Employee Benefit Considerations from the American Rescue Plan Act of 2021: All Things COBRA
Last week, the American Rescue Plan Act of 2021 (“ARPA”) became law. The $1.9 trillion stimulus package contains a mix of benefits, tax credits, programs, and subsidies in response to the continuing COVID-19 pandemic. Among ARPA’s provisions are several related to employee benefits. In the coming days, we will provide you updates on this new law as it relates to health, dependent care, and pension benefits, as well as ARPA’s changes to the paid sick and family leave tax credits, employee retention credits, and Paycheck Protection Program.
The first set of ARPA rules we wish to highlight concern health plans: a COBRA premium subsidy. Notably, these rules apply to all group health plans subject to ERISA, the Internal Revenue Code, or the Public Health Service Act, whether fully or self-insured. Church plans, although not subject to those laws, may nonetheless have to comply with some of the rules detailed below to the extent they are subject to state continuation coverage laws (or “mini-COBRA”). Importantly, however, ARPA’s COBRA premium subsidy provisions do not apply to health care flexible spending accounts, qualified small employer health reimbursement arrangements, or “excepted benefits” coverage.
Up to Six Months of Free COBRA
Under ARPA, employers must subsidize 100% of COBRA (or mini-COBRA) premiums for certain individuals from April 1, 2021 through September 30, 2021 (the “subsidy period”). Employers will be able to recoup these costs via a tax credit on its quarterly payroll tax returns.
ARPA generally provides that only “assistance eligible individuals” are entitled to the subsidy. An “assistance eligible individual” is defined as any qualified beneficiary (e.g., employee, spouse, child) who
(1) is eligible for COBRA continuation coverage by virtue of the covered employee’s reduction in hours or an involuntary termination for any reason other than gross misconduct, and
(2) elects COBRA coverage.
With this definition, Congress seems focused at helping qualified beneficiaries who lost job-based health coverage due to COVID-19 in layoffs and hours reductions. Covered employees who voluntarily terminated or retired and their covered dependents who are qualified beneficiaries would not be assistance eligible. It is expected that the DOL and IRS will issue guidance on what types of involuntary terminations would allow someone to qualify for the subsidy.
There are two instances where someone who would otherwise qualify as an assistance eligible individual would not be entitled to the subsidy: (1) where the person becomes eligible for Medicare or coverage under another group health plan; or (2) her maximum COBRA coverage period has ended. For example, the normal maximum COBRA coverage period is 18 months; so, if Suzy is a covered employee and was involuntarily terminated in September 2019 due to a reduction in force, Suzy will not be eligible for the subsidy because her maximum COBRA coverage period ended March 31, 2021 (before the subsidy period beginning April 1st). Generally, if a qualified beneficiary became eligible for COBRA on or after November 1, 2019, she may be eligible for the subsidy.
Second Opportunity to Elect COBRA
Earlier in the pandemic, the DOL and IRS issued guidance which extended certain employee benefit plan deadlines, including those for a qualified beneficiary to elect and pay for COBRA. The deadlines were extended until the end of the “Outbreak Period,” or the period from March 1, 2020 through 60 days after the end of the declared COVID-19 national emergency. Unfortunately, the national emergency has yet to end, so the Outbreak Period has continued such that COBRA premiums and elections technically are not yet due in most cases.
To further complicate matters, ERISA and the Internal Revenue Code under which the earlier guidance was issued, only allow the DOL and IRS to provide relief for up to one year. Practitioners had begun to question how the one-year limitation would apply in the context of the COVID-19 extension: Would the one-year limitation mean that the relief would end as of March 1, 2021 (i.e., one year from the beginning of the Outbreak Period)? Or would the one-year limitation apply on an individual basis (e.g., if a qualified beneficiary became eligible for COBRA in July 2020, would the relief extend to July 2021?) In a recent notice, the DOL and IRS clarified that the one-year period is to be applied on an individual basis. This rule makes administering employee benefit plan deadlines somewhat difficult moving forward—plan administrators will have to look at each plan participant or beneficiary who had a deadline that expired on or after March 1, 2020 and see when that individual’s one-year period ends.
In case administering the one-year rule was not enough, ARPA gives employers and COBRA administrators even more to contend with: a second opportunity to elect COBRA. ARPA provides that if an assistance eligible individual previously elected COBRA but is not enrolled as of April 1, 2021 or previously declined or has not elected COBRA, she must be given a second opportunity to elect COBRA for any time during the subsidy period, provided she is within the maximum coverage period. This requirement ensures that qualified beneficiaries can take advantage of what is essentially free COBRA coverage. To that end, ARPA requires administrators to give certain notices to these and other assistance eligible individuals.
To-Do List for Employers:
- Begin identifying assistance eligible individuals. We recommend first identifying individuals who are currently on COBRA coverage due to a reduction in hours or involuntary termination. Next, look at who lost coverage due to a reduction in hours or involuntary termination of employment but who rejected, has not yet elected, or otherwise terminated COBRA coverage.
- Refund any COBRA premiums already paid by assistance eligible individuals for the subsidy period within 60 days of their payment.
- Update COBRA election notices to describe the premium subsidy. ARPA requires the DOL to issue a new model election notice to capture the required subsidy information by April 10, 2021. These updated election notices will take care of the premium subsidy notice requirement for those assistance eligible individuals who become entitled to COBRA during the subsidy period.
- Prepare notices of premium subsidy and special election period for assistance eligible individuals who became entitled to COBRA or mini-COBRA coverage before April 1, 2021. Again, the DOL is to publish a model notice for this purpose by April 10, 2021. Plan administrators must provide these notices within 60 days of April 1, 2021.
- Prepare notices of expiration of premium subsidy period. ARPA requires plan administrators to inform assistance eligible individuals when the subsidy will expire (between 15 and 45 days before the end of the subsidy period). The DOL will put out model notices for this requirement also.
- Coordinate with plan insurers or third-party administrators. Among other items, employers will want to clarify who is responsible for providing the required notices and how the COBRA administrator, if applicable, will collect any COBRA administrative fee (normally 2%).
- Stay tuned for the model notices and implementation guidance from the DOL and IRS.
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Because legal developments pertaining to COVID-19 are constantly evolving, we recommend that our clients call the Kullman Firm attorney(s) with whom they work for the most current guidance on these matters.