The American Rescue Plan Act includes a 100% COBRA subsidy for COBRA qualified beneficiaries where the qualifying event was an involuntary termination of employment or reduction in hours. The subsidy will apply to coverage periods beginning on April 1, 2021 and ending on September 30, 2021.
Engage will keep our clients updated. Please refer to the following FAQs for details based on current information from the IRS and other federal agencies.
The federal agency guidance regarding COBRA is continually evolving, and the obligations of PEOs and their client employers under COBRA may change over time. The information below will be updated accordingly.
For clients with Engage PEO-sponsored benefits, Engage's COBRA administration partner, Benefit Resources Inc., will be identifying the potential COBRA eligible, and handling the required notifications which will include the available plan and rates information. 100% of the elected plan premium, will be subsidized. All elections will be returned to Benefit Resources Inc. and enrollments will be provided directly to the appropriate insurers, and Engage PEO will take the appropriate tax credit.
The Act requires employers to update COBRA notices sent to assistance-eligible individuals to describe the subsidy and to issue extended COBRA election notices by May 31. Employers also must provide a separate notice to assistance eligible individuals advising of the end of the premium subsidy, between 15 to 45 days before the subsidy ends.
Individuals receiving the COBRA premium assistance must notify their plans if they become eligible for coverage under another group health plan (not including excepted benefits, a QSEHRA, or a health FSA), or for Medicare. Failure to do so can result in a tax penalty.
Essentially, almost any group health plan that is subject to the federal COBRA requirements (whether the plan is insured or self-funded). Specifically, the COBRA subsidies apply to most group health plans subject to COBRA (including major medical, dental, and vision plans (even if “HIPAA-excepted”) but not health FSAs.
The COBRA subsidies will also apply to group health insurance that is required by State law to provide comparable continuation coverage (such as “mini-COBRA”).
The PEO, as the employer that sponsors the group health plan, has the responsibility of offering and administering the subsidized COBRA coverage. This is true whether the plan is insured or self-funded.
With respect to PEO-sponsored plans that are fully insured, the PEO will advance the subsidized COBRA premiums to the insurer on behalf of the individuals it co-employed who are eligible for the subsidized coverage. As discussed in more detail below (under tax credits), the PEO will then be eligible for a federal tax credit to offset the cost of the subsidized premiums.
If the group health plan is being offered at the client-level, the client employer that sponsors the plan likely has the legal responsibility of offering the subsidized COBRA coverage and forwarding the subsidized COBRA premiums to the insurer. This is the case even if the PEO assists with the COBRA administration.
The client employer will be eligible for a federal tax credit to offset the cost of the subsidized premiums, and the PEO may have to assist with applying for the credit if it is responsible for federal tax filing and reporting for the client.
Under the American Rescue Plan, subsidized COBRA coverage is generally available between April 1, 2021 and September 30, 2021. However, an otherwise-eligible individual will lose their right to subsidized coverage if they become eligible for Medicare or other group health plan coverage, or if their maximum period of eligibility COBRA coverage expires.
The American Rescue Plan makes the premium assistance available to "Assistance Eligible Individuals" (AEIs). An AEI is a COBRA qualified beneficiary who meets the following requirements during the period from April 1, 2021 through September 30, 2021:
You are not eligible for the premium assistance if you are eligible for other group health coverage, such as through a new employer’s plan or a spouse’s plan (not including "excepted benefits," a qualified small employer health reimbursement arrangement (QSEHRA), or a health flexible spending arrangement [FSA]), or if you are eligible for Medicare.
Note: If the employee’s termination of employment was for gross misconduct, the employee and any dependents would not qualify for COBRA continuation coverage or the premium assistance.
Yes, they can be eligible for subsidized COBRA coverage. Thus, individuals who had an involuntary termination of employment or reduction in hours within the last 18 months and did not timely elect COBRA must be given the ability to elect subsidized COBRA coverage for the months between April and September 2021 during which they would have been eligible for COBRA.
A qualified beneficiary whose qualifying event was a reduction in hours or an involuntary termination of employment prior to April 1, 2021 and who did not elect COBRA continuation coverage when it was first offered prior to that date, or who elected COBRA continuation coverage but is no longer enrolled (for example, an individual who dropped COBRA continuation coverage because he or she was unable to continue paying the premium) may have an additional election opportunity at this time.
