100% Subsidized COBRA Adds Complexity for Employers

The American Rescue Plan Act of 2021 (“ARPA”), which became law on March 11, 2021, provides government-subsidized free COBRA coverage for a six-month period from April through September 2021 for employees (and their family members) who experience a loss of group health coverage due to reduced hours of employment or involuntary termination of employment (other than for gross misconduct). Employers are reimbursed the coverage premiums through Medicare tax credits.

Who is an “assistance-eligible individual”?

1. Employees who experience an involuntary termination or reduction in hours that occur on or after April 1, 2021.

2. Any Employees who were terminated or experienced a reduction in hours and prior to April 1, 2021 and did not elect COBRA coverage during their original election period, are eligible to retroactively elect fully subsidized COBRA coverage starting effective April 1, 2021 and running to the earlier of the expiration of their initial 18-month period or September 30, 2021.

3. Any employee who is still within the initial 18-month period from their COBRA qualifying event, who elected COBRA coverage and then stopped paying premiums, may be eligible to retroactively elect fully subsidized COBRA coverage effective April 1, 2021.

Examples:

a. If an employee and dependents lost benefits as of March 1, 2020, 18 months of eligibility would expire at the end of August 2021 and premiums would be subsidized for five months – April through August 2021.

b. If an employee and dependents lost benefits as of January 1, 2020, 18 months of eligibility would expire at the end of June 2021 and premiums would be subsidized for three months – April through June 2021.

4. Employees who are eligible for other group health coverage or Medicare are not eligible for the subsidy. Employees who elect subsidized COBRA coverage and become eligible for other group health coverage or Medicare between April 1, 2021 and September 30, 2021 cease to be eligible for the subsidy.

Employers are obligated to notify all assistance-eligible individuals of their right to receive the COBRA subsidy by May 31, 2021. This includes both individuals currently receiving COBRA coverage and those who previously waived or dropped coverage but are still within their eligible coverage period. The U.S. Department of Labor is required to issue model COBRA notices addressing the subsidy prior to the notification deadline. Assistance eligible individuals who previously waived or dropped COBRA coverage must elect to start or reinstate coverage within 60 days of receiving notice from their employer of the availability of the subsidy.

Employer Reimbursement for Premiums

Employers with fewer than 20 employees are generally subject to state and not federal laws regarding the continuation of health care coverage. However, the ARPA subsidy is available for 100 percent of the cost of continuation coverage (no 2% administration premium) provided under any medical, dental, or vision plan – whether the continuation coverage is provided under federal or state law. ARPA specifically excludes COBRA coverage under flexible spending accounts from eligibility for the subsidy. Employers are eligible to claim a Medicare payroll tax credit equal to the cost of coverage for assistance-eligible individuals and their dependents. The credit can be advanced if the cost of coverage for eligible individuals exceeds an employer’s tax liability.

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