The federal government's subsidy of COBRA premiums (the Federal Subsidy) under the American Rescue Plan Act (the Act) ends on September 30, 2021. There are notices associated with the end of the subsidy, and those notices have a fast-approaching deadline. In addition, the IRS recently published new guidance about the Federal Subsidy—this new guidance supplements the FAQs the IRS issued in May. (Our previous alerts about the Federal Subsidy and the May FAQs are available here and here.) This alert provides a brief explanation of the notice requirements and summarizes the provisions of the new guidance that are most relevant to employers.
Which group health plans are affected by the subsidy? Plans that are subject to federal COBRA or to a state law requiring comparable continuation coverage.
What are the dates of the subsidy period? It began April 1, 2021 and ends September 30, 2021.
What is the amount of the subsidy? If an individual is eligible for the subsidy, the subsidy covers 100% of the individual's premium.
Notice That the Subsidy Is Ending
Under the Act, plan administrators must notify individuals when their subsidy is about to expire. The expiration notice must identify the date the individual's subsidy will expire and must inform the individual that unsubsidized COBRA coverage or other group health plan coverage may be available. (The DOL has issued a model expiration notice.)
The expiration notice must be provided between 45 and 15 days before the day the individual's subsidy ends. Many individuals will be receiving subsidies through the last available day (September 30). For these individuals, the expiration notice is due no later than September 15. Failure to provide a timely notice may result in penalties.
Note: In some scenarios, an expiration notice could be due before the individual has even received a COBRA election notice. (For example, if a qualifying event occurred in August 2021.) The IRS has not provided specific guidance regarding these scenarios. We are hopeful that the IRS will not impose penalties if a plan administrator provides the expiration notice at a time that is reasonable under the circumstances.
Extended Coverage Periods. Under COBRA, individuals with 18 months of COBRA continuation coverage may be able to extend that period to 29 months (due to disability) or 36 months (due to a second qualifying event). The new guidance clarifies that the Federal Subsidy is available not only for eligible individuals whose 18-month period overlaps the subsidy period, but also for eligible individuals whose 29-month or 36-month COBRA period overlaps the subsidy period.
Dental and Vision Coverage. We already knew that Federal Subsidies are available under vision-only and dental-only plans. We also already knew that individuals are disqualified from Federal Subsidies once they become eligible for coverage under another group health plan or Medicare. According to the new guidance, if an individual is enrolled in COBRA for a vision-only or dental-only plan, and the individual becomes eligible for a group health plan or Medicare, the individual is disqualified from Federal Subsidies even if the group health plan or Medicare does not include vision or dental benefits.
Claiming the Tax Credit. As a general rule, for single-employer plans that are subject to federal COBRA or are self-funded, the employer maintaining the plan is entitled to claim the tax credits related to the Federal Subsidy. In the new guidance, the IRS has provided various scenarios to clarify entitlement to the tax credit, such as:
- Controlled Groups. If a plan covers employees of two or more employers in a controlled group, each employer is entitled to the tax credit for its own employees or former employees. This is the case even though the controlled group members are treated as a single employer for plan purposes and even though a different employer may be the plan sponsor.
- Professional Employer Organizations (PEOs). A PEO providing health coverage to its clients' employees may claim the tax credit only if it also pays the employees' wages and reports the wages on its quarterly federal employment tax return (Form 941).
- Business Reorganizations/Mergers and Acquisitions. A selling employer is entitled to claim the tax credit if, after the sale of its stock or assets, it continues operating its group health plan and remains obligated to provide COBRA to individuals who were already receiving the Federal Subsidy before the transaction or to individuals who become eligible for the Federal Subsidy as a result of the transaction. If no employer is required to make COBRA available to Federal Subsidy-eligible individuals after the transaction, no employer is entitled to claim the tax credit.
Questions? If you have questions or concerns regarding this client alert, please contact the authors, any member of Venable's Employee Benefits Practice Group, or your regular Venable lawyer.