COBRA Without the Bite

On March 11, 2021, President Biden signed into law the American Rescue Plan Act (“ARPA”).  The ARPA mandated several important changes for both employers and employees.  One of these is potentially significant for both: full subsidies for employer-paid COBRA premiums.  The ARPA requires employers to provide temporary, fully subsidized COBRA continuation coverage premiums for certain individuals for up to six months.  Employers will be able to recover the subsidized premiums by claiming a tax credit.

The benefits provided to employers and employees are available to COBRA qualified beneficiaries (i.e., an employee, former employee, covered spouse, or covered dependent) who, with respect to a period of coverage during the period beginning on April 1, 2021, and ending on September 30, 2021, is eligible for and elects COBRA coverage due to a qualifying event of involuntary termination of employment or reduction of hours.  These are known as an “assistance-eligible individuals” or “AEIs.”

COBRA benefits provided under the ARPA are generally available from April 1, 2021 to September 30, 2021.  Eligibility for these benefits, however, may end earlier if the qualified beneficiary’s maximum period of coverage ends before September 30, 2021, or if the qualified beneficiary becomes eligible for coverage under another group health plan or Medicare.

AEIs are also provided with an extended election period.  The ARPA provides the opportunity to retroactively elect COBRA benefits or state benefits effective as of April 1, 2021 as a result of the new election.  The new election period—in this case, 60 days—also applies if the employee elected but then discontinued COBRA coverage or otherwise declined to elect coverage.  Employees who enrolled in COBRA coverage prior to the coverage period and continue to be enrolled during the coverage period are eligible for the subsidy.

The main benefit to employers is a quarterly tax credit against the Medicare payroll tax equal to the premium amounts not otherwise paid by the AEIs.  If the credit amount exceeds the quarterly Medicare tax, the excess will be treated as an overpayment refundable under the Internal Revenue Code (the “Code”).  Additionally, the quarterly credit may be paid in advance according to forms and instructions that will eventually be provided by the Department of Labor.  During the time the AEI is receiving this benefit, they will not be able to claim the healthcare tax credit under Code Section 35.  But, the premiums paid by the employer will be excluded from the former employee’s gross income.

Employers must provide notice to subsidy-eligible individuals at least 15 days and not more than 45 days before any COBRA premium payment subsidy ends, unless the AEI has obtained other group health plan coverage.  The Department of Labor is expected to issue model notices in the near future.

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