IRS Issues Guidance on COBRA Subsidies Just In Time

The Internal Revenue Service (IRS) issued Notice 2021-31 on May 18, providing much anticipated guidance implementing the COBRA subsidy rules under the American Rescue Plan Act (ARPA). As described in our March 11, 2021 e-bulletin, ARPA provides a tax-free subsidy that pays 100% of the COBRA continuation premium for employees (and their dependents) who are eligible for COBRA due to a reduction in hours or an involuntary termination of employment ("assistance eligible individuals"). The COBRA premium assistance begins April 1, 2021, and plan administrators are subject to new requirements to notify individuals who may be eligible for this relief, including a notice that must be provided by May 31, 2021. While the Department of Labor (DOL) issued model notices and other guidance regarding the subsidy on April 7, 2021, employers have had many questions related to the COBRA subsidy rules that were not addressed by that guidance. IRS Notice 2021-31 answers many of these questions in 86 FAQs over 40 pages. The guidance includes everything from what is an "involuntary" termination of employment to how the extension of COBRA deadlines due to the COVID-19 national emergency ("Emergency Relief") applies to COBRA subsidy assistance.

The FAQs in Notice 2021-31 are helpfully organized by topic, starting with who is eligible for COBRA premium assistance, and ending with how employers claim the federal tax credit to pay for the subsidy. Given the expansive ground that the Notice covers, this ebulletin addresses only the key points that all employers should know.
 

• Self-Certification/Attestation. The DOL guidance included a form that individuals could complete attesting as to their eligibility for COBRA premium assistance, but it was not clear that an employer could require or rely on the form. Notice 2021-31 confirms that an employer can require individuals to self-certify or attest that they are eligible for COBRA premium assistance and that they do not have other disqualifying group health plan coverage or Medicare, and that an employer can rely on that self-certification or attestation for the purpose of substantiating eligibility for a premium assistance credit, unless the employer has actual knowledge to the contrary.
   
• Substantiation/Records. Notice 2021-31 requires employers who claim a premium assistance credit to maintain records of either the self-certification or attestation from the individual as to eligibility for the COBRA premium assistance, or other documentation substantiating eligibility, in order to demonstrate the employer's eligibility for a premium tax credit. Employers need to retain this documentation in case the IRS questions the employer's eligibility for the tax credits or decides to conduct formal audits.
   
• Definition of Assistance Eligible Individual. An assistance eligible individual is eligible for COBRA premium assistance beginning April 1, 2021, until the earlier of: (i) the end of the individual's COBRA continuation coverage, (ii) September 30, 2021, or (iii) the date that the individual is eligible to enroll in coverage under another group health plan (including coverage under a spouse's group health plan) or Medicare. Notice 2021-31 clarifies the following:
  • An assistance eligible individual includes an individual who was eligible for or enrolled in another group health plan prior to April 1, 2021, but as of April 1, 2021 is not eligible for or enrolled in such coverage. For example, an individual may be employed by an employer that offers a group health plan, but if the individual does not have a right to actually enroll in that plan between April 1 and September 30, 2021, the individual will remain an assistance eligible individual for the entire subsidy period. On the other hand, if the individual has an open enrollment right or a special enrollment right in the other employer's plan for coverage to begin on, for example, July 1, 2021, then the individual ceases to be an assistance eligible individual as of July 1—even if the individual does not actually enroll in the other employer's group health plan.
  • An individual who is currently enrolled in Medicare is not an assistance eligible individual, even though he or she may be eligible to elect COBRA continuation coverage.
  • An assistance eligible individual includes an individual who is enrolled in individual health insurance coverage through a Health Insurance Exchange, although such individual is not eligible for both COBRA premium assistance and a premium tax credit to pay the cost of Exchange coverage for the same month.
  • An assistance eligible individual does not include an individual who loses coverage under a health plan that is not subject to COBRA continuation coverage (such as a self-insured church plan or small employer plan)—even if the plan voluntarily provides for continuation coverage.
  • If an individual whose original qualifying event was a reduction in hours or involuntary termination of employment has elected and remained on COBRA for an extended period due to a second qualifying event, disability determination, or extension under a State mini-COBRA law, such individual is eligible for COBRA premium assistance during the extended period, to the extent it falls within the period April 1 to September 30, 2021. 
  • An individual who is offered retiree coverage under a group health plan that is separate from the plan under which COBRA continuation coverage is offered is not an assistance eligible individual. However, if the retiree coverage is offered under the same group health plan as the COBRA continuation coverage, then the individual is eligible for COBRA premium assistance.
  • If COBRA continuation coverage is extended to individuals who are not qualified beneficiaries (such as a domestic partner, grandchildren, or other household members), then the COBRA premium assistance is available only with respect to the premiums attributable to COBRA continuation coverage for qualified beneficiaries who are assistance eligible individuals. Notice 2021-31 provides guidance on how to calculate the attributable premiums.
• Reduction in Hours. Any reduction in hours that results in a loss of coverage can make someone an assistance eligible individual, regardless of whether the reduction in hours is voluntary or involuntary. In addition, individuals can qualify as assistance eligible individuals even if they lose coverage because of a reduction in hours due to a furlough or a lawful work stoppage, so long as there is a reasonable expectation of a return to employment or resumption of hours.
   
