BACKGROUND: COBRA HEALTH INSURANCE CONTINUATION COVERAGE
When an employee separates from service, whether voluntarily or involuntarily, or has work hours reduced to the extent that the employee no longer qualifies for participation in the employer’s group health plan, the Consolidated Omnibus Budget Reconciliation Act (COBRA) requires employers—both public and private–to allow the employee (and beneficiaries) to continue their coverage under the plan for eighteen months if the employee pays the premium (actually 102% of the cost of the premium). COBRA continuation coverage applies in a few other circumstances that are not relevant to this discussion.
COBRA requires only the continuation of health insurance coverage; it does not require the employer to continue to pay the premiums for coverage. The employee pays the premium. But that’s where the APRA makes its big change. The employee, from April 1 through September 30, does not have to pay the premium.
BACKGROUND: THE ARPA’S COBRA SUBSIDY
Section 9501 of the ARPA provides that 100% of the premiums of employees who lose health care coverage because they are involuntarily terminated (other than for gross misconduct) or have their hours of work reduced will be treated as if fully paid, beginning April 1, 2021, and ending September 30, 2021. In other words, the ARPA provides a continuation of COBRA health insurance coverage without employees and beneficiaries having to make premium payments (the “COBRA subsidy”). Employees who voluntarily leave employment are not eligible for the COBRA subsidy. Employees’ spouses and dependents who were enrolled in the employer’s group health plan are also eligible for the COBRA subsidy. The ARPA refers to everyone who is eligible for the COBRA subsidy as “Assistance Eligible Individuals.” This blog post will refer to them as “covered individuals.”
The COBRA subsidy is available for COBRA continuation coverage of any group health plan (except for a pre-tax flexible spending arrangement offered under a section 125 cafeteria plan). This includes not only comprehensive health insurance, but vision-only and dental-only plans, as well.
The cost of the COBRA subsidy will be borne by the federal government. That is because the federal government will give employers and, in some cases, insurance companies, a credit against their share of the Medicare tax they must pay (employers pay a Medicare tax of 1.45% of an employee’s wages). In other words, employers will not receive premium payments from covered individuals during the April to September period of the COBRA subsidy, but they will be fully reimbursed by a reduction in their Medicare tax liability in the same amount. See APRA § 9501(b)(1)(A), creating new Internal Revenue Code § 6432(a) and (b).
THE NEW IRS GUIDANCE ON HOW THE COBRA PREMIUM SUBSIDY WILL WORK
The ARPA says that covered individuals “shall be treated for purposes of any COBRA continuation provision as having paid in full the amount of such premium.” See APRA § 9501(a)(1)(A). The statute does not say just who it is who “shall treat” the COBRA premiums of covered individuals as paid in full, however. And the language and organization of the statute made it unclear whether it was fully-insured employers or their insurance companies who would receive the tax credit. Different lawyers interpreted the statute’s meaning differently. In a previous blog post (which this blog post replaces), I opined that no one would collect any premium payments and that the insurers (that is, self-insured employers and insurance companies) would claim the tax credit for the foregone premium payments. That interpretation had simplicity on its side, but that is not how it is going to work.
Employers Will Pay Insurers and Employers Will Receive a Tax Credit
Instead, the IRS has now clarified that the organization that regularly collects premium payments from participants in an employer’s group health plan will be the organization that receives the tax credits. In other words, self-insured employers will be able to claim the tax credit. Fully-insured employers who collect premium payments and then pass them on to their health insurance providers will be able to claim the tax credit. In those cases where employees, former employees and beneficiaries electing COBRA continuation coverage make payment directly to the health insurance company, the health insurance company will be eligible for the tax credit, rather than the employer. See IRS Notice 2021-31, Premium Assistance for COBRA Benefits (at the bottom of page 3).
For a more detailed description of how the tax credit will work, see below.
Questions and Answers about the ARPA’s COBRA Subsidy
Who is eligible for the subsidy?
- Employees (and their qualified beneficiaries) who lose health care coverage between April 1, 2021 and September 30, 2021 and elect COBRA continuation coverage are eligible for the subsidy unless they voluntarily left employment (or were involuntarily terminated due to gross misconduct).
- Employees, former employees, and qualified beneficiaries who lost health care coverage before April 1, 2021 and are currently paying the premiums for COBRA continuation coverage are eligible for the subsidy. These covered individuals should be refunded any premium payments that they have made for coverage for April and succeeding months.
