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). Employers (or their COBRA administrators) are required to send special notices and may be entitled to a tax credit. For an overview of the Act's COBRA provisions, see our previous client alert.
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?
As an initial matter, the plan must be required to offer continuation coverage under federal COBRA or under a similar state law. (In this alert, "COBRA" means both federal and state continuation coverage unless otherwise noted.) The IRS confirmed that the Act's COBRA provisions apply to vision-only plans, dental-only plans, health reimbursement arrangements (HRAs), and individual coverage HRAs (ICHRAs), but do not apply to health flexible spending accounts (FSAs) or qualified small employer HRAs (QSEHRAs).
Who qualifies for the Federal Subsidy generally?
We already knew that 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 new 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 work stoppage due to strike or lockout is a reduction of hours. 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 (for example, due to an expected business recovery of the employer) 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 includes the employer's decision not to renew an employee's contract, if the employee is willing and able to continue on the same terms. However, if the contract was for a set term and the parties understood at the outset and through performance that it would not be renewed, the failure to renew is not an involuntary termination. Involuntary termination generally does not include an employee-initiated termination, but circumstances amounting to a constructive discharge (for example, a material change in the location of the employment) 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, or due to COVID-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. However, the Guidance articulated a narrow exception: an individual is eligible for a Federal Subsidy if the qualifying event was reduction of hours or involuntary termination, the individual elected COBRA, and the individual continued their COBRA coverage beyond the 18-month period because of a second qualifying event (for example, death or divorce), a disability extension, or an extension under state COBRA.
When do individuals lose their eligibility for the Federal Subsidy?
We already knew that individuals are not entitled to the Federal Subsidy once they become eligible for coverage under another group health plan or Medicare. The Guidance confirmed that individual market coverage (for example, from healthcare.gov) is not disqualifying. The Guidance also explained that group coverage is not disqualifying until the individual is actually eligible—if an individual is not eligible for an employer's group health plan for the first 60 days of employment, then during that 60-day waiting period the individual remains eligible for the Federal Subsidy.
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 use payroll service providers or professional employer organizations to report and pay employment taxes. Although the details are beyond the scope of this client alert, it is worth noting that the Guidance addresses how tax credits should be handled in those situations.
- Second-Chance Elections. Generally, the Act requires that certain individuals be given a second chance to elect COBRA coverage so that they can take advantage of the Federal Subsidy. The Guidance clarified that only individuals who were eligible for federal COBRA are entitled to the second-chance election.
- Retiree Coverage. If an individual is offered a choice between COBRA coverage in one plan and retiree coverage in a different plan, the individual will not be eligible for a Federal Subsidy—the retiree coverage is disqualifying. If the individual is offered COBRA coverage and retiree coverage in the same plan, the individual may be eligible for a Federal Subsidy—the retiree coverage is not disqualifying.
- Employer 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.
Important Questions Remain
- 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 or the extent to which these types of agreements affect the employer's ability to claim the tax credit.
- Electing a COBRA Start Date. The Guidance indicates that someone with a second-chance election may, within 60 days, elect COBRA coverage beginning on their original COBRA start date, subsidized COBRA coverage beginning during the subsidy period, or both. However, the Guidance does not explain how these choices should be communicated. The model notices published by the Department of Labor do not include all of these options—or even a blank where one could enter one's desired start date.
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.
If you have questions or concerns regarding this alert, please contact the authors, any member of Venable's Employee Benefits and Executive Compensation Practice Group, or your regular Venable lawyer.