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Volume XI, Number 267

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Calculating the ARP COBRA Premium Subsidy Tax Credit

On May 18, 2021, the IRS released Notice 2021-31 (the “Notice”) providing guidance on the temporary 100% COBRA premium subsidy under the American Rescue Plan Act of 2021 (“ARP”), summarized generally here.  The Notice addresses how to calculate the premium subsidy and the corresponding tax credit available to premium payees, as well as the rules for claiming the tax credit.

Calculating the Tax Credit: Generally

The general COBRA rules provide that a group health plan may charge a qualified beneficiary 102% of the applicable premium for COBRA continuation coverage.  According to the Notice, if the employer does not subsidize COBRA premiums for similarly situated qualified beneficiaries who are not eligible for the subsidy, then the tax credit is equal to the full premium charged to other similarly situated qualified beneficiaries for COBRA continuation coverage.  Additionally, the Notice clarifies that the premium amount includes any administrative costs typically permitted to be charged with respect to COBRA continuation coverage.  Thus, if an employer does not provide a subsidy for COBRA continuation coverage, the employer may claim a tax credit for the full 102% of the applicable premium.

Effect of Employer Subsidies

If the employer subsidizes all or part of the COBRA premium for similarly situated individuals who are not eligible for the subsidy, the amount of the tax credit available to the employer is the premium that would have been charged to an assistance eligible individual in the absence of the premium subsidy.  The Notice clarifies that the tax credit does not include any amount that the employer would have otherwise subsidized.  For example, if the full COBRA cost for continuation coverage (102% of the applicable premium) is $1,000 per month, but the employer only charges terminated employees $250 per month, the tax credit is $250.

The amount of the credit varies based on how the employer structures its severance package.  As an example, assume 102% of the applicable premium is $1,000 per month, and the employer offers a 3-month period during which terminated employees may continue coverage for $200 per month, after which they must pay the full COBRA rate.  Based on the Notice, the analysis is as follows:

  • If the employer considers the 3-month period part of the terminated employee’s COBRA continuation period, the available credit is $200 per month during the 3-month period, and $1,000 per month thereafter.

  • If the employer considers the loss of health coverage and the beginning of the COBRA period to occur at the end of the 3-month severance period, then the employee is not entitled to the ARP premium subsidy during that period (because the coverage is not COBRA coverage) and the employer may not claim the credit. Once the severance period ends, if the former employee (who is an assistance eligible individual) elects COBRA coverage, the credit is $1,000 per month for the remainder of the subsidy period.

The Notice contemplates that employers may change their severance programs to take advantage of the subsidy/credit.  In addition, the Notice clarifies that an employer may claim the credit if it charges the full COBRA premium to all employees and qualified beneficiaries but makes a separate, taxable payment to assistance eligible individuals (i.e., pays a severance amount as taxable compensation rather than subsidizing COBRA as part of the severance packages).

How Much is the Premium Subsidy When Non-Qualified Beneficiaries are Covered?

An assistance eligible individual is any COBRA “qualified beneficiary” who loses group health coverage on account of a covered employee’s reduction in hours of employment or involuntary termination of employment.  COBRA’s definition of a “qualified beneficiary” includes only a covered employee and their spouse and dependent children who were covered under the health plan on the day before the COBRA qualifying event, as well as children born to or adopted by the employee during a period of COBRA coverage.  However, group health plans may extend “COBRA-like” coverage to family members who are not considered qualified beneficiaries (e.g., a domestic partner), and covered employees may add new spouses to their COBRA coverage in accordance with HIPAA’s special enrollment rules.  In such instances, the employer or plan administrator will need to determine what portion of the premium is eligible for the subsidy and how much it may claim as a tax credit.

The Notice confirms that the IRS uses an incremental approach when determining the amount eligible for the premium tax credit (and subsidy) in these situations.  If the cost of covering a non-qualified beneficiary does not add to the cost of covering the assistance-eligible individual(s), then the amount of the tax credit is the full COBRA premium.  If covering a non-qualified beneficiary adds to the cost of coverage, then the incremental cost to cover the non-qualified beneficiary is not eligible for the COBRA premium subsidy or the corresponding tax credit.

Example: An assistance eligible individual elects COBRA coverage for himself and all of his family members who were covered under the plan on the day before the qualifying event, which includes one dependent child and his domestic partner.  Under the terms of the plan, COBRA coverage for an employee plus-two-or-more-dependents costs $800 per month, and the COBRA premium is $600 per month for self-plus-one-dependent.  Accordingly, the incremental cost of covering the domestic partner is $200 per month.  As a result, the individual will pay $200 per month for COBRA coverage for his domestic partner, and the premium payee may claim the $600 per month as a payroll tax credit for the subsidy.

Takeaway

The Notice provides useful guidance on the calculation of the premium subsidy and the corresponding tax credits in various circumstances.  However, the calculations may be less than straightforward depending on the facts and circumstances, particularly where post-termination coverage is subsidized, or if the plan voluntarily provides continued coverage to individuals who are not otherwise qualified beneficiaries.  When in doubt, reach out to legal counsel for advice.

© 2021 Proskauer Rose LLP. National Law Review, Volume XI, Number 162
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About this Author

Roberta K Chevlowe, Labor, Employment, Attorney, Proskauer, Law Firm
Senior Counsel

Roberta Karen Chevlowe, a Senior Counsel in the Labor & Employment Law Department, practices in the field of employee benefits law. Roberta counsels employers and other benefit plan sponsors with regard to a broad spectrum of issues relating to the establishment, administration and continued legal compliance of all types of employee benefit plans. She advises clients regularly with regard to ERISA’s reporting and disclosure requirements and fiduciary duty provisions; health care reform compliance; COBRA administration; plan qualification issues arising under the Internal Revenue Code;...

212-969-3949
Katrina E McCann, Proskauer Rose, Tax Lawyer, ERISA Attorney, Benefits
Associate

Katrina McCann is an associate in the Tax Department and a member of the Employee Benefits, Executive Compensation & ERISA Litigation Practice Center.

Katrina previously served as Special Assistant to the Mayor’s Office of Pension and Investments, assisting New York City’s Chief Pension Administrator with projects to improve the benefits administration, board processes, investment decision-making, and governance of City plans with a combined $130 billion under management. Before that she was Special Assistant Corporation Counsel, Pensions...

212-969-3639
Mary Grace Richardson Labor and Employment Attorney Proskauer New Orleans
Associate

Mary Grace Richardson is an associate in the Labor & Employment Department and a member of the Employee Benefits & Executive Compensation Group. She counsels clients on a myriad of issues related to employee retirement and health plans.

Mary Grace received her J.D. and diploma in comparative law, summa cum laude, from Louisiana State University Paul M. Hebert Law School. At LSU, she served as a senior editor of the Louisiana Law Review, was a member of the Board of Advocates, and was a member of the Order of the Coif....

504-310-4086
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