COBRA Subsidy: What Employers Need to Know
The American Rescue Act of 2021 (ARPA) is the latest federal law addressing the economic impact of the COVID-19 pandemic. Most aspects of the law do not directly affect the employer’s HR/Benefits function, but ARPA does include an optional extension of sick and family leave (see our summary) and the establishment of a COBRA subsidy.
This article takes a closer look at the COBRA subsidy. If you offer a group health plan, you’ll want to know how the subsidy works and what you, as the employer, are required to do. A newly-created Department of Labor (DOL) webpage provides guidance and model notices to help employers administer the subsidy.
Frequently Asked Questions
- What is the COBRA Subsidy?
Employees typically lose their group health coverage if their work hours are reduced to part-time status or if they are furloughed or terminated. This disruption in employment-based health coverage has been particularly acute during the COVID-19 pandemic. Although employees can elect continuation coverage under COBRA, the high premium cost makes it difficult for most people to afford COBRA. ARPA offers relief by providing a federal subsidy equal to the entire COBRA premium cost for up to six months from April 2021 through September 2021.
- Who is eligible for the subsidy?
Persons eligible for the subsidy are called assistance eligible individuals or AEIs. An AEI must meet all the following conditions:
- Loses or lost group health coverage because of the employee’s:
- Reduction in hours; or
- Involuntary termination of employment (except for gross misconduct);
- Is eligible for continuation coverage under the federal COBRA law or a state’s mini-COBRA law;
- Is not eligible for:
- Other group health coverage (but excepted benefits such as limited-scope dental or vision plans, health flexible spending accounts (HFSAs), and qualified small employer health reimbursement arrangements (QSEHRAs) are disregarded); or
- Does the subsidy apply to all group health plans and coverages?
The subsidy applies to almost all employer-sponsored health plans. They fall into two categories:
- Group health plans that are subject to the federal COBRA law, which includes both insured and self-funded plans sponsored by a private-sector or governmental employer. The only exceptions from federal COBRA are small employer plans (employers with fewer than 20 workers) and church plans.Medical, dental, and vision coverages, and traditional health reimbursement arrangements (HRAs), are eligible for the subsidy. Health flexible spending accounts (HFSAs) are excluded.
- Group health insurance policies that are subject to a state’s continuation coverage law (so-called mini-COBRA). Over 40 states currently have some type of mini-COBRA law. Most of them only apply to group medical policies for small employers that are not covered by the federal COBRA law.
- How much is the subsidy? Who pays the COBRA premium?
The subsidy covers the entire COBRA premium cost, including the administrative fee, for coverage months between April 2021 and September 2021, inclusive. The AEI does not have to pay the COBRA premium and wait to be reimbursed. Instead, the employer or carrier must pay (or waive) the AEI’s COBRA premium. The employer’s or carrier’s expense will be reimbursed by the federal government.
It works like this:
- If federal COBRA applies, the employer pays or waives the AEI’s COBRA premium each month. The employer claims the subsidy amount as a credit against its quarterly Medicare payroll taxes. If the employer’s subsidy expense exceeds the amount of Medicare taxes, the IRS will provide the tax credit as a refund to the employer.
- If federal COBRA does not apply, but the subsidy is required under a state’s mini-COBRA law, the carrier will pay or waive the AEI’s premium and then collect reimbursement through a federal tax credit.
The process seems straightforward for single-employer health plans. For other types of plans, such as multiemployer plans or union trusts, multiple employer welfare arrangements (also called association health plans), and plans arranged through professional employer organizations (PEOs), upcoming IRS guidance should help clarify the process.
- What do AEIs have to do to get the subsidy?
The subsidy is not automatic. The AEI must be offered COBRA and elect the coverage in order to request the subsidy. As noted above, individuals do not qualify for the subsidy if they are eligible for another group health plan or Medicare. Eligibility for the other coverage, even if not enrolled, will disqualify the individual from getting the subsidy.
- The subsidy period covers April 2021 through September 2021. Does it cover COBRA events that happened before April 2021?
The subsidy cannot be used for any COBRA coverage months before April 2021 (nor after September), but that does not mean that individuals who lost coverage before April are not included. ARPA requires plans to identify persons who lost their coverage due to reduced work hours or involuntary separation, provided their maximum COBRA period would have run past April 1, 2021.
For instance, a laid-off employee whose 18-month COBRA period would have started November 1, 2019 (even if never elected or elected and dropped for non-payment) is now an AEI for April 2021 as it is the 18th month of original period. Assuming the individual is not eligible for other coverage, they can elect COBRA with the subsidy starting April 1, 2021. They cannot be required to pay for the months before April 2021, so there may be a gap in their coverage.
- If the employer offers a choice of medical plans, can AEIs make a change when they elect COBRA with the subsidy?
COBRA typically requires continuing the same coverage the individual had while active. Under the new subsidy rules, however, employers have the option of allowing AEIs to change their medical plan election to a lower-cost plan. Employers that are considering making this option available will need agreement from their medical carrier(s).
- What are the key action items for employers?
If you offer a group health plan, whether insured or self-funded, you’ll want to work with your broker, carriers, vendors, and COBRA administrator to develop an action plan as quickly as possible. The key requirement for employers is to identify all potential AEIs and notify them of the new COBRA subsidy. The DOL provides model notices for your use:
- Model General Notice and COBRA Continuation Coverage Election Notice: MS Word|PDFFor all federal COBRA events going forward (not limited to those who may be subsidy eligible)
- Model Notice in Connection with Extended Election Period: MS Word|PDFFor prior COBRA qualifying events; the so-called “second chance” election opportunity
- Model Alternative Notice: MS Word|PDFFor individuals eligible for a state’s “mini-COBRA” continuation law
- Model Notice of Expiration of Premium Assistance: MS Word|PDFFor individuals receiving the subsidy; notify individual 15-45 days before subsidy period expires.
- Summary of COBRA Premium Assistance Provisions under the American Rescue Plan Act of 2021: MS Word|PDF
- What are the important deadlines?
Over the past year, the federal agencies have extended many of the typical plan deadlines. For instance, the usual 60-day limit on COBRA elections is automatically extended during the “outbreak period” due to the COVID-19 national emergency. The extended deadlines do NOT apply to the COBRA subsidy. That means that employers need to provide COBRA notices, including information about the subsidy option, within 44 days of the COBRA event.
Also, as noted above, persons who lost coverage due to reduced hours or involuntary termination before April 1, 2021 now have a second chance to elect COBRA and request the subsidy. The deadline to notify them is May 31, 2021. They will have 60 days from the time they are notified to elect COBRA with the subsidy.
The DOL has posted FAQs to help individuals considering the subsidy. This valuable tool explains the eligibility criteria, the notices they will receive, and how to elect COBRA and request the subsidy. Individuals who have purchased insurance through the Marketplace need to pay particular attention to this information.
The new COBRA subsidy offers significant financial assistance to help employees continue their health coverage following a job loss or reduced work hours. Employers should work promptly with their COBRA administrators, carriers, and advisors on how the new COBRA subsidy applies to their situation. The new DOL webpage dedicated to this topic provides valuable information for individuals along with guidance and model notices for the employer’s use.
The DOL and IRS will continue to release guidance to help employers and carriers understand the law’s requirements. We are continuing to monitor developments and will post updates on this blog.