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Article | Insider

IRS issues guidance on ARPA COBRA premium assistance

Benefits Administration and Outsourcing Solutions|Health and Benefits
COVID 19 Coronavirus

By Maureen Gammon , Benjamin Lupin and Kathleen Rosenow | June 8, 2021

The Q&As cover who is eligible for COBRA premium assistance under the American Rescue Plan Act and calculating premiums for tax credit purposes.

The IRS has issued Notice 2021-31 on the premium assistance available for COBRA continuation coverage under the American Rescue Plan Act of 2021 (ARPA). The Q&A guidance is intended to help employers and their COBRA vendors/third-party administrators determine who is an assistance eligible individual (AEI), calculate the premiums for tax credit purposes and claim such credits.

ARPA includes 100% COBRA premium assistance for up to six months (from April 1, 2021, until September 30, 2021) for individuals who are eligible for COBRA due to an involuntary termination of employment or reduction in hours and are either (1) currently enrolled in COBRA, or (2) in their COBRA continuation period but have not elected or discontinued payments for COBRA coverage.1

Due to the COVID-19 pandemic, the departments of Labor and Treasury previously provided relief to employer-sponsored group health plans (GHPs) and their participants from having to comply with certain deadlines, including those for making COBRA elections and premium payments and providing COBRA election notices. The relief, known as the Outbreak Period rules, provide that individuals and plans may disregard applicable deadlines until the earlier of (1) one year from the date they were first eligible for relief, or (2) 60 days after the announced end of the National Emergency (i.e., the end of the Outbreak Period). A disregarded period cannot exceed one year.2

The Q&As in the IRS notice and the implications to employers are described below.

Employer implications

Eligibility for COBRA premium assistance

To determine whether an individual may be eligible for premium assistance, an employer may require the individual to self-certify eligibility (including whether the individual has “other” disqualifying coverage) and rely on that self-certification when providing COBRA continuation coverage with the premium assistance and claiming the COBRA premium assistance tax credit. If employers do not require self-certification of eligibility, they must maintain other documentation to show eligibility for the premium assistance. Tracking “other” disqualifying coverage by an employer will be a challenge.

  • An AEI is any individual who is:
    • A qualified beneficiary as the result of (1) the reduction of hours of a covered employee’s employment, or (2) the involuntary termination of a covered employee’s employment (other than by reason of an employee’s gross misconduct)
    • Eligible for COBRA continuation coverage for some or all of the period beginning on April 1, 2021, through September 30, 2021
    • Elects the COBRA continuation coverage
  • An AEI includes the employee who had the reduction in hours or involuntary termination of employment resulting in a loss of coverage, as well as the employee’s covered spouse and dependent children who are qualified beneficiaries as a result of the same event.
  • An individual can become an AEI more than once during the premium assistance period.
  • An individual who is eligible for other GHP coverage or Medicare is not an AEI.
  • Individuals currently enrolled in individual health insurance coverage through a health insurance exchange may be eligible to elect COBRA continuation coverage and receive COBRA premium assistance; however, they cannot receive both a premium tax credit to help pay for the exchange coverage and COBRA premium assistance in the same month.
  • A reduction in hours or involuntary termination of employment that follows an earlier qualifying event, such as a divorce, does make the qualified beneficiary from that first qualifying event an AEI.
  • COBRA premium assistance is available to individuals who have elected and remained on COBRA continuation coverage for an extended period due to a disability determination, second qualifying event, or an extension under state mini-COBRA, to the extent those additional periods of coverage fall between April 1, 2021, and September 30, 2021, if the original qualifying event was a reduction in hours or an involuntary termination of employment.
  • Retiree health coverage (that is not COBRA continuation coverage) offered to a potential AEI may affect COBRA premium assistance eligibility depending on whether the retiree health coverage is offered under the same GHP as the COBRA continuation coverage or under a separate GHP.
  • Even if an individual makes or owes COBRA premium payments for retroactive COBRA continuation coverage elected under the Outbreak Period rules for which the payment due date has been extended, the individual may still receive premium assistance. Any late or unpaid premiums for retroactive COBRA continuation coverage will not affect an individual’s eligibility for COBRA premium assistance.

Reduction in hours and involuntary termination of employment

In order to determine whether an individual is an AEI, an employer must confirm whether the individual has had a reduction in hours or an involuntary termination of employment. The Q&As confirm that if an individual is eligible for COBRA continuation coverage due to a reduction in hours, he or she may be an AEI regardless of whether the reduction in hours is voluntary or involuntary. Determining whether a termination of employment is voluntary or involuntary is based on all of the facts and circumstances, and not on how the employer labels the termination of employment. Employers should discuss the decision with legal counsel if any uncertainty exists.

