IRS Guidance on New COBRA Subsidy Clarifies Many Outstanding Questions

On May 18, 2021, the IRS released Notice 2021-31, a lengthy series of FAQs clarifying many aspects of the new COBRA subsidy made available under the American Rescue Plan Act of 2021 (ARPA). The FAQs address many of the issues raised by plan sponsors since the subsidy was enacted earlier this year. Although this blog post does not address every nuance of the guidance—the IRS issued a whopping 86 FAQs—below we point out some clarifications that might be of interest to group health plan sponsors:

  • Eligible Health Plans. The guidance confirms that the COBRA subsidy is available for participants under any group health plan (except health FSAs offered under a cafeteria plan), including vision-only and dental-only plans. This is true regardless of whether the employer pays for a portion of the premiums for active employees.
  • Other Disqualifying Coverage. The guidance confirms that the COBRA subsidy is not available if an individual is eligible for coverage under any other group health plan or for Medicare even if the individual is not enrolled in the coverage. If an individual receiving the subsidy becomes eligible for coverage under any other group health plan or for Medicare, the subsidy ends. Individuals receiving the subsidy are required to notify the group health plan providing COBRA continuation coverage of eligibility for other disqualifying coverage.
  • Eligibility Attestations. The guidance allows employers to require individuals to self-certify or attest that they are eligible for the COBRA subsidy due to a reduction in hours or involuntary termination of employment (and that they are not eligible for other group health plan coverage or Medicare, which would make them ineligible for the COBRA subsidy). Employers are not required to obtain these self-certifications or attestations, but if they want to claim the accompanying tax credit for providing the COBRA subsidy, they must retain in their records either a self-certification or attestation from the individual regarding his or her eligibility status, or some other documentation to substantiate the individual’s eligibility for the COBRA subsidy.
  • Involuntary Termination. The guidance includes an extensive discussion of the various types of events that might constitute an “involuntary termination” for purposes of subsidy eligibility. Generally, an “involuntary termination” is a severance from employment initiated by the employer when the employee was willing and able to continue performing services. Whether a termination is “involuntary” is based on the facts and circumstances of each particular case. The guidance addresses specific situations that may be of interest to employer plan sponsors (e.g., illness or disability, retirement, termination for cause or good reason, “window” programs, resignations due to workplace safety concerns, etc.).
  • Reduction in Hours. The guidance clarifies that an employee’s reduction in hours triggers eligibility for the COBRA subsidy regardless of whether the reduction in hours is voluntary or involuntary.
  • Extended Period Due to Disability/Second Qualifying Event. The guidance clarifies that the COBRA subsidy is available to individuals who elected and remained on COBRA coverage for an extended period due to a disability determination, second qualifying event, or an extension under a state mini-COBRA program if the original qualifying event was a reduction in hours or an involuntary termination, to the extent the extended coverage overlaps with the subsidy period (i.e., April 1 to September 30, 2021).
  • Subsidized Coverage. With respect to the employer tax credit, the guidance provides that the amount of the tax credit will depend on whether or not the employer subsidizes COBRA premiums. If the employer does not subsidize COBRA premiums, then the credit is generally equal to the premiums not paid by the subsidy recipient—that is, the COBRA premiums charged (including administrative costs) for similarly situated employees who were not eligible for the subsidy. If the employer does subsidize COBRA premiums, then the credit is generally equal to the amount of premiums that the employer would have charged the individual if there were no ARPA COBRA subsidy (indicating that employers cannot claim a credit for premium amounts they would have subsidized in the absence of the ARPA COBRA subsidy).
  • Individuals Who Are Not Qualified Beneficiaries. The guidance clarifies that the COBRA subsidy does not apply to the portion of premiums attributable to COBRA coverage for individuals who are not qualified beneficiaries. For example, the subsidy will not apply to coverage for a spouse who was not a beneficiary under the plan on the day before the qualifying event. While not specifically addressed in the guidance, this would also apply to domestic partners who are enrolled as dependents but do not meet the definition of a qualified beneficiary. The FAQs include guidance regarding determining what portion of the COBRA premium is eligible for the subsidy in such a case.

As a reminder, the notice of the ARPA extended election period must be distributed by May 31, 2021, which is rapidly approaching. See our prior post regarding the ARPA notices here.

Contact your Faegre Drinker benefits attorney with questions or for assistance with implementing the COBRA subsidies and other COBRA relief.