IRS Guidance on ARPA's COBRA Subsidy & Tax Credit

The IRS has provided guidance on the premium assistance and tax credit under the American Rescue Plan Act of 2021 (ARPA) for continuation health coverage under COBRA. Notice 2021-31 provides guidance for employers, plan administrators, and health insurers regarding the new credit available to them for providing continuation health coverage to certain individuals. The notice, in the form of 86 Q&As, provides information regarding the eligibility of individuals, involuntary termination, calculating and claiming the credit, and more.

ARPA. The ARPA provides a temporary 100 percent reduction in the premium that individuals would have to pay when they elect COBRA continuation health coverage following a reduction in hours or an involuntary termination of employment. The new law provides a corresponding tax credit for the entities that maintain group health plans, such as employers, multiemployer plans, and insurers. The 100 percent reduction in the premium and the credit are also available with respect to continuation coverage provided for those events under comparable State laws, sometimes referred to as “mini-COBRA.”

Eligibility for premium assistance. The notice clarifies that an Assistance Eligible Individual (AEI) is any individual who is:

1. a qualified beneficiary as the result of : (A) the reduction of hours of a covered employee’s employment or (B) the involuntary termination of a covered employee’s employment (other than by reason of an employee’s gross misconduct),
2. eligible for COBRA continuation coverage for some or all of the period beginning on April 1, 2021, through September 30, 2021, and
3. elects the COBRA continuation coverage.

This includes qualified beneficiaries who are the spouse or dependent child of the employee who had the reduction in hours or involuntary termination of employment resulting in a loss of coverage, as well as the employee, if that reduction in hours or involuntary termination of employment caused the qualified beneficiary to lose coverage and the other requirements are satisfied.

The notice indicates an individual can become an AEI more than once. An individual who becomes a qualified beneficiary as the result of a reduction in hours or involuntary termination of employment, and who otherwise meets the requirements to be an AEI, is treated as an AEI regardless of whether the individual was also treated as an AEI at an earlier date.

Other qualifying events. The notice also provides that qualifying events other than a reduction in hours or an involuntary termination of employment, such as divorce or a covered dependent child ceasing to be a dependent child under the generally applicable terms of the plan (such as loss of dependent status due to aging out of eligibility), are not events qualifying an individual for COBRA premium assistance.

Coverage issues. Premium assistance is available to a potential AEI who was eligible for other group health plan coverage before April 1, 2021, but on and after April 1, 2021, has not been permitted to enroll in that other group health plan coverage.

In addition, enrollment in other group health plan coverage before electing COBRA continuation coverage does not end the period of eligibility for COBRA continuation coverage. If the individual is no longer covered by (or eligible to enroll in) the other group health plan coverage as of April 1, 2021, that prior coverage by a group health plan does not disqualify the individual from COBRA premium assistance. However, beginning on April 1, 2021, coverage by (or eligibility to enroll in) another group health plan would disqualify the individual from COBRA premium assistance, even though it does not end the period of eligibility for COBRA continuation coverage.

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.

Qualified beneficiaries. A qualified beneficiary whose qualifying event is a voluntary reduction in hours is a potential AEI who qualifies for COBRA premium assistance. An employee’s reduction in hours would cause the qualified beneficiary to be a potential AEI regardless of whether the reduction in hours is voluntary or involuntary.

The notice also explains that a qualified beneficiary whose qualifying event is a furlough is a potential AEI who qualifies for COBRA premium assistance. The notice defines “furlough” as a temporary loss of employment or complete reduction in hours with a reasonable expectation of return to employment or resumption of hours (for example, due to an expected business recovery of the employer) such that the employer and employee intend to maintain the employment relationship.

Involuntary termination. An involuntary termination of employment means a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services.

Good reason. An employee-initiated termination of employment constitutes an involuntary termination of employment for purposes of COBRA premium assistance if the termination of employment constitutes a termination for good reason due to employer action that results in a material negative change in the employment relationship for the employee analogous to a constructive discharge. An employee-initiated termination of employment in response to an involuntary material reduction in hours is treated as a termination for good reason.

General concerns about safety. However, in general, an employee’s termination of employment due to general concerns about workplace safety is not treated as an involuntary termination of employment. A departure due to the personal circumstances of the employee unrelated to an action or inaction of the employer, such as a health condition of the employee or a family member, inability to locate daycare, or other similar issues, generally will not rise to the level of being analogous to a constructive discharge absent the employer’s failure to either take a required action or provide a reasonable accommodation.

