IRS Bites Into COBRA Subsidy Questions Under ARPA
On May 18, 2021, the IRS issued Notice 2021-31, which provides guidance in the form of 86 questions and answers related to the COBRA subsidies under the American Rescue Plan Act of 2021 (“ARPA”). Under ARPA, an assistance eligible individual (“AEI”), which is a COBRA qualified beneficiary (“COBRA QB”) who becomes eligible for COBRA due to a reduction in hours or involuntary termination of employment, may be eligible for a COBRA subsidy equal to the entire COBRA premium for the period from April 1, 2021 through September 30, 2021.
During this six-month period, an AEI does not pay the COBRA premium. Instead, the employer (in most, but not all, situations it is the employer) “advances” the COBRA premium, and then is reimbursed for the cost of the COBRA premium by the government through a refundable tax credit against the employer’s Medicare tax. An AEI will cease to be eligible for the COBRA subsidy upon becoming eligible to enroll in another group health plan that provides major medical coverage or Medicare (“disqualifying coverage”). (For additional information about the COBRA subsidies under ARPA, please see our previous client alerts here and here.)
IRS Notice 2021-31 provides helpful clarifications about the eligibility of COBRA QBs for the COBRA subsidies, the subsidy period, the calculation of the Medicare tax credit, and more. This client alert highlights some of the key points in this new guidance.
Eligibility for COBRA Subsidy
- Q&As 4, 5, 6 and 7. Based on the text of ARPA, it was unclear if an employer was affirmatively required to provide the COBRA subsidy to COBRA QBs who the employer reasonably believed were AEIs and were enrolled in COBRA as of April 1, 2021. This is not required. Employers are permitted (but not required) to wait until a COBRA QB self-certifies eligibility for the COBRA subsidy (such as by using the DOL model request form available here). Employers may also require an AEI to self-certify that the AEI is not eligible for disqualifying coverage. In fact, the IRS recommends collecting these self-certifications to substantiate the entitlement to the Medicare tax credit. If these self-certifications are not collected, employers will be required to provide other evidence to substantiate entitlement to the Medicare tax credit if audited by the IRS (such as employment records showing a reduction in hours or an involuntary termination of employment that caused a loss in coverage).
- Q&A 9. An AEI will be eligible for the COBRA subsidy even if the AEI was eligible for disqualifying coverage since the COBRA qualifying event, as long as the AEI is not permitted to enroll in the disqualifying coverage on or after April 1, 2021.
- Example 9A. A COBRA QB became eligible for COBRA due to an involuntary termination of employment on October 1, 2020. The COBRA QB was eligible to enroll in disqualifying coverage provided by the employer of the COBRA QB’s spouse during the annual open enrollment period from November 1, 2020 to November 30, 2020 with coverage effective January 1, 2021. The COBRA QB declined the disqualifying coverage from the spouse’s employer. The COBRA QB is not eligible to enroll in the disqualifying coverage from the spouse’s employer until the next annual open enrollment period from November 1, 2021 to November 30, 2021 with coverage effective January 1, 2022. The COBRA QB is still eligible for the COBRA subsidy despite the previous opportunity to enroll in the disqualifying coverage from the spouse’s employer.
- Example 9B. Same facts as example 9A, except the annual open enrollment period is from June 1, 2021 to June 14, 2021 with coverage effective July 1, 2021. In this situation, the COBRA QB is not eligible for the COBRA subsidy as of July 1, 2021 regardless of whether the COBRA QB enrolls in the disqualifying coverage from the spouse’s employer.
- Example 9C. Same facts as example 9A, except the COBRA QB is also eligible to enroll in the disqualifying coverage from the spouse’s employer due to a HIPAA special enrollment right (loss of other coverage). EBSA Disaster Relief Notices 2020-01 and 2021-01 (see our previous client alert here) extended the 30-day deadline to request enrollment under a HIPAA special enrollment right to the earlier of: (1) one-year from the date of the original deadline; or (2) the end of the “outbreak period.” Since the COBRA QB is still permitted to enroll due to the HIPAA special enrollment event, the COBRA QB is not eligible for the COBRA subsidy.
- Q&A 17. If an AEI’s 18-month COBRA period is extended by a disability extension (which is an 11-month extension for a 29-month COBRA period) or a second qualifying event (which is a 36-month COBRA period), the AEI is eligible for the COBRA subsidy during the extended COBRA period, as long as (1) the COBRA QB elected and remained enrolled in COBRA for the entire 29- or 36-month period; and (2) the extended period overlaps the six-month period of April 1, 2021 to September 30, 2021.
Involuntary Termination of Employment
Generally, an involuntary termination of employment means a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services.
- Q&A 25. If an employer terminates an individual’s employment while the individual is absent due to an illness or disability, this is considered an involuntary termination of employment, but only if the employer had a reasonable expectation that the employee would return to work after the illness or disability. The absence from work due to the illness or disability is not an involuntary termination of employment, but if the absence caused a loss in coverage, this is a reduction in hours that triggers COBRA for which the COBRA subsidy is available.
- Q&A 29. An involuntary termination of employment includes employees with impending terminations of employment who are offered a severance agreement to terminate employment within a limited period of time (generally, no more than one year) (i.e., a “window program”). If the severance agreement includes a voluntary COBRA subsidy provided by the employer, the amount of the subsidy is not eligible for the Medicare tax credit (see our comments regarding Q&As 63 & 64).
- Q&A 30. An involuntary termination of employment does not include a termination due to an employee’s general concern about workplace safety (e.g., contracting COVID-19), unless the employee can demonstrate the employer’s actions or inactions created a material negative change in the employment relationship analogous to a constructive discharge. Similarly, departures due to personal circumstances of the employee, such as a health condition of the employee or family member, inability to find daycare, or similar reasons, are not involuntary terminations of employment, unless the employer’s failure to take a required action or provide a reasonable accommodation rises to the level of a constructive discharge.
