What You Need to Know
- Workers who became eligible for COBRA before April 1 may still qualify.
- The subsidy applies only to people affected by reductions in hours or involuntary terminations.
- Workers fired due to gross misconduct are not eligible for the subsidy.
The IRS has posted information about how employers and workers can use a new, temporary emergency program that could help health plans keep coverage in place for more than 2.2 million departing workers and dependents.
The IRS explains how it sees the new COBRA Premium Assistance tax credit program in Notice 2021-31.
The IRS lists Jason Sandoval as the principal author of the notice and Mikhail Zhidkov as a source of advice about how to claim the tax credit.
A COBRA Primer
A health coverage continuation provision in the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) lets many departing workers, and dependents, keep their group health coverage in place — if they’re willing to pay 102% of the full cost of the premiums.
The full cost of the premiums is often three to four times more than an employee’s share of the premiums.
Because the cost of ordinary COBRA coverage is so high, eligible enrollees’ take-up rates have typically been less than 10%, according to consultants at Mathematica Policy Research.
From Sept. 1, 2008, through May 31, 2010, Congress tried to help workers displaced by the 2007-2009 Great Recession by creating a temporary COBRA subsidy. The subsidy paid 85% of eligible enrollees’ coverage continuation premiums, and it may increase average COBRA continuation coverage take-up rates to more than 30%.
The COBRA Premium Assistance Program
The new temporary COBRA premium subsidy was created by Section 9501 of the American Rescue Plan Act of 2021.
The IRS is referring to the act using the acronym “ARP.”
ARP Section 9501 is part of the effort to help people keep health coverage in place during the COVID-19 pandemic. The section calls for the federal government to pay the full COBRA coverage continuation premiums, from April 1, 2021, through Sept. 30, 2021, for workers who lose access to coverage as a result of a reduction in hours or an involuntary termination.
The IRS will provide the subsidy tax credit to the plan, not directly to former enrollees.
In most cases, an employer can claim the tax credit when filing Form 941, the Employer’s Quarterly Federal Tax Return.
An employer can get the tax credit by either reducing payments for other federal employment taxes or by asking for a cash advance.
Questions and Answers
IRS officials give answers to 86 questions about the new tax credit in the notice.
Here’s a look at some of the topics addressed.