IRS Answers Questions About the COBRA Subsidies
The American Rescue Plan Act of 2021 (ARPA) creates a 100% COBRA premium subsidy for certain “assistance eligible individuals” beginning April 1, 2021, through September 30, 2021. While the DOL has issued the new model notices which must be used by plan administrators during the subsidy period, a number of questions related to the COBRA premium subsidies have been left unanswered.
Fortunately, on May 18, 2021, the IRS published Notice 2021-31 which addresses a number of those outstanding issues, in a question-and-answer format.
Reduction in Hours and Involuntary Termination
- Reduction in Hours. An employee who incurs a reduction in hours, regardless of whether the reduction in hours is voluntary or involuntary, may qualify as an assistance eligible individual. (Q&A-21).
- Involuntary Termination. The determination of whether a termination is involuntary is based on the facts and circumstances but generally means “a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services.” (Q&A-24).
- Examples of Involuntary Termination. (Q&A 24-34)
- A termination designated as voluntary but where the employee was willing and able to continue performing services;
- Employer action to terminate employment while the individual is absent from work due to illness or disability;
- Involuntary termination for cause (other than gross misconduct);
- Resignation as result of a material change in the employment relationship, such as a material change in the geographic location of employment;
- An employer’s decision not to renew an employee’s contract if the employee was otherwise willing and able to continue employment. (On the other hand, expiration of a contract that was for a set term would not be considered an involuntary termination.)
Terminations of employment for “good reason” if the employee terminates employment because of concerns about workplace safety or inability to locate daycare would not typically be considered involuntary.
Other Eligibility Issues
- Self-Certification. Employers may require an individual to self-certify that both (a) the individual is eligible for the COBRA premium subsidies due to a reduction in hours or involuntary termination of employment; and (b) the individual is eligible (or not) for other disqualifying group health plan coverage or Medicare. Employers should retain a record of the individual’s self-certification. (Q&A-4, 5, 7).
- Enrolled in Coverage Through Exchange. An assistance eligible individual who is currently enrolled in coverage through the Health Insurance Exchange is eligible to elect COBRA continuation coverage and receive the COBRA premium subsidy. Individuals enrolled in other group health coverage (including a spouse’s group health plan) or Medicare are not eligible for the subsidy. (Q&A-11, 12, 13).
Coverage Eligible for the Subsidy
- Health, Dental, and Vision Coverage. The COBRA premium subsidy is available for vision, dental, and health plans, including vision-only and dental-only plans. (Q&A-35). The subsidy is also available for health reimbursement arrangements (HRAs) but not for health flexible spending accounts (FSAs). (Q&A-36, 37).
- Retiree Coverage. Retiree-only health coverage may be eligible for the COBRA premium subsidy. (Q&A-36).
Effect on Extended Deadlines
- Coverage for Assistance Eligible Individuals Electing COBRA under Extended Deadlines. For assistance eligible individuals who elect COBRA continuation coverage under the extended election periods, coverage is not required to begin effective April 1. Rather, the assistance eligible individual may elect coverage either (a) retroactively to the original date on which he may have been covered under COBRA, (b) as of April 1, 2021, or (c) prospectively from the date of the notice. (Q&A-44, 53).
- Premium Payments. If a potential assistance eligible individual elects retroactive COBRA coverage but has not paid his or her premiums, the employer may require the individual to pay the premiums for the period of COBRA coverage before April 1, 2021, pursuant to such extended deadlines. If by the applicable extended deadlines, the individual has still failed to pay any premiums, the employer may treat the individual as having not elected COBRA until April 1, 2021. (Q&A-58).
Claiming the Premium Assistance Credit
- Fully-Insured Plans. Insurers claim the credit for fully-insured plans. (Q&A-72). Note that an employer sponsoring a fully-insured group health plan should communicate with its insurer to confirm the payroll tax credits will be returned to the employer in exchange for the employer’s fronting the premiums. Alternatively, the employer and insurer should separately agree that the insurer will front the premiums.
- Self-Insured Plans. Employers claim the credit for self-insured plans. (Q&A-72).
- Claiming the Credit. Insurers or employers claim the premium assistance credit by reporting the credit and the number of individuals receiving COBRA premium assistance on the designated lines of the federal Form 941, Employer’s Quarterly Federal Tax Return. If the employer or insurer has no federal employment tax liability, the employer or insurer should nonetheless file Form 941 to claim the credit and enter “zero” on all non-applicable lines.
Alternatively, an insurer or employer may reduce its deposits of federal employment taxes owed in anticipation of the credit. If the anticipated credit exceeds the federal employment taxes owed, the employer or insurer may file a Form 7200 to request an advance. (Q&A-75-77).
- Inclusion in Gross Income. The premium assistance credit is included in the gross income of the employer or insurer claiming the credit. (Q&A-79).
- Substantiation. Employers and insurers claiming the credit must retain documentation (including any employee self-certifications and employment records) to substantiate that the individual was eligible for the COBRA premium subsidy. Note that the employer will be liable for any employment taxes due as a result of any improper claim for credits. (Q&A-84).
Although the FAQs provide significant guidance regarding the COBRA premium subsidies, a number of questions remain unanswered. The IRS acknowledges that additional issues exist. We anticipate the DOL and IRS will continue to publish additional guidance in the coming months.
For now, employers should (1) use the new model COBRA notices issued by the DOL; (2) retain careful documentation of any COBRA subsidies paid and of individuals’ eligibility for such subsidies; and (3) for fully-insured employers, communicate with insurers to determine who will front the cost of the premiums and how the credits will be claimed.