New IRS Guidance Addresses ARPA COBRA Subsidies and Tax Credits
May 25, 2021
On May 18, 2021, the IRS published Notice 2021-31 (the “notice”), providing guidance and clarification on the premium assistance and tax credits available for COBRA and state continuation health coverage per the American Rescue Plan Act of 2021 (ARPA). In addition to a summary overview, the notice provides clarification on many issues regarding administering the premium assistance and tax credits, via 86 questions and answers.
The notice states that an individual is not eligible for premium assistance if they do not meet the definition of a qualified beneficiary under federal COBRA. For reference, a “qualified beneficiary” is defined as someone who was a beneficiary under the plan on the day before the qualifying event. COBRA premium assistance is available to individuals who have elected and remained on continuation coverage due to disability, a second qualifying event or an extension under state continuation coverage, so long as the original qualifying event was a reduction in hours or an involuntary termination of employment and to the extent the extended period of coverage falls between April 1, 2021, and September 30, 2021. This supports the idea that spouses and dependents are also eligible for the subsidy, as they are also COBRA qualified beneficiaries.
However, COBRA premium assistance does not apply to the portion of the premium related to continuation coverage for individuals who are not qualified beneficiaries. This means that premiums paid for a spouse or dependent who was not a beneficiary under the plan before the qualifying event are not eligible for premium assistance (since such spouse or dependent is not a qualified beneficiary). In other words, a spouse (or dependent) added to the plan at open enrollment by a COBRA qualified beneficiary is not eligible for premium assistance. Likewise, a domestic partner is not eligible for premium assistance since they are not qualified beneficiaries under federal COBRA.
The notice also touches on an important circumstance that would cause an individual to be ineligible for premium assistance. An individual is not eligible for premium assistance if they are eligible for other group coverage. The notice states that eligibility for other group coverage impacts eligibility for the premium assistance only if the individual is permitted to enroll in that other coverage mid-year. If the individual is locked out of enrollment mid-year due to the lack of a qualifying event, the eligibility for the other coverage is disregarded and the individual is eligible for premium assistance. It is important to note, however, that an individual who lost eligibility for the employer’s plan within the last year due to termination of employment or reduction of hours would still have a HIPAA special enrollment right to enroll in their own or a spouse’s group health plan and would therefore be ineligible for premium assistance.
The notice also states that any late or unpaid premiums for retroactive COBRA continuation coverage elected pursuant to the extension of certain timeframes does not impact an individual’s eligibility for ARPA COBRA premium assistance.
In order to establish that an individual is an assistance eligible individual (AEI), employers may require individuals to provide certification or attestation of their eligibility, although other documentation, such as records showing an individual’s involuntary termination or reduction of hours, may suffice. The notice states that the employer should retain such certification, attestation, or other documentation in order to claim the payroll tax credit.
The notice states that the penalty due from an AEI who fails to provide notice of their eligibility for other coverage under a group health plan or Medicare is not payable to the employer, plan or issuer who receives the premium assistance credit. However, the notice does not provide any additional guidance on how to report this failure or what the procedures will be for investigating or enforcing this violation.
One of the qualifications for eligibility for premium assistance is that an individual must have had a reduction in hours or been involuntarily terminated. Previous guidance did not define what “involuntary termination” meant, other than emphasizing language from the ARPA that excluded instances of voluntary termination. This notice drills down on the concept, providing a definition and several examples to clarify this qualification.
The notice defines involuntary termination as 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. To determine whether termination is involuntary, a facts and circumstances test is used. The notice provides an example that explains that termination is involuntary, even if it is designated as voluntary, when the facts and circumstances indicate that the individual was willing and able to continue working and but for the voluntary termination, the employer would have terminated the individual (and the individual was aware that the employee would be terminated). Involuntary termination also includes situations where an employee quits because the employer initiates a reduction in hours. Further, it applies to a reduction of hours due to an individual’s choice to be furloughed due to an impending furlough.
The notice applies this definition to various employment agreements. An individual is involuntarily terminated when they volunteer to be terminated and enter into a severance agreement as an alternative to an imminent termination. This analysis applies to retirement too, when the individual chooses to retire as an alternative to an imminent termination. An employer’s decision not to renew an employee’s contract is an involuntary termination if the employment is willing and able to continue the employment relationship. However, it is not considered to be an involuntary termination if all parties always understood that the contract was for specified services over a set term and would not be extended.
The notice applies this analysis to other common situations. Absence from work due to disability or illness is not an involuntary termination unless the employer has taken action to terminate employment (the question of whether a reduction in hours applies will depend on whether the absence causes a loss of coverage). Termination due to general concerns about workplace safety, the health condition of the employee or a family member, or other similar issues, generally will not be an involuntary termination. This is because the actual reason for the termination is unrelated to the action or inaction of the employer.
Note that employees who quit because they don’t have childcare would not be AEIs. However, if they take leave for that reason (while remaining employed), and lose coverage as a result, then they have experienced a reduction in hours that would make them an AEI.
The notice also delves into the types of coverage that can be paid for with premium assistance. An individual who is eligible for other standalone group dental or vision coverage remains eligible for premium assistance for medical coverage. However, whether retiree health coverage will impact eligibility for premium assistance depends on whether the retiree health coverage is offered under the same group health plan as COBRA continuation coverage or under a separate group health plan. An individual is not eligible for premium assistance if offered retiree health coverage that is not COBRA continuation coverage and is coverage under a separate group health plan from the plan under which the COBRA continuation coverage is offered. However, if the retiree health coverage is offered under the same group health plan, the offer of said coverage does not impact eligibility for premium assistance.
