United States

COBRA premium assistance under the American Rescue Plan Act of 2021

INSIGHT ARTICLE  | 

Authors’ Note (August 18, 2021): The IRS has issued Notice 2021-46 which provides additional guidance about premium assistance for COBRA benefits. The notice clarifies that the common law employer of the assistance eligible individual is typically the entity entitled to the COBRA premium assistance credit. However, exceptions can apply if a third-party payer of employees’ wages is involved, a business reorganization occurs, or if COBRA is offered through a multiemployer plan, state agency plan or SHOP exchange plan. The notice also addresses (1) extended coverage periods for individuals due to second qualifying events, disability or state COBRA rules, (2) termination of premium assistance for dental and vision coverage, and (3) state continuation coverage for a subset of state residents.

Due to the American Rescue Plan Act of 2021 (ARPA) enacted in March, individuals losing their healthcare coverage due to a reduction of hours or involuntary termination of employment will be eligible for COBRA premium assistance from April 1, 2021 through Sept. 30, 2021. In general, employers sponsoring group health plans will be required to pay 100% of the COBRA premiums for these individuals for this six-month period. However, employers can claim the amount of the COBRA premium assistance as a payroll tax credit on their 2021 Form 941, Employer’s Quarterly Federal Tax Return.

Affected organizations

The COBRA premium assistance requirement applies to group health plans sponsored by private-sector employers, employee organizations (unions), and state and local governments. In addition, it applies to plans subject to certain state laws regarding continuation coverage, and may apply to some church plans. Plans maintained by employers with fewer than 20 employees may be exempt. The premium assistance applies to insured and self-insured medical, dental and vision plans, but not to health flexible spending arrangements (FSAs).

Generally, the employer maintaining the group health plan is responsible for funding the COBRA premium assistance. However, if health coverage is provided through a multiemployer plan maintained by a union, the plan funds the premium assistance. In certain cases, such as when a plan is subject to state continuation coverage requirements, the insurance company providing the health coverage funds the premium assistance. The premium assistance is equal to the amount the individuals would have paid for the COBRA coverage offered to them (including the 2% administrative fee).

Payroll tax credit

Employers (or multiemployer plans or insurers) may claim 100% of the COBRA premium assistance as a tax credit against their share of Medicare taxes reported on their quarterly payroll tax returns. Since the premium assistance is in effect from April 1, 2021 through Sept. 30, 2021, the tax credit can be claimed on the second and third quarter 2021 Forms 941, as appropriate. Special rules apply to railroad employers.

If the COBRA premium assistance tax credit exceeds the employer’s Medicare taxes for the quarter, the employer may request a refund on its Form 941. In addition, in anticipation of receiving a tax credit, an employer can reduce its payroll tax deposits during a quarter, or file Form 7200 to request an advance refund of the credit, prior to filing its Form 941.

Employers will need to coordinate their various tax credits to ensure that they do not utilize the same health plan costs for the COBRA premium assistance credit and for other tax credits, such as the employee retention credit. In addition, employers will need to include any COBRA premium assistance tax credit received as income on their federal income tax returns.

Assistance eligible individuals

Individuals and their family members who qualify for the COBRA premium assistance are called “assistance eligible individuals” (AEIs). To qualify, they must meet three requirements:

  1. They are entitled to COBRA due to a reduction in hours or an involuntary termination of employment (other than for gross misconduct). Individuals and their family members who become entitled to COBRA for other reasons, such as voluntary termination of employment, death, divorce or loss of dependent status, are not eligible for the COBRA premium assistance.
  2. They are eligible for COBRA coverage for some or all of the period of April 1, 2021 through Sept. 30, 2021. Since the COBRA coverage period due to reduction of hours or termination of employment is 18 months, potential AEIs will need to be identified starting from October of 2019.
  3. They elect COBRA continuation coverage.

Potential AEIs eligible for COBRA prior to April 1, 2021, who either declined the coverage or enrolled and then dropped the coverage, must be given a new opportunity to enroll in COBRA. However, the ARPA premium assistance requirement and this second COBRA election do not extend the original COBRA coverage period. For example, if an AEI’s original 18-month COBRA coverage period ends on May 31, 2021, the AEI could be entitled to premium assistance for April and May of 2021, but will not be eligible for COBRA benefits or premium assistance thereafter.

