What COBRA Subsidies in the Stimulus Package Mean for Your Clients

It’s important that both individual and small-business clients understand the new COBRA rules for 2021.

In response to the ongoing COVID-19 pandemic, the American Rescue Plan Act of 2021 (ARPA) reinstated the federal COBRA subsidies that were last seen during the Great Recession under the American Recovery and Reinvestment Act of 2009. The relief will provide free COBRA continuation coverage to millions of Americans who lost coverage during the pandemic.

It also provides a second-chance election period for those who did not elect coverage in past months. Although the government will technically finance the subsidy, employers will be required to cover any COBRA premiums up front — and will be reimbursed in the form of a refundable tax credit. 

It’s important that both individual and small-business clients understand the new COBRA rules for 2021, which offer substantial benefits to out-of-work Americans and impose an immediate administrative burden on the employers responsible for administering employer-sponsored health plans.

ARPA COBRA Premiums: The Basics

The ARPA provides free COBRA coverage for a six-month period beginning April 1 through Sept. 30 (the “subsidy period”) for employees and their family members who have lost or lose group health coverage because of involuntary termination or reduced work hours. The new 100% COBRA subsidy generally applies to all employees who lost employer-sponsored health care due to an involuntary loss of work since the COVID-19 pandemic began. 

More specifically, assistance-eligible individuals (AEIs) include those who (1) are eligible for COBRA coverage during all or part of the subsidy period because of an involuntary termination of employment (other than for gross misconduct) or a reduction in hours or (2) elected COBRA coverage during the subsidy period or were already enrolled in COBRA coverage as of April 1.

Note also that employees who lost coverage as of April 2020 are potentially eligible for the entire six-month subsidy because those employees’ 18-month COBRA period includes the period from April 1 through Sept. 30. 

However, individuals who are eligible for other group health coverage or Medicare are not eligible. 

The subsidy is available to both employees who did not elect COBRA coverage during the original election period and those who initially elected COBRA, but allowed their coverage to lapse. These individuals must be offered an additional 60-day window to elect COBRA coverage and will not be required to pay retroactive premiums to the original loss-of-coverage date. 

Ultimately, these subsidies will be funded by a refundable tax credit available in the form of quarterly payroll tax credits. The agencies are expected to provide rules outlining the procedure for having the credits advanced if the amount of the credit exceeds the employer’s Medicare payroll tax obligations.

New Notice Requirements for Employers

The ARPA creates a number of new notice requirements for plan administrators. Within 60 days of April 1, an election notice must be provided to AEIs who previously failed to elect COBRA coverage, AEIs who discontinued COBRA coverage and AEIs who remain eligible to elect COBRA coverage under the traditional rules, but have yet to make an election. That notice must provide information about the premium subsidies and whether the employer will offer the participant an option to elect a less-expensive coverage option.

A separate notice must be sent to individuals who become eligible to elect COBRA coverage during the subsidy period (the DOL is directed to provide a model notice within 30 days of enactment of the ARPA).

Administrators will also be required to provide a subsidy termination notice if the termination is for a reason other than the individual’s eligibility for alternative coverage. These notices must be provided no more than 45 days, but no less than 15 days, before the date coverage will terminate. The DOL is also directed to provide a model notice of the subsidy termination notice within 45 days of enactment of the ARPA.

Conclusion

The new law directs the IRS, Department of Labor and Department of Health and Human Services (HHS) to release guidance and regulations on how the new subsidy will be implemented. Clients who are affected by the new rules should pay close attention to these rules, which are expected to apply retroactively as well as prospectively.

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