- Employees, former employees, and qualified beneficiaries who lost coverage before April 1, 2021, but who declined COBRA coverage or discontinued coverage may now reverse that decision and enroll in COBRA coverage without paying premiums, provided that their 18-month period of COBRA eligibility has not ended. These covered individuals have 60 days after receiving the COBRA subsidy notice described below to elect COBRA coverage.
- Employees, former employees, and qualified beneficiaries who lost coverage before April 1, 2021, initially chose COBRA coverage, but discontinued it, may now re-enroll without paying premiums, provided that their 18-month period of COBRA eligibility has not ended. These covered individuals have 60 days after receiving the COBRA subsidy notice described below to elect COBRA coverage.
- In no circumstance is an employee who voluntarily left employment eligible for the COBRA subsidy. Beneficiaries who lose coverage due to divorce or because they have lost dependent child status are not eligible for the subsidy.
Who pays the premium during the April to September subsidy period?
In most cases, employers will bear the responsibility for paying the COBRA subsidy premiums on behalf of their employees, former employees, and qualified beneficiaries. That is because the organization that has collected COBRA premiums from covered individuals before April 1, 2021 will be the organization responsible for paying the COBRA subsidy premiums to their outside insurance company or into their self-insured plan between April 1 and September 30, 2021. In Notice 2021-31 (at Q&A No. 60), the IRS says that a fully-insured employer is responsible for continuing to pay the COBRA continuation premium to its health insurer, although an employer and insurer may agree to have the insurer collect the COBRA premiums directly from those qualified for continuation coverage.
How does the tax credit work? Are both fully-insured and self-insured local government employers entitled to the tax credit?
Yes. Both fully-insured employers and self-insured employers are entitled to a credit against the employer’s share of the Medicare (hospital insurance) portion of the FICA tax. The credit will be given on a quarterly basis. The amount of the credit will be equal to the total amount of premiums that the employer has not collected from covered individuals during that quarter, plus any administrative fee (up to an additional 2%) that the employer has been charging. If an employer subsidizes COBRA continuation coverage, either as a matter of policy or as part of a separation agreement, it may receive a tax credit only in an amount equal to what it would have regularly collected from the employee and/or beneficiaries in premiums.
The credit will be claimed by reporting the number of individuals for whom the employer is paying a COBRA subsidy on the designated lines of Form 941, the Employer’s Quarterly Federal Tax Return. An employer may also reduce the amount it deposits in payment of federal employment taxes that it would otherwise be required to deposit up to the amount of the credit it anticipates for that quarter. So for the premiums it pays as part of the COBRA subsidy for the period April 1, 2021 through June 30, 2021, an employer should report the payments and the corresponding credit on the Form 941 it files for the second quarter of the year. For premiums an employer pays as part of the COBRA subsidy for the period July 1, 2021 through September 30, 2021, it should report the payments and the corresponding credit on the Form 941 it files for the third quarter of the year.
When does the COBRA subsidy end?
- The COBRA subsidy ends for everyone on September 30, 2021.
- For covered individuals whose initial COBRA eligibility period began before April 1, eligibility for the COBRA subsidy will end before September 30, if their original 18- or 36-months of COBRA eligibility ends before September 30. In other words, the ARPA’s COBRA subsidy provisions do not extend the period of COBRA continuation coverage for which a person would otherwise be eligible.
- Eligibility for the COBRA subsidy will end before September 30 if a covered individual becomes eligible to participate in another group health plan (through a new job or through another family member) or becomes eligible for Medicare. It will be the responsibility of the covered individual to inform the health plan of their eligibility for other coverage. Failure to do so will result in a fine of $250, payable to the U.S. Government. In the event the failure is deemed fraudulent, the penalty may be increased to 100% of the cost of premiums that were subsidized after the employee became eligible for other coverage.
- Covered individuals will cease to be eligible for the COBRA subsidy when they first become eligible for other coverage, not at some later time when they actually enroll in other coverage. Otherwise, most rational people would choose to continue with the free COBRA coverage for as long as possible rather than enroll in a new plan which might require payment of premiums.
Do employers have to allow employees to change plan options during the COBRA subsidy period?
No. The ARPA’s COBRA provisions permit employers who offer more than one level of health care coverage to allow anyone eligible for a COBRA subsidy to switch from a more expensive plan to a less expensive plan within 90 days of the employee’s receiving notice of this option, but this is not a requirement. Employers may voluntarily choose to allow or not to allow such changes. For example, an employer may offer two plans: a) a 70/30 plan with a more restricted network of providers, lower copays and deductibles, and a premium that the employer pays in full, and b) an 80/20 plan with a larger network of providers, higher co-pays and deductibles, and a premium to which employees must contribute. During the COBRA period (when the employee may be out of work), a covered individual might prefer the plan that has lower copays and deductibles rather than the more generous, but more expensive plan in which they were enrolled while the employee was fully employed.
