The Ins and Outs of the 100 Percent COBRA Subsidy Under the American Rescue Plan Act

As a result of the COVID-19 pandemic, employees who have been involuntarily terminated or had their hours reduced and lost their group health plan coverage face a major hardship – being able to afford the premiums for COBRA continuation coverage. The newly enacted American Rescue Plan Act of 2021 (the “Act”) addresses this hardship through a 100 percent subsidy for premiums for COBRA coverage for the six-month period from April 1, 2021 through September 30, 2021.

Individuals and Coverages Eligible for the Subsidy

Employees who have involuntarily been terminated or had their hours reduced, and who are currently in their 18-month COBRA continuation coverage period, are eligible for the subsidy. Their qualified beneficiaries, spouses, and dependents who were covered under the employer’s plan and lost coverage due to the employee’s involuntary termination or reduction in hours are also eligible. Domestic partners and their children, regardless of whether the employer’s plan provides COBRA-like coverage for them, are not qualified beneficiaries and therefore are ineligible for the subsidy.

Eligible individuals are currently in their 18-month continuation coverage period if their involuntary termination or reduction in hours occurred on or after November 1, 2019. Individuals are eligible for the subsidy regardless of whether they previously elected COBRA and continue to be on COBRA, previously elected COBRA but discontinued it, or did not previously elect COBRA.

The subsidy is unavailable for loss of group health plan coverage due to voluntary termination, termination for gross misconduct, death, divorce, or a child attaining age 26.

The subsidy is available for COBRA continuation coverage provided under federal law through ERISA or under state law for employers that are not subject to ERISA’s COBRA continuation coverage requirements. The subsidy applies to group health plans that provide medical, dental, and vision benefits and employee assistance programs. It does not apply to healthcare flexible spending accounts.

There is no income cap for the subsidy, and the subsidy is not taxable to the employee or his or her qualified beneficiaries.

Extended COBRA Election Period

To qualify for the subsidy, an eligible individual must have COBRA continuation coverage. The Act provides an extended election period for individuals who do not have COBRA elections in effect on April 1, 2021 and who previously elected COBRA but discontinued coverage, or who did not previously elect COBRA. Eligible individuals may elect COBRA beginning on April 1, 2021 and ending 60 days after the date they are provided with the required notice of the extended election period. The coverage period begins with the first period of coverage that begins on or after April 1, 2021 and does not extend beyond the date the maximum coverage period would otherwise end, which is generally 18 months after the date of involuntary termination or reduction in hours. Accordingly, eligible individuals will be able to enroll in COBRA during the subsidy period without electing COBRA retroactive to the date of involuntary termination or reduction in hours.

Complicating the extended COBRA election period is Employee Benefits Security Administration (EBSA) Disaster Relief Notice 2021-01, which suspends the COBRA election period until the earlier of one year after the regular qualifying event for COBRA coverage and 60 days after the end of the nationally declared public health emergency. Additional guidance is necessary to coordinate the extended election period for the subsidy and Notice 2021-01.

Period of Subsidy

The subsidy applies for the six-month coverage period from April 1, 2021 to September 30, 2021. The subsidy ends earlier for months of coverage that begin on or after the earliest of the following events:

1. The first date the individual is eligible for Medicare;
2. The first date the individual is eligible for coverage under another group health plan – the subsidy does not end if the new coverage is for only excepted benefits (e.g., standalone dental and vision plans), a healthcare flexible spending account, or a qualified small employer health reimbursement arrangement; and
3. The date after expiration of the regular maximum COBRA period, which is 18 months after the involuntary termination of employment or reduction in hours – if COBRA continuation coverage is provided under state law, and the coverage period is less than 18 months, such as one year, the shorter period would apply.

It is important to note that under the regular COBRA rules, COBRA continuation coverage ends when the beneficiary becomes enrolled in Medicare or another group health plan, rather than when the beneficiary merely becomes eligible for Medicare or another group health plan.

It is likely that many eligible individuals and their qualified beneficiaries will elect COBRA for the subsidy period. As a result, group health plans may experience higher claims, which will likely affect the cost for renewal of traditional group health plan insurance and stop-loss insurance.

Optional Coverage Changes

The employer has the option to allow eligible individuals to elect a different type of coverage provided by its plan. The eligible individual must elect the different coverage no later than 90 days after the date he or she is provided with the required notice of the right to change coverage. The premium for the new coverage cannot exceed the premium for the coverage that the individual had prior to involuntary termination or reduction in hours. The new coverage must also be offered to similarly situated active employees and cannot be coverage that provides only excepted benefits (e.g., standalone dental and vision plans), a healthcare flexible spending account, or a qualified small employer health reimbursement arrangement.

Notice of Extended Election Period

For employees and their qualified beneficiaries who became eligible to elect COBRA before April 1, 2021, the plan administrator must provide by May 31, 2021 a written notice of the extended election period and subsidy. The Department of Labor (DOL) must issue a model notice by April 10, 2021. The notice must advise the recipient in clear and understandable language of the availability of the subsidy. In addition, if the employer decides to offer optional coverage changes, the notice must describe the changes available and provide the following information:

1. The forms necessary for establishing the subsidy;
2. The name, address, and telephone number to contact the plan administrator and any other person with relevant information regarding the subsidy;
3. Description of the extended election period;
4. Description of the individual’s obligation to provide notice if he or she becomes eligible for Medicare or other group health plan coverage and the penalty for failure to provide the notice;
5. Description displayed in a prominent manner of the individual’s right to a subsidized premium and any conditions on entitlement to the subsidized premium; and
6. If the employer has decided to offer optional coverage changes, a description of that option.

To comply with this notice requirement, employers should immediately determine all employees who were involuntarily terminated or had an involuntary reduction in hours since November 1, 2019, and which of these employees or their qualified beneficiaries previously elected COBRA and continue to be on COBRA, previously elected COBRA but discontinued it, or did not previously elect COBRA.

Notice of Expiration of Subsidy 

Between 45 and 15 days before the subsidy ends for an individual, the plan administrator must provide written notice in clear and understandable language that the subsidy for the individual will expire soon and include prominent identification of the date of expiration and that the individual may be eligible for continued COBRA coverage without the subsidy or coverage under a group health plan. The notice does not apply to a subsidy that ends because the individual becomes eligible for Medicare or another group health plan. The DOL must issue a model notice by April 25, 2021.

Notice by Individual COBRA Beneficiary

An individual must provide written notice to the plan administrator of his or her eligibility for Medicare or another group health plan (other than coverage only for excepted benefits (e.g., standalone dental and vision plans), a healthcare flexible spending account, or a qualified small employer health reimbursement arrangement). The individual must provide the notice in such time and manner as specified by the Secretary of Labor. An individual who fails to provide the notice is subject to a $250 penalty unless the failure is due to reasonable cause and not willful neglect. For a fraudulent failure, the penalty is the greater of $250 and 110 percent of the subsidy provided to the individual once his or her eligibility for the subsidy ended due to eligibility for Medicare or other group health plan coverage.

Employer’s Recovery of Premium Benefits

For insured plans, the employer pays the COBRA premiums to the insurer, and for self-insured plans, the employer covers the cost of COBRA continuation coverage. The employer recoups the premium or cost by claiming a refundable payroll tax credit for Medicare taxes on its quarterly IRS Form 941. If the credit exceeds the amount of the Medicare payroll taxes otherwise due, the government will refund the excess to the employer.

If you have any questions regarding the COBRA subsidy under the American Rescue Plan Act, please do not hesitate to contact Steven H. Sholk.