The American Rescue Plan Act of 2021 (ARPA) passed by Congress and signed by President Biden on March 11, 2021 contains various employee benefits provisions, including premium assistance for participants of group health plans through the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) subsidies.

Like any new piece of legislation, there are many details yet to be determined. Regulations for COBRA subsidies are expected to be released soon, including IRS and Department of Labor (DOL) guidance clarifying the implementation process for plan sponsors and employers. The below questions address what we know so far.

What is the COBRA subsidy?

A participant or qualified beneficiary is entitled to receive a subsidy for their full monthly cost of COBRA from April 1, 2021 through September 30, 2021. The full subsidy appears to include the 2% administrative fee. Also, the subsidy is tax-free to the participant.

Which employers are impacted by the COBRA subsidies?

All employers subject to COBRA rules are impacted, including small employers with under 20 employees required to offer state-specific “mini-COBRA.” This includes:

• Public employers
• Private employers
• Multiemployer health plans
• Self-funded health plans
• Fully insured health plans.

What kind of plans are impacted by the COBRA subsidies?

According to Gallagher’s News & Insights, the subsidies apply to health plans subject to COBRA, including dental and vision. However, health care flexible spending accounts (FSAs) are not covered under ARPA rules.

Who pays for the subsidies?

Employers subject to COBRA will take a refundable tax credit against their payroll taxes. Milliman’s Multiemployer Alert indicates that if a plan sponsor does not have a payroll tax liability, as in the case of a multiemployer health plan, it will still be able to claim the federal COBRA subsidy. Additional IRS guidance is expected on this topic. If the plan sponsor’s COBRA premium costs exceed its Medicare payroll tax liability, it can file to get direct payment of the remaining credit amount, although this process is still unclear. In the case of a fully insured small employer plan subject to mini-COBRA, the plan’s insurers will take the tax credit.

Who is eligible for COBRA Subsidies?

Participants and other qualified beneficiaries who experience a COBRA qualifying event caused by an involuntary termination of employment such as a layoff or furlough or a reduction in hours are eligible for the subsidy. Voluntary termination or other COBRA qualifying events such as divorce or a dependent turning age 26 who ages out of the employer-sponsored health insurance are not eligible for a subsidy.

To qualify, the COBRA participant or beneficiary:

• Must have incurred an involuntary termination of employment or a reduction in hours
• Must be enrolled in COBRA coverage on April 1, 2021 and still within their 18-month maximum coverage period
• Must not be eligible for other employer-sponsored coverage
• Must not be eligible for Medicare.

What about employees who have terminated in the past 18 months?

Segal’s Compliance News explains that employers should consider that participants who elected or could have elected COBRA as far back as November 2019 could potentially be eligible for the COBRA subsidy. For example, if one participant did not previously elect COBRA but would still be within their 18-month coverage period if they had elected COBRA and another participant initially elected COBRA but then dropped the coverage prior to exhausting their 18-month maximum coverage period, both participants will have a new 60-day election period to elect continuation coverage.

What is the extended election period?

Using the above scenario, the extended election period begins April 1, 2021 and ends 60 days after receipt of a COBRA notice from the plan sponsor. Note that for those electing coverage based on this extension, the coverage will be effective as of April 1, 2021 but will not extend beyond the maximum coverage period based on the original qualifying event. For example, if a participant’s original COBRA effective date was August 1, 2020 and the participant is choosing coverage now through the extended election period, COBRA will be effective April 1, 2021 through January 31, 2022 (18 months from August 1, 2020), although the subsidy would end September 30, 2021.

As part of the extended election period, can participants elect a different plan option?

Plan sponsors may, but are not required to, allow participants and beneficiaries eligible for the COBRA subsidy to change their medical plan option. If allowing a plan change, the following requirements must be met in order to qualify:

• The new plan option premium cannot exceed the premium of the original plan option at the time of the COBRA qualifying event.
• The new plan option must also be available to active employees.
• The qualified beneficiary must elect the plan option change within 90 days of receiving notice of the ability to make such change.

What notices are required?

Between April 1 and September 31, 2021, the American Rescue Plan provided a list of notification guidelines that plan sponsors must include in their COBRA election notices. Although the model language for the notices has not been released, DOL is required to issue it by April 10, 2021.  In the meantime, the additional content required includes:

• The forms required to establish eligibility
• The name, address and telephone number for the plan sponsor and/or third-party administrator
• The participant’s or beneficiary’s rights to the extended election period
• Information about the participant’s or beneficiary’s obligation to notify the group health plan if eligible for another employer-sponsored health plan or Medicare and the penalties for failure to do so
• A clear and understandable description of the right to the COBRA premium subsidy.

What is the timing of the election notices?

• Plan sponsors with participants or beneficiaries eligible for the extended election period are required to send a notice within 60 days of April 1, 2021 (no later than May 31, 2021).
• Plan sponsors are required to provide a notice of eligibility within 30 days to participants and beneficiaries who have a COBRA-eligible qualifying event after April 1, 2021.
• Plan sponsors are required to notify their COBRA participants as to when their subsidy will expire.
• Upon receipt of the notice, participants will have a 60-day enrollment window to elect coverage.

Next Steps for Plan Sponsors

The International Foundation will be monitoring the government agencies for the new regulations and guidance. Plan sponsors should understand the new requirements under the American Relief Act and consider having conversations with their plan counsel or third-party administrators as there may be administrative challenges in determining the COBRA eligible participants and beneficiaries back to November 1, 2019.

In addition, plan sponsors should: 

• Update their COBRA election notice and revise it as new guidance is issued
• Develop a plan to communicate with COBRA participants
• Maintain supporting documentation regarding the initial reason for termination or reduction in hours and the qualified beneficiary’s COBRA election.

[Related Reading: COBRA’s Interaction With HSAs, HRAs and FSAs]

Anne Newhouse, CEBS
Information/Research Specialist at the International Foundation of Employee Benefit Plans

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