• Involuntary Termination of Employment. According to Notice 2021-31, "[a]n involuntary termination of employment means a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate employment, other than due to the employee's implicit or explicit request, where the employee was willing and able to continue performing services." A determination of whether a termination of employment is "involuntary" is based on the facts and circumstances and, for example, may include a resignation or termination designated as voluntary if the facts demonstrate that absent the voluntary termination, the employer would have terminated the employee's employment. An involuntary termination of employment includes terminations for cause (but an employee terminated for gross misconduct is not COBRA eligible), and also includes employee resignations for good reason, constructive discharge, or pursuant to certain window programs. However, an involuntary termination generally would not include a retirement, death, or a resignation due to a child being unable to attend school or daycare due to COVID-19 closures. The guidance also clarifies that an involuntary termination of employment includes an employer's decision not to renew an employee's contract if the employee was willing to continue the employment relationship on the same or similar terms, but that this would not apply if the parties understood at all times that the contract was for a specified period and would not be renewed.
   
• Coverage Eligible for COBRA Premium Assistance. COBRA premium assistance is available for COBRA continuation coverage for dental only and vision only plans in addition to medical plans and health reimbursement accounts (HRAs). Notice 2021-31 provides guidance on the unique rules that apply with respect to HRAs. Retiree health insurance that is offered under the same group health plan in which active employees participate may also be treated as COBRA continuation coverage for which COBRA premium assistance is eligible. However, COBRA premium assistance is not available for COBRA continuation coverage for health FSAs and qualified small employer health reimbursement accounts (QSEHRAs). COBRA premium assistance is also not available for any coverage with premiums greater than the premiums for the coverage in which the individual was enrolled at the time of the qualifying event, unless that coverage is no longer available or the coverage is elected in the normal course of an open enrollment that occurs during the subsidy period.
   
