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IRS Posts Guidance for Temporary COBRA Premium Subsidy Program

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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.

1. Timing

Question 9

A health plan can use the tax credit to pay for COBRA continuation coverage for a worker who became eligible for COBRA before April 1 and was still eligible for COBRA on April 1, but the plan can use the tax credit money to pay for the coverage provided during periods beginning on or after April 1.

2. Firing

Questions 1 and 24

The IRS may treat a worker who was forced to resign as being involuntarily terminated for COBRA tax credit purposes, but a worker who is fired for “gross misconduct,” such as theft, fraud or damage to property, is not eligible for the tax credit.

3. Divorce

Question 8

In some cases, people become eligible for ordinary COBRA continuation coverage as a result of events other than job loss. If a wife has group health coverage, for example, her husband is on her coverage, and the husband divorces her, the husband could use ordinary COBRA rules to pay 102% of the full premiums and keep the group health coverage in place.

The new COBRA premium assistance tax credit applies only to people who lose coverage due to a reduction in hours or involuntary job loss, not to people who lose coverage for other reasons.

4. Gray Areas

Question 26

Officials note that interpretations of some rules may depend on the details.

A worker would not be eligible for COBRA help because of a voluntary decision to retire, officials write.

“However,” officials continue, “if the facts and circumstances indicate that, absent retirement, the employer would have terminated the employee’s employment, that the employee was willing and able to continue employment, and that the employee had knowledge that the employee would be terminated absent the retirement, the retirement is an involuntary termination of employment.”

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