The Wagner Law Group | Est. 1996

Sophisticated Legal Solutions And Boutique-Style Service

IRS Finally Releases Guidance Implementing COBRA Subsidies but Leaves Important Questions Unanswered

On Behalf of | May 26, 2021 |

On May 18, 2021, the IRS issued Notice 2021-31 providing highly anticipated guidance for employers who must implement the COBRA rules under ARPA (as we described in our publication on March 17, 2021), including a relief notice that must be provided by May 31, 2021. While COBRA subsidies began April 1, 2021, employers have been faced with many questions that were not addressed until this guidance was issued. The guidance consists of 86 FAQs organized by topic, beginning with who is eligible for the subsidy and ending with how employers can claim the federal tax credits designed to pay for the subsidies.

Given the expansiveness of the FAQ guidance and our prior publication, this Alert is designed to focus on specific issues addressed in the guidance that every employer needs to know.

Required Employer Documentation/Self-Certification or Attestation.  Notice 2021-31 provides that employers who claim a premium assistance credit retain records of the self-certification or attestation form for individuals claiming a subsidy. The DOL guidance includes a form that individuals can complete attesting to their eligibility for COBRA premium assistance. Notice 2021-31 confirms that employers can require employees to self-certify or attest regarding both their eligibility for the subsidy and that they do not have other disqualifying health coverage. This Notice also confirms that the employer can rely on the self-certification or attestation to substantiate eligibility for a subsidy unless the employer has actual knowledge to the contrary. Employers are required to retain this documentation in case the IRS decides to audit COBRA subsidies.

Individuals who receive the subsidy and fail to notify their employers of their eligibility for other coverage under another group health plan or Medicare must pay a penalty. That penalty is not payable to the employer, plan, or issuer who received the subsidy credits

Who is an Assistance Eligible Individual?  The individuals eligible for subsidies were defined in ARPA (as set forth in our previous publication). However, there were many unaddressed issues that have now been addressed by Notice 2021-31:

  • An individual who is enrolled in Medicare is not an assistance eligible individual regardless of whether the individual is COBRA eligible.
  • Enrollment in individual exchange-based health insurance does not disqualify an individual from receiving a COBRA subsidy, but such individual cannot receive a COBRA subsidy and receive a premium subsidy to pay the cost of the same month’s coverage.
  • An individual eligible for retiree coverage under a separate plan from the COBRA plan is not an assistance eligible individual; however, if the retiree coverage is part of the same health plan as the COBRA coverage then the individual could be eligible for a COBRA subsidy (if otherwise eligible for the subsidy).
  • Participants in plans not subject to COBRA (small employer plans or church plans) are not assistance eligible individuals even if the plan voluntarily allows COBRA coverage.
  • Individuals who are not qualified COBRA beneficiaries, but who are offered COBRA coverage anyway, are not assistance eligible individuals (domestic partners or grandchildren, for example). There is significant explanation regarding how to calculate the premiums not belonging to those who are not assistance eligible individuals because they are not qualified beneficiaries. Basically, the first dollars of the premium go toward the costs for the assistance eligible individuals and those amounts will be eligible for the subsidy. Any extra dollars required because non-eligible individuals are included in the family group will not be eligible for the subsidy and may be collected by the employer.
  • All individuals whose original qualifying event was a reduction in hours or involuntary termination are assistance eligible individuals even if the COBRA coverage is now due to an extended period under the law, provided that a portion of the extended period falls with the period of April 1, 2021 to September 30, 2021.
  • An individual who is eligible for or enrolled in other employer health coverage prior to April 1, 2021, but who is no longer eligible or enrolled for such coverage as of April 1, 2021, may still be an assistance eligible individual if other qualifications are met. This means that participants who do not actually have an enrollment opportunity from April 1 through September 30 remain eligible for the COBRA subsidy even if they were previously eligible for other coverage that they declined, but individuals who become eligible for other coverage from April 1 through September 30 are ineligible for the COBRA subsidy even if they do not enroll in the other coverage.

Reduction in Hours.  Any reduction in hours that results in loss of coverage can result in eligibility for the COBRA subsidy regardless of whether the reduction was voluntary or involuntary. Even a loss of coverage due to a furlough or lawful work stoppage can qualify an individual for the subsidy based on the reduction in hours, provided there is a reasonable expectation that the individual will return to employment.

Involuntary Termination of Employment. The guidance defines involuntary termination of employment to mean “a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services.” This is a facts and circumstances determination that includes resignations for “good reason,” constructive discharges, discharges pursuant to certain window retirement programs, and employee resignations for material reduction in hours that would not otherwise result in a loss of coverage, and can even include a resignation if the facts demonstrate that, absent the resignation, the employer would have terminated the employee’s employment.  It also includes termination for cause, unless the cause constitutes gross misconduct.  It can even include an employer’s decision not to renew a contract if the employee was willing to continue under similar terms, but not where both parties understood the relationship was for a specified fixed period and that period has ended. Involuntary termination does not include the employee’s death, retirement (unless the employer instigated the retirement), or resignation due to a child not being able to attend school because of COVID-19 closures. Note, that an employee on leave due to school closures could have a reduction in hours that could qualify the employee as an assistance eligible individual.

Types of Health and Welfare Plans Eligible for COBRA Subsidies. Medical and health plans, including HRAs, dental only and vision only plans are all coverages available for COBRA subsidies, although there are some special rules applicable to HRAs. As stated earlier, retiree coverage offered for active employees under the same plan is coverage available for COBRA subsidies. COBRA subsidies are not available for health FSAs and QSEHRAs.