Individuals eligible for this additional COBRA election period must receive a notice of extended COBRA election period informing them of this opportunity. This notice must be provided within 60 days of the first day of the first month beginning after the date of the enactment of the ARP (so, by May 31, 2021) and individuals have 60 days after the notice is provided to elect COBRA. However, this additional election period does not extend the period of COBRA continuation coverage beyond the original maximum period (generally 18 months from the employee's reduction in hours or involuntary termination).
Additionally, individuals who subsequently become eligible for COBRA coverage between April and September 2021 will be able to elect subsidized COBRA coverage during the months they are eligible
The American Rescue Plan Act does not provide any direction regarding how to determine whether an individual experienced a voluntary or involuntary termination.
Under IRS guidance issued after the American Recovery and Reinvestment Act (ARRA) in 2009, the IRS indicated that an involuntary termination meant “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.” The IRS also indicated that an involuntary termination could include the employer’s failure to renew a contract for a contract worker if the employee was willing and able to continue working on essentially the same terms. We expect the IRS to issue similar guidance regarding the 2021 COBRA subsidies.
"Assistance Eligible Individuals" (AEIs) may include employees who had either a voluntary or involuntary reduction in hours.
The current agency guidance does not clarify the distinction between involuntary vs. voluntary termination, nor does it provide any examples.
Keep in mind that the employer only qualifies for the federal tax credit for providing subsidized COBRA coverage only if the individual is eligible for the subsidized COBRA coverage under the Act. Therefore, if the employer provides subsidized COBRA coverage to someone who in fact had a qualifying event due to a voluntary termination, it will do so at its own cost - the federal tax credit would not be available.
In guidance issued after the ARRA in 2009, the IRS said they would not challenge an employer’s determination that the termination was involuntary as long as the determination was consistent with a reasonable interpretation of the applicable statutory provisions and IRS guidance. Therefore, an employer should be able to establish a reasonable basis for categorizing the termination as “involuntary” if it intends to claim the tax credit in relation to the terminated individual. The employer should make a point of retaining documentation supporting its determination.
Possibly. The guidance is not definitive on this as it sits today.
After the ARRA in 2009, the IRS indicated that an “employee-initiated termination” could constitute an involuntary termination if it was “due to employer action that causes a material negative change in the employment relationship for the employee.” The IRS guidance also suggests that in situations where an employer intends to fire an employee but gives the employee the opportunity to resign or retire first, the termination would be considered involuntary even if the employee technically resigns or retires from the position.
Yes, and the employee would generally be eligible for subsidized COBRA as a result.
However, under the general COBRA rules, if termination of employment is due to “gross misconduct,” the employee and his or her family members are not eligible for any COBRA continuation coverage (subsidized or otherwise). Any employer considering not offering COBRA to an employee based on a termination for “gross misconduct” should seek legal advice regarding whether that standard has been met.
Based on IRS guidance issued after the ARRA in 2009 suggests that the answer is likely to be “no.” However, the ARRA guidance also stated that the IRS may find there are some situations where an employee quits due to a reduction in hours (for example, if an employee can no longer financially support himself or herself on the reduced schedule) and that would be considered an “involuntary termination” because it was caused by an “employer action that causes a material negative change in the employment relationship.”
If the individual is an “Assistance Eligible Individual” (i.e., had an involuntary termination or reduction in hours that caused them to lose eligibility for coverage) in the last 18 months, then they will be eligible for subsidized COBRA coverage for any of the months between April 2021 and September 2021 during which they could have received COBRA coverage.
In order to accommodate this, individuals who had an involuntary termination of employment or reduction in hours within the last 18 months and did not timely elect COBRA, or elected COBRA and then dropped coverage, must be given a new COBRA election.
Engage will be working with its COBRA vendor to identify any prior COBRA qualified beneficiaries that may be eligible for the subsidy and will handle the notification requirements.
The Act requires that employers provide these individuals with a new COBRA election notice and provide the individual with a 60-day election period starting on the date the new notice is received.
Engage PEO’s COBRA administration partner, Benefit Resources Inc. will be identifying the potential COBRA eligible and handling the required notifications, and will include the available plan and rates information. All elections will be returned to Benefit Resources Inc. and enrollments will be provided directly to the appropriate insurers.
