ARPA Requires Tax-Free COBRA Subsidy
As part of the American Rescue Plan Act of 2021 (“ARPA”), signed into law on March 11, 2021, employers will be required to provide, on a tax-free basis, a subsidy to employees and their qualified beneficiaries to pay 100% of the COBRA continuation premium for group health plan coverage. This subsidy applies only to “assistance eligible individuals,” who are eligible for COBRA as a result of an involuntary termination of employment or a reduction in hours and who are, or could have been, eligible for COBRA during the period of April 1, 2021 through September 30, 2021 (the “Subsidy Period”).
The COBRA subsidy is available to: (1) any eligible individual who is enrolled in COBRA (or will enroll in COBRA) for coverage during the Subsidy Period; and (2) any former employee (who is otherwise an eligible individual) who did not elect COBRA coverage or dropped COBRA coverage prior to April 1st , but would otherwise be within the employee’s 18-month COBRA coverage during the Subsidy Period. Premiums for COBRA-qualified beneficiaries who are eligible for the COBRA subsidy will be paid by the federal government through payroll tax credits against employers’ quarterly Medicare taxes.
Plan administrators are required to begin notifying eligible individuals of the COBRA subsidy within 60 days after April 1, 2021 (i.e., by May 31, 2021). This special election opportunity will also allow these individuals to make a prospective COBRA election for the period beginning April 1, 2021, without requiring payment of premiums retroactive to the original loss of coverage, which is a departure from the normal COBRA rules. In such a case, the maximum COBRA period is not extended (that is, it is still counted from the date of the original qualifying event).
The COBRA subsidy must be provided to eligible individuals for up to 6-months, from April 1, 2021 through September 30, 2021. Subsidies can end prior to September 30, 2021 if an individual’s original COBRA maximum period of coverage is exhausted, or an individual becomes eligible for Medicare or group health plan coverage. Individuals are required to notify the plan if they become eligible for other group health plan coverage. It is not clear yet whether becoming eligible for coverage under a spouse’s plan will disqualify an otherwise-eligible individual from receiving this coverage.
In the coming weeks, the DOL is required to issue model COBRA notices addressing the subsidy availability, extended election period, and subsidy expiration, and we expect the government agencies to issue guidance on various issues related to the subsidy, including the new notice obligations.