• Extended Election Period. 
  • ARPA requires employers to provide an extended election period to any qualified beneficiary (including spouses and dependents) who does not have an election of COBRA continuation coverage in effect on April 1, 2021, but who would be an assistance eligible individual if such an election were in effect. An assistance eligible individual electing coverage under the extended election period may waive COBRA continuation coverage for any period before electing to receive COBRA premium assistance, including retroactive coverage prior to April 1, 2021. For example, if an individual's employment was involuntarily terminated resulting in a loss of coverage on October 1, 2020, and the individual did not elect COBRA or enroll in group health plan coverage or Medicare, the individual could elect COBRA continuation coverage under the extended election period retroactive to October 1, 2020, retroactive to April 1, 2021, or prospectively.
  • If an employee who was involuntarily terminated or had a reduction in hours elected self-only COBRA coverage prior to April 1, 2021, that employee's spouse and dependent children who did not elect COBRA continuation coverage at the time of the qualifying event have an independent right to elect COBRA during the extended election period.
  • A qualified beneficiary who elected some, but not all, health coverage available to him or her at the time of his or her qualifying event (e.g., elected medical, but not vision and dental coverage) is eligible for an extended election period with respect to all of the health coverages (i.e., the individual may exercise an extended election with respect to the dental and vision coverage that he or she originally rejected at the time of the qualifying event).
  • Notice 2021-31 makes clear that the extended election period applies only to a group health plan subject to Federal COBRA, and does not apply to a group health plan subject to State mini-COBRA unless the State mini-COBRA statute itself provides for a similar extended election period.
• Emergency Relief Notices. The extension of timeframes under the Emergency Relief do not apply to the ARPA timing requirements for providing notice or the extended election period. If a qualified beneficiary receives notice of an extended election period and is an assistance eligible individual, then the qualified beneficiary may elect COBRA continuation coverage within 60 days of receiving the notice. The qualified beneficiary may elect COBRA continuation coverage eligible for premium assistance only, or may also elect retroactive coverage to the date of loss, in which case the individual may be required to pay COBRA premiums for periods of coverage before April 1, 2021. If the individual does not elect retroactive coverage at the same time that he or she elects COBRA continuation coverage eligible for premium assistance, the individual does not get another election to do so – even if the Emergency Relief would have otherwise permitted a later election. If the individual does elect retroactive coverage at the same time, the extensions of timeframes under the Emergency Relief for paying premiums remain available for the retroactive coverage, but COBRA continuation coverage only need be provided for the months for which that the individual pays the premiums when due and for the months that the individual is eligible for the COBRA premium assistance.
   
• Calculation of COBRA Premium Assistance Credit. If an employer does not subsidize premium costs for qualified beneficiaries, then the premium assistance credit that employers can claim for each calendar quarter is the amount equal to the premiums not paid by the assistance eligible individuals for COBRA continuation coverage due to ARPA. This is the premium amount charged for COBRA continuation coverage to other similarly situated covered employees and qualified beneficiaries, and may include any administrative costs up to 102% of the applicable premium. Any amount subsidized by the employer is not included in the premium assistance credit. For example, if as part of a severance package an employer subsidizes coverage for involuntarily terminated employees for a period of six months, then the premium assistance credit can be claimed only for the reduced premium that would have been paid by the terminated employee for those six months. Importantly, if an employer has historically subsidized COBRA premiums but increases the COBRA premiums beginning April 1, 2021 for all similarly situated covered employees and qualified beneficiaries, then the employer can receive a premium assistance credit for the increased premium amount.
   
• Claiming the COBRA Premium Assistance Credit. In the case of a group health plan (other than a multiemployer plan) that is either subject to Federal COBRA or is self-funded, the common law employer maintaining the plan is entitled to the premium assistance credit. In the case of a multiemployer plan, the plan is entitled to the premium assistance credit. In the case of a fully insured group health plan that is subject to State mini-COBRA, the insurer is entitled to the premium assistance credit. Notice 2021-31 makes clear that a government of any State or political subdivision, or any agency or instrumentality thereof, can be a premium payee. Notice 2021-31 sets out detailed guidance on when a premium payee becomes entitled to the premium assistance credit and how the premium payee claims the premium assistance credit through reporting the credit on its Form 941, reducing its deposits of federal employment taxes by the anticipated credit, and/or requesting an advance of the anticipated credit. The Notice also provides detailed guidance for employers that use third party payers to report and pay employment taxes to the IRS.

This is only a brief summary of key provisions under the Notice 2021-31. Employers will need to review the full Notice and consult with their COBRA administrators and benefits lawyers regarding their unique circumstances. If you have any questions, please contact Tara Sciscoe, Chris Sears, Shalina Schaefer, Gary Blachman, Audra Ferguson-Allen, Robert Gauss, Melissa Proffitt, Kathleen Scheil Scheidt, or the Ice Miller Employee Benefits attorney with whom you regularly work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.