Last week, we discussed how the American Rescue Plan Act (“ARPA”) affected the Families First Coronavirus Response Act. Today, we are discussing the ARPA’s significant impact on COBRA, which may allow former employees to qualify for free COBRA benefits.
From April 1 through September 30, 2021, ARPA will provide a 100% COBRA premium subsidy to employees who have involuntarily lost their jobs or have had a reduction in hours. Employers must pay the premiums, but can then recoup them through Medicare tax credits. This subsidy is not limited to pandemic-related terminations or reductions in hours. Employers must comply with the new law even if they are not covered by ERISA.
The subsidiary benefits employees who were terminated as long ago as November 2019. Free COBRA may be available to employees involuntarily terminated on or after April 1, and employees who have involuntarily lost their jobs between November 2019 and April 1, 2021, even if they did not elect COBRA. Those employees are not required to backpay any premiums in order to be eligible for the subsidiary.
Involuntarily terminated employees who stopped paying COBRA premiums also may be eligible if they are still within their initial 18-month maximum COBRA period. The subsidy runs from April 1, 2021, to September 30, 2021, but ends earlier if the original maximum COBRA period expires or the individual becomes eligible for other group health coverage. To be clear, previously terminated employees are not eligible for the full COBRA benefit beginning on April 1. Their entitlement depends on how much time has passed since their separations. For example, an employee who was involuntarily terminated 11 months ago would only have 7 months of COBRA coverage left, because the time clock started on the date that the employee became eligible for COBRA.
Who’s Not Eligible?
Health Insurance Available Elsewhere: Some former employees are not eligible for the “free” COBRA coverage. That includes individuals who have coverage available to them under another group health plan (even if they don’t take advantage of it) or Medicare. However, it does not appear that those who can get coverage from a healthcare exchange would be excluded from the subsidiary. There’s no guidance yet on how to determine whether a former employee has other health coverage, so right now it seems that it will be an honor system. However, the fact that there’s a penalty of 110% of the premium may keep people honest.
Gross Misconduct: Employees who are terminated for gross misconduct also are not eligible. Keep in mind, however, that gross misconduct is a high standard to meet under COBRA. Employers are advised to consult with employment counsel before denying someone coverage based on gross misconduct.
Employers Must Issue New Notices
Employers must issue updated “regular” COBRA notices for employees who are involuntarily terminated and become COBRA eligible as of April 1 and new notices to former employees. To comply with the requirement that certain former employees are offered COBRA, employers should review their records back to November 2019 to determine who was involuntarily terminated before April 1, 2021, and are eligible for the subsidy but did not elect COBRA during the election period. By May 31, new notices must be sent to those employees. The Department of Labor is expected to issue model notices by April 10, and employers can wait until these come out before notifying individuals of their right to the subsidiary.
Employers must also send “reminder” notices to employees who take advantage of the free COBRA. Employers must send notices 15–45 days before an employee’s free COBRA coverage is about to expire. For some people, that may be before the end of the free period because they simply may be running out of COBRA time available to them. For employees whose coverage eligibility extends beyond the September 30 subsidiary expiration date, employers should send notices within 15–45 days before the end of September. Well, at least for now. It’s possible that the benefit could be extended beyond September 30. We’ll have to wait and see.
Medicare Tax Credits
Employers can recoup these COBRA premiums (including the 2% administration fee) through a 100% credit against their quarterly Medicare taxes. There are some complicated features of the tax credit, so we encourage you to consult with a competent tax professional (hint: not us) to fully understand how they will work.
Some issues remain unclear:
- If employees voluntarily reduce their hours, are they eligible for the subsidiary? (Right now, there’s no differentiation between someone who chooses to work a reduced schedule and someone whose employer reduces their hours.)
- How does an employer take advantage of the tax credit? (We expect the IRS to issue some guidance on this.)
- Is a separation due to an employee’s disability considered “involuntary?” (Probably, but may depend on the circumstances.)
- How do non-profits take advantage of the tax credit? (We expect guidance on this.)
More Information to Follow
As we learn of developments with the COBRA subsidiary, we’ll let you know. In the meantime, please feel free to contact any of our attorneys to discuss any issues you might be encountering with implementing this new law.