will lose the right to elect retroactive coverage. They will also forgo the 100% COBRA subsidy. It is unclear from the Notice whether the qualified beneficiary would still be permitted to elect coverage prospective at a later date (during the Outbreak Period). 

The DOL’s Outbreak Period relief extends the period of time that individuals have to make COBRA elections and premium payments for up to a full year (or, if sooner, through the end of the Public Health Emergency plus 60 days). 

Calculating the premium tax credit and employer subsidies

Employers can only claim the tax credit in the amount equal to the amount the employee would have been required to pay in the absence of the ARPA subsidy. So, if the employer typically charges less than 102% of the premium, or has offered the employee a premium subsidy pursuant to a severance agreement, the amount the employer could claim would be reduced accordingly. But, if an employer increases the employee’s premium obligation from the previous, reduced amount, the employer can claim the increased tax credit. Separately, if an employer does not subsidize COBRA directly, but provides the employee a taxable lump sum payment intended for COBRA, the employer can still claim the full amount of the tax credit. 

If additional non-AEIs are covered (e.g., because a non-AEI spouse is added during open enrollment) causing the total COBRA premium to increase, the incremental cost is not considered to be COBRA premium assistance for purposes of the tax credit. If there is no additional cost for adding non-AEIs, then the employer can claim the full cost as a tax credit. 

Claiming the premium tax credit

Employers are entitled to the tax credit as of the date on which the employer receives the AEI’s election of COBRA continuation coverage. Employers are permitted to reduce payroll tax deposits and claim a refund of amounts, up to the amount of the anticipated credit. If applicable, an employer can file IRS Form 7200 to request an advance of the anticipated premium assistance credit that exceeds the federal employment tax deposits available for reduction on a quarterly basis.

To claim the premium assistance credit, the employer reports the credit and the number of individuals receiving COBRA premium assistance on IRS Form 941 for the applicable quarter. If an employee fails to notify the employer that he or she became eligible for other coverage, the employer can still claim the tax credit, unless the employer knew the individual was ineligible for the subsidy. The credit is included in the employer’s gross income, but the employer cannot “double dip” and also claim the credit as qualified wages under the CARES Act, or as qualified health plan expenses under the FFCRA. Employers are entitled to the credit regardless of whether it uses a third-party payer to report and pay employment taxes.  

If an employer originally collected, but then reimburses an AEI for premiums that should have been covered under the ARPA, the employer is entitled to the credit on the date in which they reimburse the AEI. ARPA requires the employer to reimburse the employee within 60 days of the date the premium was paid (or presumably later if the employer didn’t receive the individual’s attestation until a later date).

Additional issues

The Notice states that the Treasury Department and the IRS are aware of additional issues related to the COBRA premium assistance provisions, which are still under consideration. There is a possibility of additional guidance in the future. 

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