- Q&A 31. An involuntary termination of employment does not include an employee-initiated termination because the employee’s child is unable to attend school or because a childcare facility is closed as a result of the presidentially declared national emergency due to COVID-19. However, if the employee maintains the ability to work, and both the employer and employee intend to maintain the employment relationship, the absence may be considered a leave and the COBRA subsidy may be available due to a reduction in hours.
- Q&A 32. If an employee initiates a termination of employment due to a material reduction in the employee’s hours, the termination of employment is involuntary (due to a “good reason”), even if the reduction in hours did not cause a loss in coverage.
Coverage Eligible for COBRA Subsidy
- Q&As 41 and Q&A 69. Even if an employer allows AEIs to enroll in a different coverage option than what they had at the time of the COBRA qualifying event, the COBRA subsidy will not be available for coverage with a greater premium, unless the AEI elects a coverage option with a greater premium in compliance with federal regulations, such as during an annual open enrollment period. In other words, the AEI cannot “pay the difference.”
- Example 41A. Assume an AEI is enrolled in a plan with an $800 monthly COBRA premium at the time of the qualifying event. The employer that sponsors the plan permits AEIs to enroll in other coverage under ARPA. The employer offers two other coverage options with monthly COBRA premiums of $700 and $1,000. The AEI may enroll in the $700 coverage option with the COBRA subsidy. If the employer allows, the AEI may enroll in the $1,000 coverage option without any COBRA subsidy. (But see example 41B below.)
- Example 41B. Same facts as example 41A, except the AEI enrolls in the coverage option with the greater premium during an annual open enrollment period. The coverage is eligible for the COBRA subsidy.
COBRA Elections Under ARPA and Subsidy Periods
- Q&A 53. An AEI whose qualifying event occurred before April 1, 2021 who still has an open COBRA election period may elect COBRA that begins as of the date of the COBRA qualifying event or a date that is on or after April 1, 2021. If the AEI elects COBRA retroactively to the date of the COBRA qualifying event, no COBRA subsidy is available for COBRA before April 1, 2021.
- Q&A 56. If an AEI who was eligible for COBRA before April 1, 2021 elects COBRA during the ARPA extended election period, the AEI must also elect or decline COBRA retroactive to the date coverage was lost (i.e., the date of the COBRA qualifying event). If COBRA is elected retroactively to the date coverage was lost, the AEI must pay the COBRA premiums for COBRA before April 1, 2021.
- Q&A 59. An AEI who elects COBRA during the ARPA extended election period with the COBRA subsidy, but declines to elect COBRA retroactively to the date coverage was lost before April 1, 2021, may not, once the 60-day deadline has elapsed after receiving the notice of the ARPA extended election opportunity, change the election to retroactively elect COBRA to the date coverage was lost.
- Q&A 48. Unsubsidized COBRA automatically continues for an AEI who elects COBRA with the COBRA subsidy after September 30, 2021. Payment for COBRA after September 30, 2021 will be due by the normal due date, as extended by EBSA Disaster Relief Notices 2020-01 and 2021-01.
Calculation of the Medicare Tax Credit
- Q&As 63 and 64. In general, the amount of the Medicare tax credit is the amount of the COBRA premiums “not paid” by the COBRA QB considering the COBRA subsidy under ARPA. In other words, if the employer does not subsidize the COBRA premiums for similarly situated COBRA QBs, the amount “not paid” is the COBRA premium (plus the 2% administrative fee or 50% administrative fee during disability extensions). If the employer voluntarily subsidizes the COBRA premium for similarly situated COBRA QBs (who are not AEIs), the amount of the Medicare tax credit does not include any voluntary subsidy under a severance agreement.
For the following examples, assume 102% of the COBRA premium is $1,000 per month.
- Example 64A. The employer voluntarily pays $800 per month for COBRA as severance benefits for involuntarily terminated employees for three months. (Active employees are required to pay $200 per month for non-COBRA coverage.) If an AEI has an involuntary termination of employment as of April 1, 2021, and the employer considers the AEI to lose coverage on April 1, 2021, the amount of the Medicare tax credit will be $200 per month for April, May, and June 2021. Thereafter, the Medicare tax credit will be $1,000 per month.
- Example 64B. Same facts as example 64A, except the AEI is considered to lose coverage on July 1, 2021. As a result, the AEI is paying $200 per month for non-COBRA coverage in April, May and June. The credit is $0 per month for April, May and June, and $1,000 per month for July, August, and September 2021.
Claiming the Medicare Tax Credit
- Q&A 78. When an AEI fails to report loss of eligibility for disqualifying coverage (coverage under another group health plan or Medicare), the employer who advanced the COBRA premium is still entitled to the Medicare tax credit for the period of the COBRA QB’s ineligibility for the COBRA subsidy, unless the employer has actual knowledge of the AEI’s eligibility for other coverage. The COBRA QB may be subject to a penalty on the COBRA QB’s federal income tax return for the failure to provide the notice of disqualifying coverage (unless the failure was due to reasonable cause).
IRS Notice 2021-31 provides welcome guidance regarding the COBRA subsidies under ARPA. Employers that sponsor group health plans should continue to work closely with their third-party COBRA administrators to ensure compliance with ARPA and federal guidance regarding the COBRA subsidies.
If you have any questions about the COBRA subsidies under ARPA, or IRS Notice 2021-31, please contact one of the authors or another one of the Miller Johnson employee benefits attorneys.