Most of the headlines about the new American Rescue Plan Act (ARPA) have focused on welcome perks like additional recovery rebates. But it includes another provision that could prove far more valuable to your employees or former employees who are eligible for health care coverage under the federal Consolidated Omnibus Budget Reconciliation Act, better known as COBRA.
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The ARPA provides a temporary subsidy for COBRA premiums for many employees who have lost their jobs or had their hours cut throughout the COVID-19 pandemic. Now they can enjoy the peace of mind that comes with health care coverage without paying a penny out of their own pockets for premiums during those months.
COBRA in a nutshell
COBRA requires employers to offer qualified beneficiaries (typically employees and their spouses and dependents that were enrolled at the time of a specific qualifying life event) temporary continuation (usually 18 months) of health care coverage in certain circumstances where the coverage otherwise would be lost — including termination or reduced hours.
It generally applies to employers with at least 20 full-time equivalent employees for more than half of their typical business days in the previous calendar year.
Usually, the plan sponsor can require qualified beneficiaries to pay for COBRA continuation coverage but not more than the full cost of coverage, plus a 2 percent administration charge. This cost has been difficult for many qualified beneficiaries to cover during the pandemic.
How the subsidy works for qualified beneficiaries
The ARPA provides a 100% subsidy for COBRA premiums for medical plans for qualified beneficiaries who are either:
1) currently enrolled in COBRA or become COBRA eligible after April 1, 2021;
2) eligible but didn’t enroll previously and are still within their 18-month period; or
3) enrolled but dropped out and are still within their 18-month period.
Ineligible individuals, even if they meet the above criteria, include those who voluntarily left their jobs, who are eligible to enroll in their own employer’s group sponsored health coverage, or who are eligible for Medicare
The subsidy applies to COBRA premiums owed between April 1, 2021, through September . 30, 2021, subject to otherwise applicable maximum periods of coverage under COBRA. For example, if an individual’s 18-month COBRA period is set to expire Aug. 31, 2021, or they become eligible for Medicare on Sept. 1, 2021. In that case, they can’t get the subsidy for September but could get the subsidy for April through August.
How the subsidy works for employers
Employers will pay the upfront costs of COBRA premiums and receive a tax credit against their share of the Medicare payroll tax in the amount they paid.
You can’t double-dip, though. In other words, you can’t claim the credit for:
- amounts you treated as qualified wages for purposes of the employee retention tax credits or
- qualified health plan expenses for purposes of the paid sick and family leave credits under the Families First Coronavirus Response Act.
You can apply your anticipated credit to your federal tax liabilities before the end of the quarter.
The credit also can be advanced to help with the upfront premium bills, up to a calculated amount to be determined by the Treasury Department based on your most recent payroll period in the quarter.
If the amount declared on your quarterly federal tax filing exceeds the amount of taxes you owe, the excess is treated as an overpayment. If you overstate your credit, on the other hand, it will be treated as an underpayment and collected in the same way as underpaid taxes. You won’t face penalties, though, if the failure was due to anticipation of the subsidy credit.
The qualified beneficiary has an option to change plans
The ARPA also lets you provide your subsidy-eligible employees with a “plan enrollment option.” If you choose to do so, they can switch to different coverage within 90 days of receiving the required additional general notice[BN1] as long as:
- The premium on the plan they want to change to is equal to or less than the premium of the plan the qualified beneficiaries was enrolled in when they became eligible for COBRA;
- The plan they want to change to is available to similarly situated employees; and
- The plan they want to change to isn’t an excepted benefit plan (for example, dental or vision only), a flexible spending arrangement (FSA) or a qualified small employer health reimbursement arrangement (QSEHRA).
The strict notice requirements
Like COBRA, the ARPA provision comes with some stringent notice requirements for both you and your employees who take advantage of the program. Under the ARPA, the federal government is required to issue model notices within 30-45 days of the law’s enactment, depending on the type of notice.
End of eligibility notice
Qualified beneficiaries who are being subsidized (e.g., assistance eligible) must notify you when they become eligible for coverage for any other group health plan or Medicare between April 1, 2021 through September 1, 2021. This requirement applies unless the group health coverage is excepted benefits (for example, dental or vision only), an FSA, or a QSEHRA.
Make sure qualified beneficiaries, especially if they become newly eligible during the assistance time period, understand that their failure to provide the requisite notice could expose them to penalties. They may have to pay $250 for each failure. In the case of an intentional or fraudulent failure, the penalty is the greater of: 1) $250 or 2) 110 percent of the premium assistance provided and termination of eligibility.
Additional general notice
Along with the already-required general notice of COBRA continuation coverage rights that must be sent within 30 days, employers during the required time frame generally must provide notice of:
- The availability of premium assistance.
- The option to enroll in different coverage (if applicable).
To provide such notice, an employer must include:
- The forms for establishing premium assistance eligibility.
- The name, address, and phone number of the plan administrator and anyone else with relevant information related to premium assistance.
- A description of the extended election period (see below).[BN2]
- A description of the employee’s obligation to inform the health plan if they’re no longer eligible, as well as the penalty for noncompliance.
- A description of the employee’s right to a subsidized premium and any conditions for entitlement.
- A description of the change in plan enrollment option (if applicable).
Extended election period notice
You must also send the notice above to any qualified beneficiary eligible for COBRA before April 1, 2021, and are still within their 18 months of COBRA coverage. This includes any qualified beneficiary who did not elect or dropped COBRA. That means you need to identify qualified beneficiaries as far back as November 2019 — because their eligibility period would run through April 2021 — so you can send them the notice.
This notice is required to be sent within 60 days from April 1, and the employee has 60 days after receipt to opt into coverage.
Expiration of period of premium assistance
You must notify employees if their period of premium assistance will expire before Sept. 30, 2021. For example, if the employee has told you that they’re eligible for Medicare, which doesn’t qualify for the subsidy. An employer does not need to inform a qualified beneficiary of early expiration if the individual is eligible for other group group coverage.
You must provide the notice within 45 days before the expiration date, but no later than 15 days before the expiration date.
The notice must explain that:
- The premium assistance will expire soon, with the date of expiration prominently identified
- The employee may be eligible for coverage without premium assistance through continued COBRA eligibility or a group health plan
Some of the nuts and the bolts of the new COBRA premium subsidy remain to be worked out, but regulators are expected to issue additional guidance soon. In the meantime, start to plan for the necessary notifications (and contact your COBRA administrator and/or benefits broker) and think about quarterly tax filings to get the tax credit, so you’re not caught flat-footed. Even if you outsource COBRA administration to a third party, the ultimate responsibility for compliance lies with you.