The American Rescue Plan Act (the “Act”) requires COBRA covered employers to fully subsidize health insurance to COBRA eligible individuals suffering a loss of insurance coverage due to involuntary termination of employment or reduction in hours. The subsidy is available for a six-month period in 2021. Special election rules apply to individuals who previously declined coverage. A refundable tax credit (similar to the paid leave credit) is available to reimburse employers. Employers must identify eligible individuals and provide written notice by May 30, 2021.
Employers having 20 or more employees are familiar with the normal COBRA rules requiring COBRA eligibility notices, continuation coverage following a “qualifying event”, etc. The Act requires additional specific actions by employers. Employers will need to act quickly to identify eligible persons and comply with the notice requirements in the Act.
Subsidy Period. The Act was signed into law on March 11, 2021. The period during which an employer must pay insurance premiums begins on April 1 and ends no later than September 30, 2021 (the “Subsidy Period”). The subsidy requirement will not apply for months of coverage beginning on or after the earlier of:
- first date recipient is eligible under any other group health plan or Medicare;
- date following exhaustion of general 18-month COBRA coverage period;
- September 30, 2021
Eligible Person. An individual entitled to the subsidy under the Act (“Eligible Person”) is someone who suffered a loss of health insurance coverage due to an involuntary termination of employment or reduction in hours (other than for gross misconduct) (a “Termination”). Eligible Person can include a spouse or dependent. The general 18-month COBRA coverage period applicable under the normal COBRA rules (whether or not the Eligible Person elected COBRA) must include some portion of the Subsidy Period (the Act is designed to include people who suffered a Termination before and who did not elect COBRA, or who elected COBRA but stopped paying premiums, so long as some portion of their 18 month eligibility period falls within the Subsidy Period).
Example: A was laid off on October 15, 2019 and lost coverage effective November 1, 2019. A did not make a COBRA election. If A had made a COBRA election, the final month of the general 18-month COBRA coverage period would fall in the period after April 1, 2021 and before September 30, 2021. A is an eligible individual and is entitled to the subsidy for the month of April, 2021.
Employers Must Provide Notice. The Act requires employers to identify Eligible Persons and provide a notice of the right to the subsidy by May 30, 2021. This will include providing notice to current and future Eligible Persons that no premiums need be paid by them in the Subsidy Period. If an Eligible Person declined coverage during the 18 months before April 1, employers must provide notice of the right to elect coverage in the Subsidy Period. An additional notice is generally required between 15 and 45 days in advance of the expiration of the right to the subsidy and must provide statement regarding sources of alternative coverage/ non-subsidized COBRA if available. The Act requires the Department of Labor to issue model notices by mid – April which should provide a safe harbor form to be used by employers.
Election Period. A COBRA eligible individual generally has 60 days following receipt of notice of eligibility to elect COBRA. This general rule will continue to apply to individuals having a Termination in the Subsidy Period. Individuals already receiving COBRA on April 1 will need not make an election and will be deemed to have paid all premiums in the subsidy period.
Individuals entitled to extended eligibility will have 60 days following receipt of the notice of eligibility (e.g. 60 days following notice provided on May 30). The coverage will apply retroactively to April 1, 2021 but should not require an election of coverage/ payment of premium back to the underlying qualifying event.
Reimbursement of Subsidy through Tax Credit. An employer is entitled to a tax credit in reimbursement of health insurance premiums paid. The tax credit is applied against payroll taxes, specifically, the employer’s share of Medicare tax under Section 3111(b) of the Internal Revenue Code. The credit is refundable – any excess of insurance premiums over Medicare taxes owed in a quarter can be refunded to the employer. The credit may be received by:
- claim of refund on Form 941
- offset of payroll deposit
- Possible use of Form 7200 advance refund (awaiting guidance)
The credit is a deemed deposit of payroll taxes on the first day of the relevant payroll tax quarter (no penalties). An overstatement of the credit is considered an underpayment of payroll taxes and the IRS has five years from the date of return to determine an underpayment.
What Employers Should Do Now. Employers must be prepared to issue notices by May 30. This will require employers to identify each Eligible Person, including former employees that may have been terminated and lost coverage dating back to November, 2019. Employers should not collect COBRA premiums from Eligible Persons in the Subsidy Period. Employers should contact and work closely with their third-party administrators but should independently review compliance with the Act and COBRA. An employer should not cancel coverage for non-payment of premiums during the Subsidy Period absent thorough review of eligibility. An employer should watch for guidance issued by the Department of Labor and Internal Revenue Service relating to the COBRA changes.
For more information on the impact of this ruling,
contact Liam K. Healy at (313) 961-0200 or firstname.lastname@example.org.