Furthermore, an AEI will lose eligibility for the COBRA premium assistance if the AEI becomes eligible for Medicare or another group health plan prior to Sept. 30, 2021, excluding certain plans such as dental or vision, health FSAs or qualified small employer health reimbursement arrangements (QSEHRAs). AEIs must notify the plan provider of their eligibility for other coverage. Failure to do so may subject the AEIs to penalties of $250 or 110% of the premium assistance for months of ineligibility.  

Thus, AEIs may be eligible to receive COBRA coverage at no cost for up to six months in 2021 due to the ARPA requirement that their employers (or multiemployer plans or insurers) pay their COBRA premiums. This COBRA premium assistance is not taxable to the AEIs. Employers (or multiemployer plans or insurers) are required to refund to AEIs within 60 days any COBRA premiums paid by the AEIs for April to September of 2021.

Notice requirements

Individuals who are potential AEIs must receive written notices from their employers (or multiemployer plans or insurers) about COBRA elections and COBRA premium assistance availability and expiration. The Department of Labor has provided model notices on its website for these purposes which can be used as is, modified, or serve as a basis for amending existing election notices. The deadlines imposed by ARPA for providing the notices are not extended by the Joint Notice or EBSA Disaster Relief Notice 2021-01 regarding deadline extensions due to COVID-19 which were previously issued by the government. An excise tax of up to $200 per day per violation can be assessed for failure to provide the required notices.

COBRA elections and premium assistance availability

Individuals who have a COBRA qualifying event occurring between April 1, 2021 and Sept. 30, 2021 should be provided a summary about the COBRA premium assistance and a COBRA notice within the normal timeframe for providing a COBRA election.

Individuals eligible for COBRA prior to April 1, 2021 should be provided with a summary about the COBRA premium assistance and a COBRA notice about the extended election periods by May 31, 2021. These documents are for potential AEIs who, since October 2019, enrolled in COBRA, declined COBRA, or enrolled and then dropped the coverage. Individuals not on COBRA are given a new opportunity to elect COBRA within 60 days.

Under ARPA, plan providers can voluntarily allow individuals the option to elect a different health plan with the same or lower cost than the one they are entitled to under COBRA. It must be a health plan that is also offered to similarly-situated active employees and cannot be a health FSA, QSEHRA or coverage that only offers excepted benefits such as dental or vision. If individuals are given this option, information about the option needs to be included in the COBRA notice and they will have 90 days to elect the different health plan.

Individuals eligible for COBRA due to a state continuation requirement should be provided a summary about the COBRA premium assistance and a COBRA election notice. The Department of Labor includes model forms on its website specifically for state continuation requirements.

COBRA premium assistance expiration

Within 15 to 45 days prior to the expiration of an AEI’s COBRA premium assistance, the AEI must be notified of the upcoming expiration. However, notification is not required if the premium assistance is ending due to the AEI’s eligibility for Medicare or other group health plan coverage.

Implementation

Employers (or multiemployer plans or insurers) will need to work with their COBRA administrators to implement these new ARPA requirements and issue the required notices on a timely basis.  In addition, they will need to coordinate with their payroll administrators or third-party processors to claim the payroll tax credit for the COBRA premium assistance. The following information pertaining to COBRA premium assistance should be retained:

  • Attestation of an individual’s reduction of hours or involuntary termination including the date of the occurrence;
  • Proof of the individual’s eligibility for COBRA and election of COBRA coverage; and
  • Each individual’s social security number, premium assistance amount and whether family members are included.
  • Total number of AEIs each quarter.

For more information, see IRS Notice 2021-31 and the Department of Labor’s frequently asked questions (FAQs).


Related Resources

President Biden signs American Rescue Plan Act of 2021

TAX ALERT

President Biden signs American Rescue Plan Act of 2021

$1.9 trillion COVID-19 relief plan with broad individual relief and new coronavirus-related funding enacted into law.

  • Patti Burquest, Alexandra Mitchell, Andy Swanson
  • |
  • March 11, 2021

RSM CONTRIBUTORS


HAVE A COVID-19 TAX RELIEF QUESTION?


STAY INFORMED - Tax alerts and insights



UPCOMING RSM TAX EVENTS

LIVE WEBCAST

Tax innovation webcast series 2021

  • October 19, 2021

EVENT

Tax in Motion—2021 tax summit week

  • November 01, 2021