Small Business Clients Holiday from Paying COBRA Premiums

by Prof. Robert Bloink and Prof. William H. Byrnes

The American Rescue Plan Act (ARPA) created a new 100% COBRA premium subsidy for employees who lost coverage during the pandemic because of a reduction in hours or involuntary termination. ARPA also created significant questions for many employers about how to actually implement the program. Now, the IRS has offered extensive guidance about steps employers should take to obtain reimbursement for any COBRA premiums paid between April 1 and September 30. Because COBRA continuation coverage requirements generally apply to any business with at least 20 full and part-time employees, these new rules could impact nearly every small business. It’s critical for these small business clients to pay close attention to the IRS guidance in Notice 2021-31 to avoid getting stuck with an unexpected bill for COBRA premiums.

COBRA Premium Subsidies: Background

The ARPA provides free COBRA continuation coverage for a six-month period beginning on April 1, 2021, and running through September 30, 2021 (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.

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, 2021.

The Employer Tax Credit

On the date when the AEI provides the employer with a COBRA election, the employer is entitled to a tax credit for premiums not paid by the AEI for any coverage period that began before that date. In other words, if the AEI retroactively elects coverage as of April 15, 2021, and provides the election notice in June, the employer is entitled to a credit for premiums not paid from April 15 through June.

On the first day of each subsequent coverage period (month), the employer is entitled to a credit for premiums the AEI does not pay that month. The employer is entitled to the credit at the start of the coverage period even if the employer would have billed for coverage at a later date absent the subsidy.

However, the employer cannot claim the credit before the employee becomes eligible for the subsidy and elects COBRA coverage.

The employer reports the credit and individuals receiving the credit on Form 941 and is entitled to reduce federal Medicare tax deposits in anticipation of the credit (Notice 20214 offers additional guidance on penalty relief for reducing deposits). Like other COVID-19-related tax credits, if tax deposits are not sufficient to cover the entire credit amount, the employer can file Form 7200 with the IRS to receive advance payment of the credit.

Employees who become eligible for other health coverage or Medicare are no longer eligible for premium assistance. If the employee fails to notify the employer about the new coverage, it is the employee who is subject to penalty. The employer can keep the amount of the credit already claimed unless the employer knew the employee was eligible for other coverage. Employers should, of course, keep detailed records to substantiate eligibility during the COBRA subsidy period.

The guidance also contains a “no double dipping” rule. The employer cannot claim the COBRA premium subsidy credit for amounts that were also claimed under the employee retention tax credit or paid sick and family leave credit rules.

Conclusion

The IRS guidance on the credit is provided in a Q&A format that contains many examples that may be helpful to employers with unique situations. Small business clients should pay close attention to the details to avoid missing any of these valuable benefits or becoming subject to future penalties for noncompliance.

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