The American Rescue Plan Act of 2021 (Act) provides a 100% subsidy of the COBRA continuation coverage premium (including any administrative fees) for the six-month period between April 1 and Sept. 30, 2021, for certain individuals who elect COBRA continuation coverage due to an involuntary termination of employment or a reduction in hours (discussed in our earlier alert here). The Act also provides that the unpaid premiums can be recouped by the plan sponsor (or the plan or insurer, depending on the type of plan) through a refundable tax credit for the amount of the premium assistance. The Internal Revenue Service (IRS) recently issued its highly anticipated guidance on premium assistance (Notice 2021-31). The Notice is lengthy, including 86 FAQs that clarify numerous issues related to the premium subsidy and accompanying credit. This alert addresses some of the significant points in the guidance.

Assistance Eligible Individuals

An assistance eligible individual (AEI) is an individual who loses coverage due to a reduction in hours or an involuntary termination, other than for gross misconduct (a qualifying event), and is eligible for COBRA continuation coverage for some or all of the period between April 1, 2021, and Sept. 30, 2021. The Notice clarifies various points with respect to eligibility:

  • The spouse and dependent children of an individual who incurs a qualifying event may also be AEIs, but only if they also were covered under the plan and lost that coverage due to the employee’s qualifying event.
  • An individual can become an AEI more than once during the April 1 – Sept. 30 period. For example, an individual who is an AEI due to a qualifying event may cease to be an AEI if he or she becomes eligible for coverage under a spouse’s plan. If the spouse’s employment is then involuntarily terminated, causing the individual to again lose coverage, the individual again is an AEI and eligible for the premium subsidy.
  • An individual ceases to be an AEI when eligible for other coverage, but this only applies when the individual can actually enroll in the other coverage. If an individual is eligible for coverage in principle but cannot enroll until the next open enrollment period or until a new-employee waiting period has ended, then the individual remains an AEI until the individual can actually enroll in the other coverage.
  • An individual is an AEI if the individual is not eligible for other coverage on April 1, 2021, even if the individual was eligible for coverage at some time after the qualifying event and before April 1. However, if an AEI becomes eligible for other coverage on or after April 1, 2021, then the individual ceases to be an AEI even if the other coverage is subsequently lost (unless the loss of coverage is in connection with a qualifying event).
  • Enrollment in a health care exchange is not considered eligibility for other coverage and does not preclude AEI status.
  • If an individual has elected and remains on COBRA for an extended period due to a second qualifying event or disability, but the initial qualifying event was an involuntary termination of employment or reduction in hours, the individual would be considered an AEI and eligible for the premium subsidy.

The Notice further allows a plan sponsor (or other payee of COBRA premiums) — but does not obligate such payee — to require an AEI to attest or self-certify to eligibility for the premium subsidy, and the payee may rely on the attestation or certification provided that the payee does not have actual knowledge that the attestation or certification is incorrect. Since an employer generally would have actual knowledge of whether the individual has experienced a loss of coverage due to an involuntary termination or reduction in hours, this is most applicable where the payee is an insurance company or a multiemployer plan, which may not be familiar with the individual’s circumstances or to assist with determining whether the individual is eligible for other group health coverage or Medicare. Regardless, the entity receiving the credit is required to document the treatment as an AEI. The model notice published by the Department of Labor (DOL) includes a form that the AEI would return to the employer to request treatment as an AEI. Use of this form will help assist with such documentation.

Reduction in Hours

The Notice makes clear that any reduction in hours, whether voluntary or involuntary, that causes a loss in coverage is a qualifying event for purposes of the premium subsidy. Significantly, the Notice adds that an employee’s voluntarily ceasing to work could be deemed a (total) reduction in hours rather than a voluntary termination of employment if both the employer and the employee intend that the individual will return to work in the future. For example, Q&A 31 provides that an individual who voluntarily ceases employment to care for a child who is not in school due to a COVID-19-related school closure may have incurred a voluntary termination of employment (and not be an AEI) or a reduction in hours (and be an AEI), depending on whether the facts indicate that the employer and employee intend to maintain the employment relationship. A work stoppage, either as the result of a lawful strike initiated by employees or their representative or a lockout initiated by the employer, or a furlough, may also be considered a reduction in hours if at the time when the work stoppage, lawful strike or furlough commences, the employer and employee intend to maintain the employment relationship.

Involuntary Termination

Similar to the guidance that the IRS provided in connection with COBRA subsidies in 2009, the Notice includes several Q&As regarding what constitutes an involuntary termination of employment. For purposes of the COBRA subsidy, a termination of employment is involuntary if it is a severance from employment due to the independent exercise of the unilateral authority of the employer, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services. The determination of whether a termination is involuntary is based on the facts and circumstances; the designation of a termination as voluntary may not be dispositive if the facts and circumstances indicate otherwise.