Will the cost of the subsidized premiums be treated as imputed income to covered individuals and, if so, who will be responsible for reporting it to the IRS next year?
No. The IRS will not treat the COBRA premium subsidy as taxable income for covered individuals. See new section 139I of Internal Revenue Code, as set forth in section 9501 the ARPA.
COBRA NOTICE REQUIREMENTS UNDER THE ARPA
Under regular, existing COBRA rules, when employees are terminated, have their hours reduced, die, or become entitled to Medicare, it is the responsibility of the employer to inform the plan administrator (“COBRA administrator”) within 30 days. The COBRA administrator must then provide notice to the employee and qualified beneficiaries of their individual rights to elect COBRA continuation coverage. Many local governments use third-party plan administrators (TPAs) to send COBRA notices and administer continuation coverage, but occasionally the COBRA administrator is an employee of a local government itself (usually the human resources director or benefits manager). Notice must be sent within 14 days after the COBRA administrator received notice that a qualifying event has occurred.
An employee or beneficiary then has 60 days to elect continuation coverage and has 45 days after the day on which continuation coverage is elected to make the first premium payment. Any medical expenses that an employee or beneficiary incurs during the period between the loss of employer coverage and the election of COBRA coverage are covered retroactively. This means that employees may wait to see whether they incur any medical expenses during this initial period before they decide whether to elect COBRA coverage.
COBRA Subsidy Notice Requirements
COBRA administrators (whether TPAs or local government employees) must now modify their COBRA notices to incorporate information about the availability of the COBRA subsidy and of the option to switch coverage if the employer allows employees to do so. The ARPA also imposes a new duty to provide timely notice to covered individuals when their COBRA subsidy is due to expire.
Questions and Answers about the ARPA’s COBRA Notice Requirements
Is there a specific form the new COBRA subsidy eligibility notice must take?
No. COBRA administrators have the option of either modifying their existing COBRA notices or adding an additional page to their existing COBRA notice.
Is there specific information the new COBRA subsidy notice must include?
Yes. Regardless of how a COBRA administrator chooses to provide notice, the following information must be provided to all covered individuals:
- the forms necessary for establishing eligibility for the COBRA subsidy;
- the name, address, and telephone number necessary to contact the plan administrator and anyone else who has information in connection with the COBRA subsidy;
- an explanation of the time period by which the covered individual must elect COBRA coverage;
- an explanation of the obligation of each covered individual to inform the health plan when they become eligible for other coverage and of the $250 penalty for failure to do so;
- an explanation, displayed in a prominent manner, of a covered individual’s right to the COBRA subsidy; and
- a description of the covered individual’s right to enroll in different coverage if the employer permits such a switch.
Will the U.S. Department of Labor (DOL) provide a model COBRA subsidy eligibility notice?
DOL has issued a model COBRA subsidy eligibility notice, which can be found here. It has issued a separate model notice for covered individuals who have not elected COBRA or who have terminated their COBRA coverage early, which can be found here. Remember, covered individuals have 60 days after receiving the COBRA subsidy notice to change their minds and elect COBRA coverage.
What information must the COBRA subsidy expiration notice include?
COBRA administrators must provide covered individuals with written notice of the date on which their COBRA subsidy will end. The notice must be provided no earlier than 45 days before the expiration date and no later than 15 days before that date. Depending on the circumstances, the notice must advise covered individuals that they may be eligible for regular continued COBRA coverage at 102% of the premium (if the person’s regular 18- or 36-month continuation period has not yet run its course) or that they may be eligible for coverage through a group health plan (exactly what that means is not clear). DOL’s model COBRA subsidy expiration notice is available here.
At 41 pages, IRS Notice 2021-31, Premium Assistance for COBRA Benefits contains much useful information for those with responsibility for administering COBRA continuation coverage. This blog post gives an overview of the way in which the COBRA subsidy will be implemented. Notice 2021-31 provides much more detail. Through a series of questions and answers, it addresses various scenarios that may arise over the course of the next few months in areas such as eligibility for the COBRA subsidy (pages 6 – 13), what it means to have a reduction in hours or involuntary termination of employment (pages 13 – 17), the kinds of coverage eligible for the COBRA subsidy (pages 17 – 20), the beginning and end of the subsidy period (pages 20 – 23), and the extended election period (pages 23 – 25), as well as detailed guidance on how to calculate the tax credit (pages 28 – 40).