In March, Congress passed and the president signed the American Rescue Plan Act (the Act). Under the Act, the federal government will subsidize COBRA premiums for certain individuals for up to six months (the Federal Subsidy). Last week, the IRS published new guidance (the Guidance) explaining many details about the Federal Subsidy, the notices, and the tax credits. This alert summarizes the provisions of the Guidance that are most relevant to employers.
What group health plans are affected?
Plans that offer continuation coverage under federal COBRA or under a similar state law. (Hereafter, "COBRA" means both federal and state continuation coverage unless otherwise noted.) The Act's COBRA provisions apply to all health plans, including vision and dental plans, health reimbursement arrangements (HRAs), and individual coverage HRAs, but do not apply to health flexible spending accounts or qualified small employer HRAs.
Who qualifies for the Federal Subsidy generally?
To qualify for the subsidy, an individual must (i) be eligible for COBRA because the individual lost coverage as a result of a qualifying event that is a reduction of hours or involuntary termination of employment, (ii) be eligible for COBRA during some or all of the period from April 1 to September 30, 2021, and (iii) elect COBRA. The Guidance added and confirmed details regarding these requirements:
- Qualified Beneficiaries. Only "qualified beneficiaries" as defined by federal COBRA are eligible for the subsidy. This means the individual must be an employee, the employee's spouse, or the employee's dependent child; must be enrolled in the plan on the day before the qualifying event; and must lose coverage as a result of the qualifying event. Covered dependents who are eligible for state COBRA, but not federal COBRA, are not eligible for the Federal Subsidy.
- Reduction of Hours. The reduction of hours may be voluntary or involuntary. A reduction of hours includes "temporary loss of employment or complete reduction in hours with a reasonable expectation of return to employment or resumption of hours such that the employer and employee intend to maintain the employment relationship."
- Involuntary Termination. An involuntary termination generally means an employer-initiated termination of employment, where the employee is willing and able to continue performing services. Involuntary termination generally does not include an employee-initiated termination, but circumstances amounting to a constructive discharge may be an involuntary termination. Involuntary termination does not include an employee-initiated departure due to health issues of the employee or a family member, COVID-19-related school closures or childcare closures, the employee's retirement (unless the employee was given a choice between retirement and termination), or the employee's death.
- April-to-September Time Frame. For a qualifying event that is a reduction of hours or involuntary termination, the maximum COBRA coverage period is 18 months. Generally, if an individual's qualifying event occurred more than 18 months before April 2021, the individual will not be eligible for a Federal Subsidy, unless an exception applies.
When do individuals lose their eligibility for the Federal Subsidy?
Individuals are not entitled to the Federal Subsidy once they become eligible for coverage under another group health plan or Medicare. Employer-sponsored retiree coverage is generally disqualifying, unless the retiree coverage and COBRA coverage are offered under the same plan. However, individual market coverage (for example, from healthcare.gov) is not disqualifying.
How and when does an employer claim the tax credit?
An employer is entitled to the tax credit for a given month on the first of the month, provided that the employer has received the individual's COBRA election and has not charged the individual for a COBRA premium. If the employer charged a premium that needs to be refunded to the individual under the Act, the employer may claim the credit when it issues the refund. Generally, an employer will claim the tax credit to which it is entitled on its quarterly federal employment tax return (Form 941). If the credit will exceed the federal employment taxes, the employer may request advance payment of the credit on Form 7200, which it may submit at the end of the payroll period in which it became entitled to claim the credit.
- Documentation. An employer claiming the tax credit must retain records showing that the individual was eligible for a subsidy. If the individual fails to notify the employer of disqualifying coverage, then unless the employer knew about the coverage, the employer is not required to reverse the credit.
- Third-Party Payers. Many employers report and pay employment taxes through payroll companies or professional employer organizations. In these cases, the employer may not be entitled to the credit, or there may be a different process for claiming the credit.
What is the effect of an employer subsidizing all or part of COBRA premiums?
- Broad-Based Subsidies. If the employer subsidizes COBRA premium costs for "similarly-situated" individuals who are not eligible for the Federal Subsidy, the employer cannot claim 100% of the COBRA premium as a tax credit. Instead, the amount of the tax credit related to an individual is the premium that the individual would have owed but for the Federal Subsidy.
- Separation Agreements. In many separation agreements, the employer promises to pay some portion of the COBRA premiums for the former employee or promises to pay a monthly amount to the former employee in lieu of paying COBRA premiums. The Guidance does not say whether these types of agreements affect the employer's ability to claim the tax credit.
This is a high-level summary of the Guidance and cannot include all of the specific points that may be relevant to your company or your specific situation. Additional information regarding the Act's COBRA provisions is available here.
If you have questions or concerns regarding this article, please contact the authors, any member of Venable's Employee Benefits Practice Group, or your regular Venable lawyer.