Under the American Rescue Plan, the “person to whom premiums are payable” will be reimbursed by the federal government for any subsidized COBRA premiums advanced through a refundable tax credit (against Medicare hospital insurance (HI) taxes).
In most circumstances, it will be the employer that sponsors the coverage, assuming the plan is subject to federal COBRA. Therefore, if the plan is sponsored by a PEO, the PEO will advance the subsidized COBRA premiums and apply for the tax credit.
There are only limited exceptions where the employer would not claim the tax credit. One is for multiemployer plans, which are special collectively bargained plans in which multiple employers participate. The other is for insured plans that are not subject to federal COBRA, but are only subject to state “mini-COBRA” laws- for those plans, the insurer will claim the tax credit.
(Find information on other employer tax credits related to COVID-19 federal relief here,)
The Act does not address this question, so it will depend on the processes to be established by the IRS. It is likely that the employer (the PEO in the case of PEO-sponsored coverage) will claim the tax credit through its Form 941 filing.
The American Rescue Plan gives employers the option to allow Assistance Eligible Individuals who elect subsidized COBRA to also elect a different plan option, as long as it is the same or lower cost than the option they were in previously. Employers are not required to allow individuals to select a different option within the plan, however.
If electing a new benefit option is allowed, this must be described in the new COBRA election offer and Assistance Eligible Individuals must be given 90 days from when the notice is received to change elections.
No. While individuals who had an involuntary termination of employment or reduction in hours within the last 18 months and did not timely elect COBRA, or elected COBRA and then dropped coverage, must be given a new COBRA election, no individual’s maximum COBRA coverage period will be extended.
No. The subsidized COBRA premiums must be advanced by the employer sponsoring the plan to the insurer, if the coverage is provided through an insured group health plan subject to federal COBRA.
Keep in mind that premiums will need to be paid until Assistance Eligible Individuals (AEIs) are identified, notices released (no sooner than May 31), and all documentation is signed and received by the employer or Engage’s COBRA partner. Premiums will then be credited accordingly.
Those individuals will retain their right to COBRA coverage, but they will no longer be eligible to have their premiums subsidized, and therefore they will have to pay the full cost of COBRA coverage from October 2021 forward (unless they choose to drop COBRA).
In April 2020, the federal agencies issued guidance tolling certain deadlines related to retirement, health, and welfare plans in response to the current COVID-19 pandemic. This included the deadlines for individuals to elect COBRA and pay COBRA premiums, and the deadlines for employers to provide COBRA notices. The Agencies have indicated that those tolling periods will end upon the earlier of one year from the date the deadline would have begun running for that individual or employer; or 60 days from the end of the COVID-19 “National Emergency” (currently, there is no indication when the National Emergency will end).
It is currently unclear whether these extensions will apply to the new election rights for subsidized COBRA coverage, or an employer’s requirement to provide a new election notice, as provided by the ARPA. We do know that regardless of the extensions, assistance eligible individuals still within their 18-month COBRA coverage period should have a new special election right for their prospective subsidized coverage. Hopefully, future guidance from the Agencies will shed more light on how these rules will apply.
Under some states’ continuation coverage provisions (e.g., New York and California), certain qualified beneficiaries covered under insured group health plans have a right to an additional 18 months of coverage once their initial 18-month period under federal COBRA coverage ends. The Act permits individuals to receive the subsidy for state continuation coverage (including for months 19-36 after federal COBRA coverage ends).
However, it does not currently appear that the special election right discussed above applies to state continuation coverage. In other words, if an individual is in an extended state continuation coverage period (months 19-36), it appears they would not be entitled to a special election right under the Act. Hopefully, this will be clarified in subsequent guidance from the Agencies. Also, states could adopt their own special election rights, so if a state continuation coverage law is relevant to your plan, you should monitor any guidance issued by the Department of Insurance in that state.
Assuming that the COBRA recipient is still on a PEO health policy - since coverage is available after the client company has closed - the PEO could be eligible to utilize the credit since the PEO will be required to front the premium payment for the recipient. The credit should go to the company that is paying the premium; in this instance, it would be the PEO.