Got COBRA Subsidy Questions? The IRS Has Answers

Since COBRA premium assistance under the American Rescue Plan Act of 2021 became available to Assistance Eligible Individuals as of April 1, 2021, employers and benefits advisers have had a number of questions about the mechanics of the subsidy and tax credit scheme, among other issues. In Notice 2021-31 the IRS addresses a number of the key issues in a question and answer format. Below is a selection of key points that emerge from the new guidance:

Involuntary Termination and Reduction in Hours

• The definition of involuntary termination of employment qualifying an individual for the subsidy is the same as was used in connection with a prior COBRA subsidy under the American Recovery and Reinvestment Act of 2009:  “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.”  This is a facts and circumstances test.  (Q&A 24)
• Examples of involuntary termination of employment include:
  • A termination designated as voluntary quit or a resignation, where 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 the employee had knowledge that they would be terminated. (Q&A 24)
  • Employer action to end an individual’s employment while the individual is absent from work due to illness or disability, if before the action there is a reasonable expectation that the employee will return to work. (Q&A 25)
  • Involuntary termination for cause, other than gross misconduct. (Q&A 27)
  • Resignation as a result of a material change in the employment relationship analogous to a constructive discharge, including a material change in the geographic location of employment or a material reduction in hours that did not result in a loss of coverage.  (Q&As 24, 28, 32) 
  • An employer’s decision not to renew an employee’s contract, 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.  By contrast, expiration of a contract that was for a set term that was not to be renewed, would not qualify.(Q&A 34)
• Retirement would not ordinarily constitute involuntary termination of employment, but could do so where the employee was willing and able to continue employment and had knowledge that they would be terminated absent the retirement. (Q&A 26)
• The COBRA subsidy is available to individuals whose reduction in hours of service was voluntary or involuntary, including due to a furlough, with “furlough” defined as a “temporary loss of employment or complete reduction in hours with a reasonable expectation of return to employment or resumption of hours of service such that the employer and employee intend to maintain the employment relationship.”   This rule holds whether the furlough is imposed by the employer on an employee, or the employee agreed to participate in a furlough (Q&As 21 & 22).
• It is possible to become an Assistance Eligible Individual (AEI) more than once, for instance due to your own involuntary termination, followed by coverage under a spouse’s employer’s plan, followed by the spouse’s involuntary termination triggering COBRA continuation coverage with premium assistance. (Q&A 3)

Substantiation of Premium Assistance Eligibility

• Employers who claim the tax credit must retain some documentation to substantiate that the individual was eligible for the COBRA premium assistance.  Substantiation may include collecting self-certifications or attestations from individuals that they experienced a reduction in hours or involuntary termination, or employment records of same, and that they are not eligible for other group coverage or Medicare. Employer reliance on such attestations/self-certifications is permitted so long as the employer does not have actual knowledge that the information provided is incorrect. (Q&As 4 -7)

Other Subsidy Eligibility Issues

• Ability to enroll under a spouse’s group health plan under a loss of coverage special enrollment period, extended by the Emergency Relief Notices, may disqualify an individual from receiving the COBRA subsidy.  (Q&A 9, Example 3).
• So long as the original qualifying event was a reduction in hours or involuntary termination of employment, the COBRA subsidy is available during extensions of COBRA coverage due to a second qualifying event, disability determination, or under State mini-COBRA laws.  (Q&A 17)
• Individuals are subsidy-eligible during eligibility waiting periods that overlap with the subsidy period and while outside open enrollment cycles for a spouse’s employer’s plan (Q&A 9)

Coverage Eligible for Subsidy

• COBRA premium assistance is available for vision-only or dental-only coverage, and for health reimbursement arrangements, but not health flexible spending accounts. (Q&A 36, 37).
• If an AEI elects COBRA continuation coverage during the extended election period but the employer no longer offers the health plan they were enrolled in at the time of their qualifying event, the employer must place them in option that is most similar to the discontinued plan, even if the premium is higher.  The subsidy will still apply in such instances.  (Q&A 42)
• Employers who are no longer subject to federal COBRA due to a reduction in the number of employees (for instance, due to COVID-19-related staff reductions) are still required to provide the extended COBRA election period to individuals who had a reduction in hours of service or involuntary termination while the employer was subject to federal COBRA. For instance, an employer that was subject to federal COBRA in 2020 and had reduced staff in 2020 due to COVID-19 may not be subject to federal COBRA in 2021, but must offer the subsidy to individuals who had reductions in hours or involuntary terminations in 2020 when the employer was subject to federal COBRA. (Q&A 45) Very generally, federal COBRA applies to employers who had 20 or more employees in the preceding calendar year. 

