The American Rescue Plan Act (ARPA) requires that from April 1through September 30, COBRA health insurance continuation coverage be provided free of charge to employees and their beneficiaries who lose health care coverage because the employees have been fired or because their hours have been reduced. Insurers (including self-insured employers) will receive tax credits for the amounts that they have foregone in premiums. Read on to understand why employers are not required to pay the cost of COBRA health insurance premiums during this time.
When an employee separates from service, whether voluntarily or involuntarily, or when the hours of an employee are 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 both public and private employers to allow the employee and any beneficiaries covered through the employee to continue their coverage under the employer’s healthcare plan for eighteen months at 102% of the cost of the applicable premium, payable by the employee. COBRA continuation coverage applies in a few other circumstances (“qualifying events”) in which an employee’s spouse and dependents may be entitled to thirty-six months of continuation coverage. These include the employee’s enrollment in Medicare; the divorce or legal separation of the employee and his or her spouse; the employee’s death; and a child’s loss of “dependent” status under the terms of the employer’s health insurance plan.
COBRA requires only the continuation of health insurance coverage; it does not require the employer to continue to pay the premiums for coverage. An employer may require an employee or qualified beneficiary to pay both the employer’s and the employee’s share of the premium’s cost.
THE ARPA’s COBRA SUBSIDY
Section 9501 of the ARPA provides that 100% of the premiums of an employee who loses health care coverage because they are dismissed or because their hours of work are reduced will be treated as if fully paid, beginning April 1, 2021, and ending September 30, 2021. Employees who voluntarily leave employment are not eligible for this “COBRA subsidy.” Employees’ spouses and dependents (“beneficiaries”) who are also eligible for COBRA coverage because they were also 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 employer-paid COBRA subsidy as “Assistance Eligible Individuals.” This blog post will refer to them as “covered individuals.” The term “COBRA subsidy” means the continuation of COBRA health insurance coverage without premium payment.
Questions and Answers about the ARPA’s COBRA Subsidy
1. Who is eligible for the subsidy?
- Employees (and their beneficiaries) who lose health care coverage between April 1, 2021 and September 30, 2021 are eligible for the subsidy unless they voluntarily left employment.
- Employees, former employees, and 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 beneficiaries who lost coverage before April 1, 2021, but who declined COBRA coverage may now reverse that decision and enroll in COBRA coverage without paying premiums, provided that their 18- or 36-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 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- or 36-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.
2. How will the subsidy work? Do employers have to pay the cost of employees and former employees premiums? Do they have to pay the cost of premiums for the beneficiaries of their employees and former employees, as well? Why do only self-insured employers eligible for a tax credit for the COBRA subsidy?
Employers do not have to pay anything. Nobody has to pay anything. 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). That sentence applies to both insurers and employers. Both are to treat the premium as having been paid.
There are some news reports to the effect that employers will have to pay the premiums of all covered individuals – including the premiums of employees’ beneficiaries. That is not what the statute says.
The cost of the COBRA subsidy will be borne by the federal government. That is because the federal government will give insurance companies (and self-insured employers) a credit against their share of the Medicare (hospital insurance) portion of the FICA tax in an amount equal to what they have forgone in uncollected premiums (employers pay a Medicare tax of 1.45% of an employee’s wages). Neither self-insured employers nor insurance companies will receive premium payments during the 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 ARPA does not say that employers must pay the premiums to insurance companies. Some observers have interpreted the statute to mean this, but that interpretation would make little sense. If that is what the law meant, self-insured employers would make premium payments for covered individuals to themselves and fully-insured employers would make the premium payments to the insurance company. The self-insured employers would receive a Medicare tax credit for the premium payments. The fully-insured employers would not! The statute says that in the case of fully-insured employers, the tax credit will go to “the insurer providing the coverage under the group health plan.” So the employers who spent the money covering the premiums would not get the tax credit – instead, the tax credit would go to the insurance company, which spent no extra money and received cash premium payments to boot. This interpretation cannot be correct.
3. 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 also 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 premiums.
4. Do employers have to allow employees to change plan options during the COBRA subsidy period?
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. 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.
5. 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?
The IRS will not treat the COBRA premium subsidy as taxable income for covered individuals.
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 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 COBRA administrators are employees of the local governments (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
1. Is there a specific form the new COBRA subsidy eligibility notice must take?
COBRA administrators have the option of either modifying their existing COBRA notices or adding an additional page to their existing COBRA notice.
2. Is there specific information the new COBRA subsidy notice must include?
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.
3. Will the U.S. Department of Labor (DOL) provide a model COBRA subsidy eligibility notice?
The ARPA directs DOL to issue model notices that will satisfy the requirements for COBRA subsidy notification by May 1. Covered individuals who have not elected COBRA or who have terminated their COBRA coverage early have 60 days after receiving the COBRA subsidy notice to change their minds and elect COBRA coverage.
4. 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).
5. Will DOL provide a model COBRA subsidy expiration notice?
The ARPA directs DOL to issue a model notice for the subsidy expiration by May 15.
Look for a model COBRA subsidy notice no later than May 1, and a model expiration notice by May 15. You should expect to see regulations or some form of written guidance on the COBRA subsidy and the accompanying tax credits from both DOL and the IRS, as well.