COBRA Subsidy Requirements Under the American Rescue Plan Act of 2021

Among many other pandemic relief provisions, the recently enacted American Rescue Plan Act of 2021 (“ARPA”) includes provisions for certain (a) COBRA subsidies, (b) extended COBRA election periods, and (c) related notice requirements, which employers required to offer COBRA must address very shortly.  The following briefly summarizes these provisions.

COBRA Subsidies

Under ARPA, an employer, plan sponsor, or multiemployer plan must cover the full cost of COBRA continuation for all “assistance eligible individuals” (“AEIs”).  An AEI is an individual who (i) incurs a qualifying event that is an involuntary termination or reduction in hours and (ii) is eligible for COBRA from April 1, 2021 through September 30, 2021 (the “Subsidy Period”).  An AEI includes an individual who is involuntarily terminated or has a reduction in hours prior to April 1, 2021, and is COBRA-eligible during the Subsidy Period, as well as an individual who incurs an applicable qualifying event during the Subsidy Period.

An AEI’s eligibility for the COBRA subsidy will terminate on the earliest of (a) the date on which the AEI is eligible for coverage under another group health plan; (b) the date on which the AEI is no longer eligible for COBRA continuation coverage; or (c) September 30, 2021.  An AEI receiving the subsidy who becomes eligible for coverage under another group health plan must inform the plan providing the subsidy of such eligibility.  If the AEI does not inform the plan of such eligibility in a timely manner, the AEI may be subject to penalties.  If an AEI makes a COBRA payment, the plan providing COBRA coverage must reimburse the AEI for such payment within 60 days.

Plan sponsors may, but are not required to, permit AEIs who have elected COBRA prior to the Subsidy Period to switch COBRA coverage options in certain circumstances.

COBRA Extended Election Period

An AEI who (i) becomes eligible for COBRA prior to April 1, 2021, but does not elect COBRA or (ii) elects but then drops COBRA prior to April 1, 2021 (an “Extended AEI”) can elect COBRA during the Subsidy Period and receive the COBRA subsidy. A special COBRA election notice (as described below) must be provided to each Extended AEI within 60 days after April 1, 2021.  The Extended AEI then has 60 days to elect coverage and receive the subsidized COBRA coverage.

Notice Requirements

ARPA establishes several new notice requirements, as described below:

Initial Election Notices

COBRA election notices for AEIs who become eligible to elect COBRA during the Subsidy Period (including AEIs who become eligible for a “second bite at the apple”) must include the following:

• The forms necessary for establishing eligibility and premium assistance (e., proof that the qualifying event was an involuntary termination or reduction in hours);
• A description of the extended election period described above;
• A description of the AEI’s obligation to notify the plan of eligibility for other group health coverage, and a description of the penalties for failure to comply; and
• A description of the subsidy.

Initial COBRA notices must generally be provided within 14 days of the employer notifying the third-party administrator (“TPA”) of a qualifying event.  Therefore, if an AEI incurs an applicable qualifying event on the first day of the Subsidy Period, and the employer notifies the TPA of the qualifying event that same day, a COBRA notice with the special ARPA language must be provided by April 14.  Accordingly, April 14 is the earliest date that the plan will be required to provide an AEI with an initial election notice, including the special ARPA requirements.  Under ARPA, the DOL is required to provide a model initial election notice by April 10.  Therefore, the DOL’s model notice is scheduled to be released before the first special ARPA-modified notice will be required.

Termination Notices

Between 45 and 15 days prior to the expiration of the subsidy for any AEI, the group health plan must send the AEI a notice that includes the following:

• The date on which the subsidy will terminate, and
• Notice to the AEI that the AEI may be eligible for coverage without the subsidy via either COBRA or a group health plan.

ARPA requires the DOL to issue model termination notices by April 25.  Although there may be some participants whose subsidy eligibility ends prior to such date, we believe that it should be reasonable for plan sponsors and providers to wait until the DOL issues model termination notices before drafting their own notices.  If a situation arises in which a termination notice becomes due prior to April 25, however, a plan sponsor can draft the appropriate notice with the assistance of its COBRA third-party administrator and/or legal counsel.

Employer Credits

Employers that comply with the ARPA notice requirements generally will be eligible to receive a tax credit equal to the subsidized COBRA premiums paid by the employer.  The maximum credit per quarter is limited to the employer’s Medicare payroll taxes for that quarter, and is reduced by other credits received by the employer under the paid sick leave credit, the paid family leave credit, and the employee retention credit for the quarter. The credit can be advanced and is refundable, so an employer can claim a refund if the subsidy exceeds the employer’s Medicare payroll tax.  Any overstatement of the credit will be treated as an underpayment of taxes and may be assessed for up to 5 years.  We anticipate further guidance will be issued with respect to the credit process.

If you have any questions, or if we can assist you with these new COBRA subsidy requirements, please feel free to contact a member of our Employee Benefits group.