IRS Sheds Some Clarity on COBRA Premium Assistance

The American Rescue Plan Act of 2021 (ARPA) provides for a six-month period between April 1, 2021 and September 30, 2021, during which certain participants eligible for COBRA continuation coverage may elect such coverage, even if the participant’s COBRA election period has already expired. A participant electing COBRA under these rules can do so without payment of any premiums. In April, the IRS addressed several issues with respect to COBRA premium assistance for COBRA continuation coverage under ARPA (the “COBRA Subsidy”) in Notice 2021-31 (see our related Law Alert). In Notice 2021-46, the IRS has supplemented its responses in an additional series of questions and answers.

Among the issues addressed by the IRS are:

1. The COBRA Subsidy is available for an individual whose initial 18-month COBRA continuation coverage has expired, but who, on notification to the insurer or plan, is entitled to an extended period of coverage due to disability or a second qualifying event, but who has not yet given such notification.  The individual may be entitled to the COBRA Subsidy and a new COBRA election period even if the failure to notify occurred before April 1, 2021, so long as some or all of the extended period of coverage falls between April 1, 2021 and September 30, 2021.
2. If an individual has previously elected COBRA continuation coverage for dental only or vision only coverage, the individual loses eligibility for the COBRA Subsidy on becoming eligible for another group health plan or Medicare, even if that arrangement does not provide medical or dental coverage.
3. In its earlier guidance, the IRS indicated that generally the common law employer is the party entitled to claim the credit for the COBRA premiums.  In Notice 2021-46, the IRS shows how that rule would apply in various circumstances, including a single controlled group, a multiple employer welfare arrangement, and a business reorganization, such as an M&A transaction. The guidance adheres to  the  IRS’s interpretation of ARPA that the common law employer is entitled to the credit, even in situations where the common law employer has no role in the operation of the plan, such as a MEWA (multiple employer welfare arrangement) or other multiple employer plan. (Note, however, that a qualifying multiemployer plan can claim the tax credit for its assistance-eligible individuals. Multiemployer plans are collectively bargained plans.)  Because quarterly employment tax returns (Form 941 for the second quarter of 2021) would generally be filed on August 2nd (July 31st falls on a Saturday) and no later than August 10th, affected employers should discuss this IRS interpretation with their tax filers.

While some of the conclusions reached by the IRS in this guidance may seem harsh, such as the invalidation of the COBRA Subsidy with respect to dental and vision plans on eligibility for group health plan coverage that does not include dental or vision and the denial of the COBRA Subsidy to MEWAs and other multiple employer plans, at least the silver lining is that plan sponsors will now have certainty with respect to the treatment of these situations. Previously,  plan sponsors could be caught between a significant risk of improperly denying the COBRA Subsidy to COBRA beneficiaries and a significant risk that they would be denied reimbursement for the tax credit after they had already granted the free coverage to the COBRA beneficiaries.