COBRA Subsidy: You’ve Got Questions … We’ve Got Answers
The new 100 percent premium subsidy applies to individuals eligible for Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage due to either a reduction in hours or an involuntary termination of employment, and it applies for the period from April 1, 2021, to September 30, 2021. The U.S. Department of Labor (DOL) has already produced model notice forms and initial guidance consisting of a summary sheet and frequently asked questions (FAQs). Employers are still awaiting formal regulations and guidance from the Internal Revenue Service (IRS).
A recent Ogletree Deakins webinar on the COBRA coverage subsidy under the American Rescue Plan Act of 2021 (ARPA) produced more questions than the presenters could address during the webinar. Below are answers to some of the most common and interesting questions we heard from our audience.
Question 1. An employee is out on a medical leave for six months. At the end of the sixth month, medical benefits end under the terms of the plan, but the individual is still employed. Is she an “Assistance Eligible Individual” (AEI) for purposes of the COBRA premium subsidy under the ARPA?
Answer 1. Yes. Any reduction in hours that leads to a loss of coverage is a COBRA qualifying event that would make an individual eligible for the premium subsidy. This includes a reduction in hours due to a medical or disability-related leave of absence.
Q2. An employee was fired for poor performance last year. The employee went to another company, but his employment was recently terminated for poor performance. Which company is required to send COBRA notices and offer fully subsidized COBRA?
A2. Potentially both. Under the ARPA, assuming the individual was covered by a health plan at each employer, both companies are required to send COBRA notices and either company could be responsible for the ARPA subsidy for some or all of the subsidy period. The individual will be given a choice of COBRA coverage. Individuals are not eligible for COBRA while enrolled in other group health plan coverage, and individuals lose eligibility for the subsidy when they become eligible for other group health coverage. The ARPA requires that subsidized COBRA coverage be offered even to those individuals who discontinued or never elected COBRA.
Q3. Does a second chance notice or subsidy eligibility notice go to all employees who lose coverage due to involuntary termination or a reduction in hours? What about those individuals that the company knows are eligible for Medicare or another employer’s plan?
A3. Yes. Under the ARPA, all AEIs are required to receive notification of their right to premium assistance. An AEI is an individual who lost coverage due to a reduction in hours or involuntary termination, and who elects COBRA coverage. The assistance is not available to individuals who are eligible for Medicare or coverage under another employer’s plan. The model notices issued by the DOL require individuals to indicate that they are not eligible for Medicare or another employer’s plan. Furthermore, the notices are required to inform individuals about the $250 penalty they will face for electing subsidized COBRA if they are eligible for Medicare or another group health plan. Even if a former employee does not acknowledge eligibility for age-based Medicare, an employer could still deny eligibility for the subsidy.
Q4. If a company makes a taxable lump-sum cash payment intended to represent six months of COBRA premiums as part of a severance agreement, may the company claim a Medicare tax credit for the value of that lump-sum payment?
A4. No. As noted above, the IRS is expected to release further guidance on the Medicare tax credit. Employers may want to take note that a former employee who receives this type of cash payment may decide not to elect COBRA coverage at all, and therefore no tax credit would be available to the employer for the cash lump-sum severance payment. Also, the Medicare tax credit under the ARPA is intended for the COBRA premiums “not paid” by the employee under the subsidy provisions of the ARPA. This would be consistent with situations where AEIs are not charged COBRA premiums, rather than cases where they receive cash that could be used to pay any required premiums or for any other purpose.
Q5. A former employee is not “assistance eligible” if he is eligible for another employer’s plan. What if the former employee satisfies the eligibility requirements for the other employer’s plan but is not in an open enrollment or special enrollment window where he could actually enroll in the other plan?
A5. It appears that the employee would be eligible for the subsidy until any waiting period in the other employer’s plan ends. In many cases, former employees would be immediately eligible to enroll in a new employer’s plan or under a spouse’s plan following a job loss or loss of other employer-sponsored coverage. In either of those cases, however, waiting periods or similar restrictions may prevent a former employee from enrolling right away. Neither the ARPA nor the DOL FAQs clarify whether a former employee who is subject to a waiting period is “eligible” for other coverage and therefore not eligible for the COBRA subsidy. Note that the model notices issued by the DOL indicate that eligibility for coverage does not include time spent in a waiting period.
Q6. May an employer stop treating COBRA as fully paid when a former employee turns 65 and becomes eligible for Medicare, even if the employee does not notify the plan?
A6. Probably. To date, neither the ARPA nor the DOL guidance has addressed an employer’s duties when the employer has actual knowledge of an individual’s eligibility for other coverage. The model notice issued by the DOL indicates that an employer may issue a notice due to the “end of premium assistance.” The FAQ does not require employers to inquire about other coverage, but eligibility for Medicare would end an individual’s eligibility for the subsidy. Employers may want to send a notice advising the employee that the subsidy is ending upon the employee’s Medicare eligibility, before starting to charge a COBRA premium, even if the individual has not provided notice of Medicare eligibility.
Q7. A company recently fired an employee for dishonesty. Does this qualify as gross misconduct that would make the employee ineligible for the COBRA subsidy?
A7. It depends. An employee who is fired for gross misconduct is not eligible for COBRA under most plans and would not be eligible for the COBRA subsidy. However, employers may interpret the term “gross misconduct” differently. Generally, ordinary dishonesty probably doesn’t meet the definition of gross misconduct, though it could depending upon what the employee lied about. For misconduct to be considered “gross,” it would likely need to be beyond negligence. Typically, incompetence, an honest mistake, or substandard job performance are not enough. Instead, there has to be something about the employee’s misconduct that was outrageous—something deliberate or reckless. Some courts consider whether the behavior was illegal. The bottom line is that the employer must decide that the termination of the individual’s employment is for severe, intentional misconduct in order to deny COBRA and the subsidy.