  • A reduction in hours that triggers COBRA, including furloughs or work stoppages, would cause a COBRA qualified beneficiary to be a potential AEI regardless of whether the reduction in hours is voluntary or involuntary.
  • An involuntary termination of employment occurs when the employer terminates employment when the employee was willing and able to continue performing services.
  • Involuntary termination can include:
    • Termination of an individual’s employment while the individual is absent from work due to illness or disability, if there was a reasonable expectation that the employee would return to work after the illness or disability subsided
    • Termination for cause, unless the termination is due to gross misconduct (which is not a COBRA qualifying event)
    • Resignation due to a change in the geographic location of employment for the employee
    • Participation by an employee in a window program that meets IRS requirements under which employees with impending terminations of employment are offered a severance arrangement to terminate employment within a specified period of time
    • A termination of employment initiated by the employee in response to an involuntary material reduction in hours that did not result in a loss of coverage
    • An employer’s decision not to renew an employee’s contract, unless the parties understood at the time they entered into the contract that it was for specified services over a set period of time and would not be renewed
  • Involuntary termination generally does not include:
    • Retirement unless, absent the retirement, the employer would have terminated the employee’s employment, the employee was willing and able to continue employment, and the employee had knowledge that he or she would be terminated
    • An employee’s termination of employment due to general concerns about workplace safety, unless the employee can demonstrate that the employer’s actions (or inactions) resulted in a material negative change in the employment relationship analogous to a constructive discharge
    • An employee-initiated termination of employment because a child is unable to attend school or because another childcare facility is closed due to the COVID-19 National Emergency
    • The death of an employee

Coverage eligible for COBRA premium assistance

The Q&As confirm that the COBRA premium assistance is available for any GHP that is subject to COBRA, excluding a health flexible spending account (FSA). While the Q&As specifically address vision and dental plans as well as health reimbursement arrangements (HRAs), the premium assistance would also be available for other GHPs that can be subject to COBRA, such as certain telemedicine benefits and employee assistance programs (EAPs).

  • COBRA premium assistance is available for COBRA continuation coverage of any GHP, including vision-only plans, dental-only plans and HRAs, but not health FSAs provided through a section 125 cafeteria plan. It also includes individual coverage HRAs (ICHRAs). It may include retiree coverage if the retiree coverage is offered under the same GHP as the coverage made available to similarly situated active employees.

Beginning and end of COBRA premium assistance period

The burden is on the AEI to notify the plan if he or she is no longer eligible for COBRA premium assistance. Employers should ensure the ARPA premium assistance requirements are being administered in accordance with the applicable guidance, the terms of the plan, and the AEI’s actual election for COBRA continuation coverage and the premium assistance, as it relates to when the premium assistance election begins and ends. This is particularly important since an AEI is permitted to elect to have COBRA continuation coverage and the premium assistance start later than April 1, 2021, and some AEIs may be electing COBRA continuation coverage and the premium assistance after September 30, 2021, for eligible periods before that date.

  • So long as an election for COBRA continuation coverage is made within the applicable 60-day election period, COBRA premium assistance is available through September 30, 2021, even if the election is made after that date.
  • COBRA premium assistance is available until the earliest of (1) the first date the AEI becomes eligible for other GHP coverage (not including excepted benefits, a qualified small employer HRA or a health FSA) or Medicare coverage; (2) the date 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.
  • Once COBRA continuation coverage with premium assistance ends, an AEI automatically continues COBRA without premium assistance, and the payment for the first period of coverage after September 30, 2021, will be timely if paid according to the terms of the plan and applicable COBRA continuation coverage requirements (taking into account any extensions under the Outbreak Period rules). Note that recent CMS guidance has clarified that the end of the COBRA premium assistance would result in a special enrollment period on the individual marketplace.

Extended election period and extensions under the Outbreak Period rules

The Q&As clarify that the Outbreak Period rules do not apply to ARPA’s notice and extended election period requirements. Qualified beneficiaries who are AEIs and receive a notice of extended election periods only have 60 days from the date they receive the notice to elect COBRA continuation coverage. While the AEI is not required to elect retroactive COBRA continuation coverage in order to preserve his or her rights to the COBRA premium assistance, he or she must decide when electing COBRA continuation coverage eligible for premium assistance whether to elect or waive any retroactive coverage for periods of coverage before April 1, 2021.

If the AEI waives the retroactive coverage, he or she will not get another opportunity to elect the coverage, even if a later election would have been permitted under the Outbreak Period rules.

