Treasury and IRS Release COBRA Subsidy Guidance

Background

The American Rescue Plan Act of 2021 includes a temporary six-month COBRA subsidy when group health plan coverage is lost due to reduction in hours or an involuntary termination. The subsidy first became available on April 1, 2021.

The subsidy will generally end on September 30, 2021. However, it will end earlier for individuals who become eligible for other group coverage or Medicare, or whose maximum period of COBRA coverage ends before September 30.

We summarized the American Rescue Plan Act’s COBRA subsidy in our March 11, 2021 insight.

The guidance

The extensive guidance, Notice 2021-31, is in the form of 86 questions and answers. While the guidance addresses some questions raised by plan sponsors, we anticipate that many important issues may still need to be resolved by the Treasury Department and the IRS. This insight provides an overview that highlights significant issues addressed in the notice:

• Reduction in hours/involuntary termination
• Reliance on employee attestation
• Eligibility for other group health coverage
• Duration of COBRA and subsidy
• Types of coverage eligible for COBRA subsidy
• Impact of plan sponsor’s subsidy of COBRA coverage on receiving the federal subsidy
• New requirement to elect retroactive COBRA
• Forms for claiming the subsidy
• Multiemployer plan process for claiming the subsidy

Reduction in hours/involuntary termination

A reduction in hours can be voluntary or involuntary (Q21). It includes a furlough, defined as a temporary loss of employment or complete reduction in hours with a reasonable expectation of return to employment or resumption of hours, such that the employer and employee intend to maintain the employment relationship (Q22). It also includes a work stoppage as a result of a lawful strike initiated by employees or their representatives or a lockout initiated by the employer (Q23).

Many questions address involuntary termination of employment and the facts-and-circumstances tests that will determine this (Q24–Q34):

• In general, termination is a severance from employment due to the independent exercise of the unilateral authority of the employer, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue working (Q24).
• Termination includes a termination for cause (but not a termination for gross misconduct, as that is not a COBRA qualifying event) (Q27).
• Depending on the facts, termination can include a retirement (e.g., where absent retirement, the employer would have terminated the employee) (Q26).
• Termination can include an employee’s departure due to workplace safety concerns if the employee can show that the employer’s actions or inactions resulted in a material negative change in the employment relationship (Q30).
• Termination of employment generally would not include an employee’s personal decision to leave the job unrelated to any action or inaction of the employer (such as the employee’s or a family member’s health or the inability to locate daycare), unless the employer has failed to take a required action or provide a reasonable accommodation (Q30).
• Termination generally would not include an employee-initiated termination because a child is unable to attend school or daycare due to the pandemic, unless the facts and circumstances show that this was a temporary leave of absence and the employer and employee intended to maintain the employment relationship (Q31).
• Termination of employment can include an employer’s decision not to renew an employment contract if the employee was willing and able to renew it, unless the parties understood at the time they entered into the contract that the contract would not be renewed (Q34).

Reliance on participant attestation

Plan administrators may require individuals to attest to the circumstances of the qualifying event and to their ineligibility for other group coverage or Medicare and may rely upon that attestation unless the plan administrator has actual knowledge that the attestation is incorrect (Q4 to Q7). Although not explicitly stated in the notice, this would include reliance on the model DOL form Request for Treatment as an Assistance Eligible Individual.

Eligibility for other group health coverage

The notice includes several examples illustrating when an individual is eligible for other group coverage through a special enrollment period or open enrollment period (such as through a spouse’s group plan) (Q9 and Q11). Of particular note is the impact of the extended special enrollment periods required under the DOL/Treasury Emergency Relief Notices, which we discussed in our March 2, 2021 insight. An individual is considered eligible for other group coverage for the entire extended enrollment period and would not be eligible for the subsidy for as long as special enrollment remains an option.

Duration of COBRA and subsidy

The COBRA subsidy continues to be available during periods where COBRA is extended beyond the usual 18 months. If the original qualifying event was reduction in hours or involuntary termination (and the coverage periods fall between April 1, 2021 and September 30, 2021), the COBRA subsidy is available to people who have elected and remained on COBRA for an extended period (Q17) due to:

• A disability determination
• A second qualifying event
• An extension under a state mini-COBRA law

Types of coverage eligible for COBRA subsidy

The notice confirms that the subsidy is available for COBRA coverage under any group health plan except a health flexible spending arrangement under a Section 125 cafeteria plan (Q35). For example, group health plans include vision-only and dental-only plans, regardless of whether the plan sponsor pays for a portion of the premium active employees.

If an individual initially elected COBRA only for dental and/or vision, the individual may take advantage of the American Rescue Plan Act extended election opportunity to add medical coverage, and the COBRA subsidy would be available for all of these coverages (medical plus dental and/or vision) (Q55).

Impact of plan sponsor’s subsidy of COBRA coverage on receiving the federal subsidy

The amount of the federal subsidy is calculated based on the amount of the COBRA premium charged to qualified beneficiaries.

For example, if the usual COBRA rate is $1,000 per month, but the plan sponsor charges only $500, the federal subsidy would be $500 (Q64).

If a plan sponsor temporarily subsidizes COBRA for plan participants with an involuntary termination, the government’s subsidy would be based on the COBRA premium actually charged to the qualified beneficiary. For example, if qualified beneficiaries pay only $200 for the first three months of COBRA (and the plan sponsor subsidizes the remaining $800), and $1,000 for the remaining months, the government’s subsidy would be $200 for the first three months and then would rise to $1,000 (for months falling between April and September 2021) (Q64).

If a plan sponsor previously charged less than the maximum allowable COBRA premium, but raised the amount charged to 102 percent of the applicable premium, the subsidy applies to the increased premium amount (Q65). For example, if a plan charged $500 per month for COBRA prior to April 1, but raised the amount to $1,000 per month beginning April 1, 2021, the subsidy would be $1,000 per month beginning April 1, 2021.

New requirement to elect retroactive COBRA

Individuals who take advantage of the extended election opportunity under the American Rescue Plan Act to receive the COBRA subsidy (for periods beginning April 1, 2021 or later) must make that election within 60 days of receipt of the notice of the extended election opportunity. Individuals who make this election and who also want to elect COBRA back to their initial loss of coverage are required to elect COBRA retroactively within the same 60-day period (Q56).

This rule applies to individuals who, under the DOL/Treasury Emergency Relief Notices, would have had additional time to elect COBRA back to their original loss of coverage (Q59). In essence, individuals who take advantage of the American Rescue Plan Act extended election opportunity get one bite at the apple, to elect subsidized COBRA (for April 1 through September 30) and to elect unsubsidized COBRA retroactively.

Forms for claiming the subsidy

As was the case for the 2009 COBRA subsidy, the subsidy is claimed on the designated lines of the federal employment tax return, usually Form 941, Employer’s Quarterly Federal Tax Return (Q75).

The entity to whom the subsidy is paid may also request an advance payment by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Multiemployer plan process for claiming the subsidy

Entities without any employment tax liability, such as multiemployer plans with no employees, should claim the subsidy on Form 941 for the quarter in which it becomes entitled to the subsidy. (Q77). Plans may also use Form 7200 to claim advanced payment of the subsidy, payment of which should be reported on Form 941.

Implications for plan sponsors and administrations

Plan administrators should carefully read the notice and review it with plan professionals and tax advisors. Additional guidance from Treasury and the IRS is expected.