On May 18, 2021, the IRS released FAQs regarding COBRA and state continuation premium subsidies. As a reminder, these subsidies required to be paid 100% for assistance eligible individuals (AEIs) under the American Rescue Plan Act of 2021 (ARPA).
ARPA gives an enrollment opportunity for individuals who’ve already experienced an involuntary termination of employment or any reduction in hours within the last 18 months and did not timely elect COBRA or who have dropped COBRA. These individuals will have a brand new 60-day election window following the date that they receive a new required COBRA notice. In addition, employers may allow AEIs to change elections to other plan options that have the same or lower cost premiums (optional).
The subsidy will be refunded by the federal government via payroll tax credits, which will last a total of 6 months, beginning on April 1, 2021 and ending on September 30, 2021. The assistance may end sooner if the qualified beneficiary’s maximum COBRA coverage period ends or if the participant is eligible for another group health plan or Medicare.
These new IRS FAQs provide much clarification and specific information related to reimbursement via payroll tax credits. Listed below are some of the clarifications:
Eligibility. The subsidy is available until an AEI is actually able to enroll in other group health plan coverage, including during a waiting period. Also, an individual may become an AEI more than once (e.g., due to successive losses of coverage under the individual’s or a spouse’s plan). But a reduction of hours or involuntary termination of employment that follows an earlier qualifying event, such as a divorce, does not make a qualified beneficiary from the first qualifying event an AEI. In addition, the subsidy is available to AEIs who elected and remained on COBRA for an extended period due to a disability determination or second qualifying event, as long as the additional periods of coverage fall within the 6-month subsidy period. Employers may (but are not required to) obtain employee attestations or self-certifications of AEI status or eligibility for other coverage and may rely on the attestations absent actual knowledge to the contrary.
Reduction of Hours. A furlough is considered a reduction of hours, so long as the employer and employee intend to maintain the employment relationship, regardless of whether the employer initiated the furlough or the individual participated in a “window” arrangement. A work stoppage due to a strike or lockout is also considered a reduction of hours, as long as the intent is to continue the employment relationship.
Involuntary Termination. An "involuntary termination" is now defined. Under this rule it means a “severance from employment due to the independent exercise of the unilateral authority of the employer to terminate employment,” 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. For example, if a termination is designated as voluntary or as a resignation, but the facts and circumstances indicate that the employee was willing and able to continue performing services, so that, absent the voluntary termination, the employer would have terminated the employee’s services, and that the employee had knowledge that the employee would be terminated, the termination is still involuntary.
In addition, an employer’s decision not to renew an employee’s contract will be considered an involuntary termination of employment if the employee was otherwise willing and able to continue the employment relationship and was willing either to execute a contract with terms similar to those of the expiring contract or to continue employment without a contract. However, if the parties understood at the time they entered into the expiring contract, and at all times when services were being performed, that the contract was for specified services over a set term and would not be renewed, the completion of the contract without it being renewed is not an involuntary termination of employment.
HRAs and Health FSAs. The subsidy is available for COBRA continuation of any group health plan except a health FSA. This includes standalone vision and dental plans and health reimbursement arrangements (HRAs). Qualified small employer HRAs (QSEHRAs) are not group health plans and thus are not subject to COBRA or the subsidy. Eligibility for coverage under an HRA will end an AEI’s subsidy eligibility in the same way as eligibility for coverage under any other group health plan unless the HRA qualifies as a health FSA.
Extended Election Period. Extended election periods are only required with respect to federal COBRA coverage, although if state programs provide similar rights, the subsidy would be available. AEIs electing the subsidy during an extended election period (including those with open election periods due to the outbreak period extensions) may waive COBRA for any period before their election. With respect to HRAs, AEIs who elect COBRA solely under the extended election period (and decline to elect coverage retroactive to the qualifying event) are not entitled to reimbursement for expenses incurred after the qualifying event and before the first period of coverage beginning on or after April 1, 2021. During the subsidy period, however, the AEI generally will have access to the same level of HRA reimbursements that was available immediately before the qualifying event, reduced by any reimbursements made after the qualifying event (e.g., for expenses previously incurred).
Outbreak Period Extensions. Although the outbreak period extensions do not apply to the subsidy’s notice or election deadlines, the extensions remain available for premium payments for retroactive periods of coverage prior to the subsidy period. But an AEI who elects the COBRA subsidy but declines to elect retroactive COBRA coverage may not do so after the end of the 60-day extended election period.
Tax Credits. A “premium payee” claims the credit by reporting the credit and the number of AEIs receiving the COBRA subsidy on the designated lines of Form 941, Employer’s Quarterly Federal Tax Return. In anticipation of the credit to which it is entitled, the premium payee may reduce the deposits of federal employment taxes (including withheld taxes) that it would otherwise deposit, up to the amount of the anticipated credit. Then, if the anticipated credit exceeds the federal employment tax deposit amount, the payee would request an advance of that amount by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
A premium payee would generally file Form 941 at the end of each quarter but can file a Form 7200 (requesting advance payments) after the end of the payroll period in which the payee became entitled to the credit (but they cannot file Form 7200 for a period of coverage that has not begun). The notice includes examples, including how to claim the premium assistance credit if the payee has no employment tax liability.
A premium payee can still claim the premium assistance credit even if the AEI fails to provide notice that the individual is no longer eligible for the COBRA premium assistance (e.g., the individual is eligible for other group health plan coverage or Medicare) unless the payee has knowledge of the disqualifying coverage/Medicare.
Lastly, a premium payee may include the government of any State or political subdivision, any Indian tribal government, and any agency or instrumentality of the Government of the United States that is described in § 501(c)(1) and exempt from taxation under § 501(a).
IRS Notice 2021-31 FAQs: https://www.irs.gov/pub/irs-drop/n-21-31.pdf