A dilemma remains for employers offering stand-alone dental or vision plans in addition to their major medical plans. All such plans are eligible for the subsidy, and eligibility for another dental or vision plan that is an excepted benefit will not disqualify the individual for the subsidy under any of those plans. However, if the individual only elects COBRA for the dental and/or vision plan because of having other major medical coverage elsewhere (through a spouse’s employer, for example), that major medical coverage, under the literal language of the statute, would disqualify the individual from the subsidy for the dental and/or vision coverage. Some practitioners have suggested that a good faith interpretation of the statute would disqualify an individual solely based on eligibility for the same type of coverage, and one practitioner we have spoken with claims to have had a client take that position regarding the 2009 subsidy and survive an IRS audit on the issue. Unfortunately, an employer taking such a position, based on apparently clear language to the contrary in the statute (even though the statutory language is illogical), would be taking the risk that the employer would end up providing free coverage to the qualified beneficiaries, but could end up having the IRS challenge the subsidy for that employee. Unfortunately, Notice 2021-31 does not address this dilemma.

The subsidy is also not available for coverage more expensive than what the employee was enrolled in at the time of the event unless the level the employee was enrolled in is eliminated, or elections are allowed in the normal course of an open enrollment occurring during the April 1 through September 30 subsidy period.

Extended COBRA Election Periods.  Extended election periods required by the subsidy provisions must be provided for anyone who is eligible for the subsidy, but who does not have a COBRA election in place as of April 1, 2021. These individuals can elect retroactive coverage back to the qualifying event, retroactive coverage to April 1, 2021, or prospective coverage only. This also applies to qualified beneficiary dependents and spouses where the employee elected self-only coverage. A qualified beneficiary who has elected some but not all of the available subsidized coverage has the extended subsidy election period to elect any previously unelected coverage. However, a qualified beneficiary who elects subsidized coverage without electing any pre-April 1st COBRA coverage that the individual was entitled to will have waived the pre-April 1st coverage. Therefore, qualified beneficiaries who had substantial COBRA entitlement still open, based on the COVID deadline extensions, will forfeit any such coverage that they do not elect at the time they elect subsidized coverage. However, a qualified beneficiary that does not elect the subsidy will still be eligible to make the COBRA election for the remainder of the COVID extension period. Also, an assistance eligible individual who elects pre-April 1st COBRA coverage in addition to the COBRA subsidy may take until the end of the COVID extension period to pay the premium for that pre-April 1st coverage.

The extended subsidy election period only applies to group health coverage subject to federal COBRA law. It would not apply to state mini-COBRA laws unless that state had implemented its own extended election period. Notice 2021-31 is also clear that the extension of timeframes under emergency relief do not apply to the ARPA notice requirements or the extended election period.

How to Claim the COBRA Subsidy Tax Credits.  An employer claims the credit by reporting the credit, both the refundable and non-refundable portions, and the number of individuals receiving COBRA subsidy assistance, on Form 941 (Employer’s Quarterly Federal Tax Return). In anticipation of receiving the credit, the employer may reduce the deposits of federal employment taxes that it would otherwise be required to make and may request an advance of the anticipated credit that exceeds the employment tax deposits by filing Form 7200 (Advance Payment of Employer Credits Due to COVID-19).  Deposits may not be reduced, and advances may not be requested, for a period that has not yet begun.  For periods of coverage that began before the date an individual elected coverage, the employer becomes eligible to receive the credit as of the date the employer receives the individual’s election. For each succeeding period of coverage, the employer is entitled to the credit as of the beginning of the period of coverage for which the individual is not paying the premium. If an individual fails to provide notice that the individual is no longer eligible (due to other available coverage), an employer can still claim the credit provided the employer has no knowledge of the disqualifying coverage.

The premium assistance credit is includible in the employer’s gross income, and an employer is not eligible to receive the credit, if it is also claiming a credit for qualified health plan expenses under the FFCRA or for qualified wages under the CARES Act.  If an employer uses a third party payer, such as a professional employer organization or a certified professional employer organization, in most instances it is the client that is entitled to the credit rather than the third party payer, although there are circumstances in which the third party payer is entitled to the credit.

How to Calculate the COBRA Subsidy Tax Credits.  If an employer does not otherwise subsidize COBRA premium costs for similarly situated individuals, the credit for the quarter equals the full COBRA premiums that are not paid by individuals eligible for the COBRA subsidy, including the permissible administrative fee, for a total of 102 percent of the applicable premium. If the employer would normally have subsidized any portion of the COBRA premium, then the amount of the credit does not include the amount of the employer’s normal subsidy.  However, an employer that would normally have subsidized all or part of a premium may amend its plan to increase the premium if it does so in accordance with the COBRA regulation governing changes to a COBRA premium that is less than the maximum permitted amount. In that case, the subsidy will apply to the increased premium amount, even if the increased premium amount is then paid to the employee in a separate taxable payment.

With respect to state continuation coverage, the credit is not available to portions of a COBRA premium payable for individuals who would not be qualified beneficiaries under federal COBRA law.  The Notice also provides a favorable tax rule for determining the portion of a COBRA premium allocable to individuals eligible for the subsidy and those who are ineligible. With respect to individual coverage HRAs, the credit is limited to 102 percent of the amount reimbursed with respect to the subsidized individual.

Employer Takeaway. Now that we have guidance implementing the COBRA subsidies, employers should be able to provide notices and understand the process for how it works. Employers should keep an eye out to see if the COBRA subsidy period is extended or if it will truly end September 30th.

Again, this Alert is only intended as a brief summary of some salient portions of the FAQs. Employers should review the guidance with their COBRA administrators and benefits counsel to address their specific circumstances.