Special thanks to guest contributors Christopher Guldberg and Janel Brynda.

The American Rescue Plan Act of 2021 (the “ARPA”), was signed into law on March 11, 2021, and creates a temporary COBRA premium subsidy for certain qualifying individuals. This COBRA premium subsidy applies to all group health plans subject to the Employee Retirement Income Security Act of 1974.  Thus, most employers will be impacted by the new COBRA subsidy.

Employers will need to evaluate the impact of the ARPA not only with respect to COBRA administration, but equally important,  employers may need to make changes to their severance arrangements to take into account the temporary COBRA subsidy.

The ARPA provides that an assistance eligible individual who elects COBRA coverage will be deemed to have paid 100% of any applicable COBRA premium (including the 2% administrative charge) during the period April 1, 2021 to September 30, 2021. In this respect, ARPA differs from the premium assistance under the American Recovery and Reinvestment Act of 2009 that only provided for a partial premium subsidy for eligible individuals.

Eligible Individuals

The ARPA premium subsidy is only available to an “assistance eligible individual” (an “Eligible Individual”). An Eligible Individual is any individual who elects COBRA (and their COBRA qualified beneficiaries) as the result of losing coverage due to an involuntary termination of employment (other than for gross misconduct) or to a reduction in hours of work and is eligible to receive COBRA for all, or a portion of period April 1, 2021 to September 30, 2021. This includes individuals who may already be on COBRA due to a termination of employment or reduction in hours that occurred prior to the enactment of the ARPA. However, it will likely not include individuals that are not COBRA qualified beneficiaries (e.g., domestic partners that are not tax dependents) who may receive voluntary continuation coverage from an employer.

Funding the COBRA Subsidy

The ARPA COBRA subsidy is provided by the employer with the employer then being reimbursed through a tax credit. The credit is a dollar-for-dollar credit and applies to reduce the employer’s share of the hospital insurance premium component of FICA taxes paid on employee wages. If the amount of credit exceeds the employer’s hospital insurance FICA tax, the excess amount can be claimed as a refundable tax credit. The credit only applies with respect to premiums and wages paid on or after April 1, 2021.

Special Election Period

The ARPA provides for a special election period for Eligible Individuals who did not previously elect COBRA continuation coverage but who would otherwise be eligible for the COBRA subsidy.  There is also a special election period for any individual who elected COBRA continuation coverage and dropped such coverage before April 1, 2021. These individuals may elect COBRA continuation coverage within 60 days of receiving the required employer notice (noted below). The coverage will be effective with the first period of coverage beginning on or after April 1, 2021.

At this point, the interplay between the ARPA COBRA subsidy and the guidance in the Department of Labor final rules published on May 4, 2020 and EBSA Disaster Relief Notice 2021-1 (the “Outbreak Guidance”) is unclear. The Outbreak Guidance gave individuals substantial additional time in which to make COBRA elections and premium payments. Arguably, the extension on COBRA elections provided under the Outbreak Guidance should not apply to elections for subsidized COBRA coverage under the ARPA or the related required notices.  However, additional regulatory guidance on that point is needed.

Required Revised COBRA Notices

During the period of April 1, 2021 to September 30, 2021, the employer’s COBRA election notice must include “clear and understandable language” regarding the availability of the COBRA premium subsidy. The COBRA notice requirements for Eligible Individuals can be effectuated by modifying the standard COBRA notice or with an additional disclosure included with the standard COBRA notice.

The notice for Eligible Individuals must include:

  • The forms required for establishing eligibility for the premium subsidy;
  • Contact information for the plan administrator or the persons maintaining relevant information related to the premium subsidy;
  • A description of the extended election for Eligible Individuals who previously elected or dropped COBRA coverage;
  • A description of the Eligible Individual’s right to a subsidized premium and any conditions on receipt of the premium; and
  • A description of the Eligible Individual’s obligation to notify the employer of the Eligible Individual’s eligibility for other group health coverage.

The Secretary of Labor is directed to provide a model notice no later than April 10, 2021 (30 days of the date of the ARPA enactment).

Written Notice of the Termination of the Premium Subsidy

In general, an Eligible Individual’s premium subsidy will end with the first month beginning on or after the earliest of: (i) the expiration of the person’s maximum COBRA period, (ii) the date the person becomes eligible for coverage under another group health plan (excluding eligibility for excepted benefits, such as dental or vision, or a flexible spending account) or Medicare, or (iii) September 30, 2021.

Eligible Individuals must receive a written notice regarding the end of the premium subsidy no earlier than 45 days before the end of the subsidy and no later than 15 days before such date. This notice must inform the person that the premium subsidy will end, clearly indicate the date of the expiration, and inform the Eligible Individual that they may be eligible for coverage without any premium subsidy, if applicable.  The employer does not need to send this notice if they are notified that the Eligible Individual is eligible for other coverage. The Secretary of Labor is directed to provide a model notice no later than April 25, 2021 (within 45 days of the date of the ARPA enactment).

An Eligible Individual who becomes eligible for coverage under another group health plan or Medicare must notify the plan providing the COBRA coverage regarding such eligibility. If the Eligible Individual fails to provide the notice regarding available coverage, he or she may be subject to a penalty of $250 for each failure, and if the failure is intentional, the penalty is the greater of $250 or 110% of the premium subsidy provided to the Eligible Individual. Employers may want to include information on this potential penalty in the notice to employees regarding the availability of the premium subsidy.

Employer Takeaways

The ARPA COBRA subsidy raises numerous issues for employers. Some key considerations are:

  • Employers must be able to identify individuals who were previously eligible for COBRA coverage who were involuntarily terminated or lost coverage as a result of a reduction in hours.  Not all employers have records that track the nature of an employee’s termination of employment. Similarly, employers will need to be able to identify individuals who previously dropped COBRA coverage who may now be eligible to elect under the ARPA special enrollment rules.
  • It is likely only qualified beneficiaries will be eligible for the ARPA subsidy so if an employer offers continuation coverage to a broader group (e.g., domestic partners) this group will not receive subsidized COBRA.
  • For employers with severance plans that provide for additional cash as a COBRA coverage subsidy, the employer may want to consider reducing that cash amount to reflect the required ARPA subsidy. Employers who provide an employer subsidy and who reimburse or pay COBRA directly may wish to consider offering a cash benefit to avoid having to coordinate any required and voluntary subsidies. At this point, it is not entirely clear to what extent the tax credit is available for voluntary employer subsidies.
  • COBRA notices will must be updated. This may require coordination with outside COBRA vendors including making sure those vendors are providing sufficient information about how many individuals took advantage of the ARPA subsidy, and for how long, for the employer to claim the tax credit.
  • The COBRA subsidy substantially increases the likelihood of Eligible Individuals electing COBRA which can impact claims experience.