The notice clarifies that, even if an employer allows AEIs to enroll in different coverage than what they had the day before the qualifying event, COBRA premium assistance will not be available for coverage with a greater premium. The AEI does not have an option to elect the higher cost coverage and pay the difference.
The notice states that employers must place an AEI in a plan like that provided to active employees if the plan the AEI was enrolled in is no longer offered. It should be noted that those employers who had a decrease in employees such that they are not subject to federal COBRA this year still have to offer COBRA premium assistance based on their status as a larger employer in 2020 (for AEIs who were due an offer of COBRA in 2020).
Duration of Premium Assistance
The ARPA COBRA premium assistance period is generally from April 1, 2021, through September 30, 2021. The notice clarifies that COBRA premium assistance is available, for those who qualify, through the last day of the last period of coverage beginning on or before September 30, 2021, even if the period of coverage extends into October. For example, the last two-week period of coverage for September 2021 is from September 19, 2021, through October 2, 2021. In this case, COBRA premium assistance is available through October 2, 2021.
Extended Election Period
The extended COBRA election period granted by the ARPA has been a source of confusion. However, the notice confirms that an AEI may decline to elect the COBRA continuation coverage under the original COBRA election period and instead elect COBRA continuation coverage only for the extended period of coverage that begins on or after April 1, 2021. In the alternative, if the AEI elects COBRA continuation coverage retroactively, no COBRA premium assistance is available for periods of coverage beginning prior to April 1, 2021.
The notice clarifies that a qualified beneficiary who had a reduction in hours or involuntary termination may elect additional coverage during the extended election period (i.e., medical plan plus standalone vision) if they were enrolled in that coverage prior to the COBRA triggering event. They would qualify as an AEI with respect to all types of coverage elected (i.e., those elected prior to and during the extended election period).
The notice also states that an individual who otherwise would be an AEI except for eligibility for other group coverage or Medicare still has the right to enroll during the extended election period. However, they would not receive premium assistance.
The extensions of certain timeframes available pursuant to last year’s emergency guidance do not apply to the ARPA extended election period notice or the ARPA extended election period. As such, AEIs only have 60 days to elect COBRA and premium assistance under the ARPA provision. And once they have done so, they no longer have the option to elect retroactive COBRA under the extensions of certain timeframes relief.
Entities Entitled to the Tax Credit
The notice reiterates previous guidance that the ARPA COBRA tax credit is claimed by the person to whom premiums are payable (referred to in the notice as the “premium payee”). Generally, the premium payee is the employer for a self-insured plan and for a fully insured plan subject to federal COBRA, the carrier for a fully insured plan subject only to state continuation, and the plan for a multiemployer plan.
The notice discusses the relationship between the employer and the insurer when it comes to the premium subsidy and the tax credit. Notwithstanding an agreement between an employer subject to federal COBRA and its insurer for the insurer to collect COBRA premiums directly from the qualified beneficiaries, the employer remains obligated to pay the premium to the insurer for the months of COBRA premium assistance with respect to an AEI. An employer may not receive the premium assistance credit associated with an insured plan subject solely to state continuation law (e.g., very small fully insured plans) with respect to the requirement to provide continuation coverage, even if the employer pays the full premium to the insurer.
Unless specific circumstances apply, the premium payee receives the premium subsidy tax credit even if it engages a third-party payer (such as a PEO or a reporting agent) to report and pay its federal employment taxes. However, the premium payee must file its own Form 7200 to obtain an advance payment on the credit.
If a third party, such as a charity, pays an AEI’s premium that should have been covered by the subsidy, then the premium payee should reimburse the AEI for the premium, unless the premium payee is aware that the individual assigned the right to the reimbursed premium to the third party.
Whoever the premium payee is, if that premium payee reimburses an AEI for premiums that should have been covered by the subsidy, then the premium payee is entitled to the premium subsidy tax credit on the date the premium payee reimburses the AEI. In addition, the premium payee can get an ARPA COBRA premium subsidy tax credit, but cannot also claim the same premiums as qualifying wages under the FFCRA.
Calculation of the COBRA Premium Assistance Credit Amount
The notice states that the credit amount is generally 102% of the COBRA applicable premium, assuming the employer does not subsidize the COBRA premium for similarly situated qualified beneficiaries who are not AEIs. If the employer does subsidize such cost for non-AEI qualified beneficiaries, then the amount of the credit is 102% minus the amount provided to non-AEI qualified beneficiaries (i.e., the credit does not include the amount of subsidy that the employer would have otherwise provided).
If a plan previously charged less than the allowable 102% COBRA applicable premium rate, the plan may increase the charged amount to 102% of the COBRA applicable premium rate, and the plan can claim a credit for the full 102% amount. This is true even if the employer also provides a taxable severance benefit to the AEI.
The premium assistance credit does not apply to non-AEI COBRA qualified beneficiaries, and the notice has examples of how to calculate the credit where a non-AEI COBRA qualified beneficiary is covered through an AEI.
Claiming the COBRA Premium Assistance Credit
The notice describes the process by which a premium payee claims the tax credit. A premium payee claims the credit by reporting the credit and the number of AEIs receiving the COBRA premium assistance 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. If the anticipated credit exceeds the federal employment tax deposit amount, then the payee requests an advance of that amount by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
A premium payee files 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. However, they cannot file Form 7200 for a period of coverage that has not begun. The notice includes examples, including how to claim 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.
Employers should be aware of the explanations and examples provided by the notice, for them to better understand the requirements placed upon them by the ARPA.
IRS Notice 2021-31 »