Extended Election Period

• An employee who had an involuntary termination of employment or reduction in hours before April 1, 2021 and who elected self-only COBRA coverage which later lapsed, can add a spouse or dependent under the extended election period, and receive the subsidy for their coverage, if the spouse or dependent were beneficiaries under the group health plan at the time of the qualifying event. (Q&A 51)

Outbreak Period Extension

• If an AEI elects retroactive COBRA coverage, the Outbreak Period extension applies to premium payments for the retroactive periods of coverage.  If someone fails to pay the full amount due for retroactive premiums the plan can credit the premiums received to the earliest months of coverage.  A coverage gap will exist until the period of subsidized coverage resumes on April 1, 2021.  (Q&A 58)

Claiming the Tax Credit

• Premium payees (employers, in the case of fully insured or self-insured group health plans, other than multiemployer plans) become entitled to the premium assistance credit as follows:
  • As of the date on which the payee receives an AEI’s election of COBRA continuation coverage, it is entitled to a credit for premiums not paid by an AEI (plus the administrative charge) for any period of coverage that began before that date.  So, for an AEI who on June 17, 2021 retroactively elects COBRA as of April 1, 2021, the payee is entitled to credit as of June 17, 2021 for premiums not paid by the AEI for coverage for April through June, 2021 (Q&A 74) 
  • As of the first day of each subsequent period of coverage (e.g., calendar month), it is entitled to a credit for premiums not paid by an AEI for that coverage period.  So, for example, it is entitled to a credit on August 1, 2021, for premiums the AEI will not pay for the month of August.  (Q&A 74)
• A payee claims the credit by reporting the credit (both nonrefundable and refundable portions) and the number of individuals receiving COBRA premium assistance on Form 941, Employer’s Quarterly Federal Tax Return, and in anticipation of receiving the credit may reduce deposits of federal employment taxes, including withheld taxes, up to the amount of the anticipated credit.  It may also request an advance of the amount of the anticipate credit that exceeds the federal employment tax deposits available for reduction by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
  • Thus, in the prior example involving a retroactive election on June 17, 2021, the employer would report the credit for April through June 2021 on the Form 941 for the second quarter of 2021.  If instead the AEI had elected on July 17, 2021 to start COBRA as of June 1, 2021, the payee would be entitled to a credit as of July 17, 2021 for premiums payable for June and July 2021, and would report the total credit on Form 941 for the third quarter of 2021, including the credit for the periods of coverage from June 1, 2021 through June 30, 2021.  (Q&A 75)
• It is not permissible to reduce deposits or request an advance for a credit for a period of coverage that has not begun.  (Q&A 76). 
• When an AEI fails to report loss of eligibility for the COBRA subsidy (for instance due to eligibility for coverage under another group health plan) the premium payee is still entitled to the credit for the period of ineligibility, unless the payee know of the individual’s eligibility for other coverage.  (Q&A 78)
• Premium payees that use a third party payer such as a payroll service provider or PEO to report and pay employment taxes may are still entitled to the credit, but different rules apply depending on the type of third-party payer arrangement.  Generally the third party payer will be treated as a premium payee for purposes of claiming the premium assistance credit only if the third party payer:
  • maintains the group health plan;
  • is considered the sponsor of the group health plan and is subject to the applicable DOL COBRA guidance, including providing the COBRA election notices to qualified beneficiaries, and
  • would have received the COBRA premium payments directly from the AEIs were it not for the COBRA premium assistance.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2021 Christine P. Roberts, all rights reserved.

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