An employee resignation may be deemed an involuntary termination if the resignation is due to:

  • Employer action that results in a material negative change in the employment relationship
  • A material change in the geographic location of the employment
  • Participation in a window program where employees are offered a severance agreement to terminate employment within a limited period of time
  • The employer’s decision not to renew an employee’s contract, including for an employee whose employer is a staffing agency, if the employee was otherwise willing to continue the employment relationship and enter into a similar contract or continue employment without a contract; however, nonrenewal would not be an involuntary termination of employment if the parties understood at the time they entered into the contract, and at all times when the services were performed, that the contract was for a set term and would not be renewed

Eligible Coverage

The COBRA premium subsidy is not available for flexible spending accounts or QSEHRAs, but is otherwise generally available for any group health plan. In addition, coverage under a dental-only or vision-only plan is eligible for the premium subsidy.

Under the Act, an employer may permit AEIs to elect coverage under a lower-cost medical plan rather than continue the same coverage as when an active employee. The Notice clarifies that if the AEI changes to a higher-cost medical plan, the new coverage is entirely ineligible for the premium subsidy, even up to the cost of the original coverage.

Retiree Medical Coverage

The Notice includes specific guidance with respect to retiree medical coverage and clarifies that retiree coverage can be considered COBRA coverage, and thus eligible for the premium subsidy, if the retiree coverage is provided under the same group health plan as the active employee coverage. If the retiree coverage is not considered COBRA coverage then it will preclude eligibility for the premium subsidy (i.e., if it is provided under a different group health plan as the active employee coverage). The Notice further provides that generally, all health benefits constitute a single group health plan unless it is clear from the governing instruments that the benefits are being provided under separate plans and the arrangements are operated as separate plans.

Electing the Premium Subsidy

The premium subsidy is available for all “periods of coverage” beginning on or after April 1 and on or before Sept. 30. A period of coverage is a period for which the individual must pay premiums. For plans that require premium payments on a monthly basis, the premium subsidy will be available from April 1 to Sept. 30. However, for example, if a plan charges premiums on a biweekly basis, with a period of coverage from March 28 to April 10 and then from April 11 to April 24, the Notice provides that the premium subsidy period would begin April 11.

The DOL and IRS previously issued guidance extending up to one year certain time periods relating to benefit plans (see our discussion here and here), including the period in which to elect COBRA continuation coverage. This guidance does not apply to the premium subsidy, which must be elected within 60 days of the applicable notice. The Notice addresses the situation of an individual who incurred a qualifying event before April 1 and still is within the extended period in which to elect COBRA coverage, and also is provided with additional notice of the right to elect the premium subsidy. If the individual elects the premium subsidy commencing on April 1 or a later date, the individual must, during the 60-day period, either elect retroactive COBRA or lose the right to later retroactively elect COBRA. An individual cannot elect the premium subsidy during the 60-day period and then, after the 60-day period but during the extended election period, elect nonsubsidized COBRA coverage retroactive to the pre-April 1, 2021 period.

Employer Credit

Employers (or the plan or insurer, to the extent that it is the payee of the premium) are entitled to a credit for the premium subsidy and, to the extent that the applicable payroll tax is greater than the anticipated credit, may request payment of the excess.

The amount of the credit is the amount of premiums that the employer would receive from the AEI, absent the subsidy. Thus, if the employer subsidizes COBRA coverage, the employer subsidy is not reimbursed through the credit. The Notice provides, however, that an employer may increase the amount it charges for COBRA coverage, provided it increases the amount for all similarly situated covered employees, thus also increasing the amount of the credit. Although not explicit, an example in the Notice suggests that an employer could not increase the amount it charges for COBRA coverage solely for individuals who are eligible for the premium subsidy.

While entitlement to both the credit and the advance is based on the start of the applicable period of coverage, the timing of the credit and the advance differs. To the extent that retroactive coverage is elected, the employer (or other premium payee) may reduce its Medicare payroll tax payments immediately upon receiving the election. With respect to the advance, if the anticipated credit exceeds the federal employment tax deposits available for reduction, the premium payee may apply for the advance following the end of the payroll period in which the premium payee became entitled to the credit. The credits are reported on Form 941, and an advance is requested on Form 7200.

Next Steps

Employers and plan administrators should review this guidance to identify individuals eligible for the premium assistance and the proper determination of the applicable employer credit. This Alert provides only a brief summary of certain key provisions of the Notice. Employers and plan administrators should consult with their counsel and COBRA administrators. As a reminder, the notice of the extended election period must be furnished by May 31, 2021.

If you have any questions, please contact a member of the Kramer Levin Employee Benefits and Executive Compensation department.