  • ARPA’s extended election period applies only to a GHP that is subject to Federal COBRA and not continuation coverage provided only under state law.
  • HRAs, for which an AEI has elected COBRA continuation coverage under ARPA’s extended election period but declined to elect coverage that is retroactive to the COBRA qualifying event, may not reimburse expenses incurred after the qualifying event that led to the loss of coverage and before the first day of the first period of COBRA continuation coverage beginning on or after April 1, 2021.
  • The employer may require an AEI who elects retroactive coverage for a period beginning before April 1, 2021, to pay the premiums for that period of COBRA continuation coverage consistent with the extended timeframes under the Outbreak Period rules. An individual who fails to timely pay any amount toward the premiums due for the retroactive COBRA continuation coverage may be treated as having not elected COBRA coverage until the first period of coverage beginning on or after April 1, 2021. If the individual pays only a portion of the total premiums due for retroactive coverage, the plan may credit those premiums to the earliest months of the retroactive COBRA continuation coverage and resume providing COBRA continuation coverage as of the first period of coverage beginning on or after April 1, 2021.

Calculation of COBRA premium assistance tax credit

Employer COBRA premium subsidies, such as those made available to a terminating employee through a severance package, can affect the amount of COBRA premium assistance that is available and thus the tax credit that an employer can claim. Since employers cannot claim a premium assistance tax credit for any severance-based COBRA premium subsidy they provide, they may want to consider with legal counsel changing how they provide severance benefits. If COBRA continuation coverage is being provided to non-AEIs or to individuals who are not entitled to federal COBRA, the employer should ensure that COBRA premium costs are properly allocated when determining the available ARPA premium assistance and claimed tax credit.

  • The credit for the COBRA premium assistance under ARPA is equal to 102% of the applicable premium charged for COBRA continuation coverage to other similarly situated covered employees and qualified beneficiaries.
  • If the employer subsidizes the cost of COBRA for similarly situated covered employees and qualified beneficiaries who are not AEIs, the amount of the premium assistance tax credit is the COBRA premium that would have been charged to an AEI in the absence of the ARPA premium assistance, and does not include any amount of subsidy that the employer would have otherwise provided.
  • If the plan, which previously charged less than the maximum permitted COBRA premium, increases the premium for similarly situated covered employees and qualified beneficiaries, the ARPA COBRA premium assistance will apply to the increased premium amount. The same is true if the same plan also provided a separate taxable payment to the AEI.
  • COBRA premium assistance is not available for individuals who are not AEIs nor entitled to federal COBRA.
  • For an ICHRA, the credit is limited to 102% of the amount of eligible health care expenses actually reimbursed with respect to an AEI.

Claiming the COBRA premium assistance tax credit

Employer plan sponsors need to accurately document AEIs and the amount of the COBRA continuation coverage premium assistance in order to file the appropriate documents with the IRS to receive the premium assistance tax credit. In addition, employers need to collect and retain self-certification and attestation in the case of an IRS inquiry. Employers must maintain records substantiating eligibility for the tax credit generally for at least six years; however, they generally need not refund credits received for AEIs who failed to report their ineligibility for the premium tax credit. Employers should speak with their tax advisors about claiming the tax credit or requesting an advance of the anticipated credit.

  • The “premium payee” for COBRA continuation coverage is eligible for the premium assistance tax credit. The premium payee is either (1) the multiemployer plan; (2) the employer maintaining the GHP that provides coverage that is subject to federal COBRA (whether fully insured or self-insured); or (3) the insurer providing coverage under a fully insured plan subject to state continuation coverage requirements or “mini-COBRA.” The premium payee may also be a third-party provider and, in limited circumstances, a government of any state or political subdivision, or any agency or instrumentality thereof.
  • The premium assistance tax credit can be claimed on designated lines of the federal payroll tax return (Form 941, Employer’s Quarterly Federal Tax Return). Alternatively, the premium payee may (1) reduce the deposits of federal employment taxes, including withheld taxes, that it would otherwise be required to deposit, up to the amount of the anticipated credit; and (2) request an advance of the amount of the anticipated credit that exceeds the federal employment tax deposit available for reduction by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
  • The premium payee must include any tax credit in its gross income for the taxable year, which includes the last day of any quarter with respect to which the credit is allowed.
  • Employers wishing to claim a premium assistance tax credit will need to maintain records of an individual’s self-certification or attestation as COBRA premium assistance eligibility, or other documentation substantiating eligibility.

Going forward

Employer plan sponsors should review the Q&As in the IRS notice and discuss their implications with their carriers/third-party administrators as soon as possible.

Footnotes

1 See “Health and benefit implications of ARPA,” Insider, March 2021

2 See “DOL guidance on end of COVID-19 Outbreak Period,” Insider, March 2021

Authors

Senior Regulatory Advisor, Health and Benefits

Senior Regulatory Advisor, Health and Benefits

Senior Regulatory Advisor, Health and Benefits

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