Other situations. Involuntary termination of employment includes an employer’s action to end an individual’s employment while the individual is absent from work due to illness or disability if that action would otherwise constitute an involuntary termination of employment. It also includes a resignation as the result of a material change in the geographic location of employment for the employee. However, generally, involuntary termination of employment does not include retirement.

Coverage eligible for premium assistance. The notice provides that COBRA premium assistance is available for COBRA continuation coverage of any group health plan except a health FSA under Code Sec. 106(c) offered under a cafeteria plan. Thus, premium assistance is available for vision-only and dental-only plans. It is also available for COBRA continuation coverage under a health reimbursement arrangement (HRA) and an individual coverage HRA. However, a qualified small employer health reimbursement arrangement (QSEHRA) is not a group health plan eligible for COBRA continuation coverage.

Extensions under Emergency Relief Notices. The extensions of timeframes available under the Emergency Relief Notices do not apply to either the required furnishing of a notice of an ARPA extended election period or to the ARPA extended election period. The notice of the ARPA extended election period must be furnished by May 31, 2021 (60 days after April 1, 2021). An individual receiving the notice must elect COBRA continuation coverage no later than 60 days after the notice is provided in order to receive COBRA premium assistance.

Calculation of credit. If the employer does not subsidize COBRA premium costs for similarly situated qualified beneficiaries who are not AEIs, the credit for a quarter is the amount equal to the premiums not paid by AEIs for COBRA continuation coverage due to the application of ARPA Sec. 9501(a)(1) for the quarter. In this case, the amount of the premiums not paid by the AEI is the premium amount charged for COBRA continuation coverage to other similarly situated covered employees and qualified beneficiaries (for example, coverage for a single individual, individual plus one, or family who are not AEIs). The premium amount also includes any administrative costs otherwise allowed (that is, generally 102 percent of the applicable premium under Code Sec. 4980B(f)(4).

For an employer that subsidizes the COBRA premium costs for similarly situated covered employees and qualified beneficiaries who are not AEIs, the amount of the credit is the premium that would have been charged to an AEI in the absence of the premium assistance, and does not include any amount of subsidy that the employer would have otherwise provided. Thus, absent the premium assistance, if the premium that the employer would have charged to an AEI is less than the maximum COBRA premium—for example, if the employer would have subsidized the coverage by paying all or part of the premium—the credit is equal to the amount that the employer actually would have charged to the AEI.

The premium amounts for COBRA continuation coverage for one or more individuals who are AEIs and one or more individuals who are not AEIs are allocated first to the premiums for the AEIs, based on the cost of COBRA continuation coverage (without COBRA premium assistance) for only AEIs, and then to the premiums for the individuals who are not AEIs.

Claiming the credit. The notice explains the premium payee for continuation coverage is eligible for the credit. The premium payee is:

1. the multiemployer plan, in the case of a group health plan that is a multiemployer plan,
2. the common law employer maintaining the plan, in the case of a group health plan, other than a multiemployer plan, that is (a) subject to Federal COBRA, or (b) under which some or all of the coverage is not provided by insurance (that is, a plan that is self-funded, in whole or in part), or
3. the insurer providing the coverage, in the case of any other group health plan not described in (1) or (2) (generally, fully insured coverage subject to State continuation coverage requirements).

Third-party payer. A third-party payer may be treated as a premium payee for purposes of claiming the premium assistance credit only under certain circumstances. A third-party payer is treated as the premium payee for purposes of the credit if the third-party payer:

• maintains the group health plan,
• is considered the sponsor of the group health plan and is subject to the applicable DOL COBRA guidance, including providing the COBRA election notices to qualified beneficiaries, and
• would have received the COBRA premium payments directly from the AEIs were it not for the COBRA premium assistance.

Timing of credit. As of the date on which the premium payee receives the potential AEI’s election of COBRA continuation coverage, the premium payee is entitled to the credit for premiums not paid by an AEI for any periods of coverage that began before that date.

Reporting. A premium payee claims the credit by reporting the credit (both the nonrefundable and refundable portions of the credit, as applicable) and the number of individuals receiving COBRA premium assistance on the designated lines of its federal employment tax return(s), usually Form 941, Employer’s Quarterly Federal Tax Return.

SOURCE: IR-2021-115, May 18, 2021;IRS Notice 2021-31, I.R.B. 2021-23, June 7, 2021.

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