Fast Facts About the COBRA Subsidy

The recently enacted American Rescue Plan Act of 2021 (ARPA) contains a number of financial aid measures to help Americans coping with the economic fallout of the COVID-19 pandemic, including a 100% subsidy of COBRA continuation coverage premiums for a period of up to six months.  The subsidy provisions are set forth at Title IX, Subsection F of ARPA, Section 9501, titled “Preserving health benefits for workers.”  The following fast facts on the COBRA subsidy will help employers and benefit advisors prepare for more detailed guidance and model notices that are soon to follow from the Department of Labor. 

Subsidy Period

  • The subsidy is first available April 1, 2021 and ends, unless terminated earlier as described below, on September 30, 2021 (the “subsidy period,” as used herein).  The subsidy covers 100% of COBRA premiums, including the 2% administrative fee, for medical, dental and vision coverage during that time.  It does not apply to continuation coverage under a health flexible spending account.

Assistance Eligible Individuals

  • The subsidy applies to “assistance eligible individuals.”  This means someone who is eligible for continuation coverage during some or all of the subsidy period, by reason of an involuntary termination of employment or a reduction of hours.  The subsidy would also appear to apply to that person’s dependents.  
  • The subsidy is not available to those who resign or voluntarily quit employment.  
  • The change in employment status need not be directly related to COVID-19.  The usual exception for termination due to gross misconduct applies, but remember that that exception is applied sparingly.

Extended Election Period

  • Under a special extended election period, the subsidy is available not only to assistance eligible individuals who newly become COBRA eligible as of April 1, 2021, but also to persons who earlier declined COBRA, or elected COBRA but let it expire.  For instance, this group may include assistance eligible individuals who first became COBRA on or after November 1, 2019 (April 2021 would be the 18th month of COBRA coverage).  
  • The subsidized continuation coverage would apply prospectively only, in such instance.
  • A notice of the extended election period must be provided, triggering a 60-day period to elect to re-instate COBRA .  The Department of Labor is required to provide a model notice within 30 days of the March 11 ARPA enactment date.  

Option to Change Coverage

  • Assistance eligible individuals may receive the subsidy for the same coverage they were enrolled in at the time of their qualifying event, or they may elect a different coverage option so long the applicable premium does not exceed the premium for the coverage they had at the time of the qualifying event.  This is an optional feature of the subsidy provisions and an employer may choose not to extend the option to change coverage.

Termination of Subsidy Period

  • The subsidy period will end prior to September 30, 2021 in the event the assistance eligible individual’s maximum COBRA period ends (for instance, with regard to someone who made a special extended COBRA election).
  • Alternatively, it will end when an assistance eligible individual becomes eligible for coverage under another group health plan, or becomes eligible for Medicare.  
  • Eligibility under other group coverage or Medicare triggers a duty to notify the group health plan providing the COBRA subsidy.  The Department of Labor will further define the form and timing of the notice.  
  • A $250 penalty applies to each failure to provide the notice, and a higher penalty, equal to 110% of the applicable COBRA premium, may apply to an intentional failure to notify.  An exception to the penalty applies in the case the failure to notify was due to reasonable cause and not willful neglect.

Notification Duties

  • ARPA requires an update to COBRA notices sent to assistance eligible individuals who first became eligible for COBRA before the subsidy period, describing the premium assistance and the option to enroll in different coverage, if that latter option is extended by the employer, as well as the duty to provide notice of eligibility for other group coverage or Medicare.   The deadline to provide the new information is 60 days from April 1, 2021.  
  • This information must also be added to new COBRA qualifying event notices for assistance eligible individuals.  The new information may either be provided as part of amended qualifying event notices or in a separate document provided with the qualifying event notice.
  • As mentioned above, a special notice about the extended election period must be provided, and triggers a 60-day election period.  If the option to choose different coverage of an equal or lower premium is extended, an additional 30-day election period, for a total of 90 days, applies.
  • Advance notice of the expiration of the subsidy period is also required to be provided.  The Secretary of Labor will provide a model notice no later than 45 days from the March 11 enactment date.  

Subsidy is Not Taxable Income

  • The dollar value of the COBRA subsidy is excluded from the gross income of assistance eligible individuals.

Payment for Subsidy:  Credit Against Medicare Taxes

  • The person to whom COBRA premiums are payable will be entitled to reimbursement for the subsidy, in the form of a credit against the Medicare component of Social Security taxes.  
  • The employer is the person to whom premiums are payable, and who may claim the credit, in the case of a self-insured plan or an insured plan subject to federal COBRA  It is the plan itself in the case of a multiemployer plan.  
  • If the credit exceeds taxes payable the excess is treated as a refundable overpayment.   

DOL Outreach

  • ARPA allots $10 million to the Department of Labor to help implement the COBRA subsidy, enabling it to provide outreach in the form of public education and enrollment assistance to employers, group health plan administrators, and other stakeholders.

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.

Photo Credit:  Marten Bjork, Unsplash

Year-End Troop Return Triggers Benefit Obligations under USERRA

Last month President Obama announced that the remaining 40,000 or so American troops in Iraq would be returning home by December 31 of this year; it is also expected that he will announce an additional troop draw-down from Afghanistan.

For U.S. employers, this means that it is time to get reacquainted with benefit reinstatement rights under the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA). USERRA generally protects the workplace rights of persons who voluntarily or involuntarily leave employment positions to undertake military service and broadly applies applies to all U.S. employers, public or private. Essentially USERRA requires employers to treat employees as if they were employed throughout their period of military service, despite their physical absence.

Provided that the returning servicemember applies for reemployment within set time frames under the regulation, which are based on the period of military service, there is a duty to rehire the servicemember that is subject to very few exceptions. Further, the returning servicemember must be reinstated not to his or her “old” job but to the position – and compensation and perks – that the servicemember would have enjoyed had he or she never interrupted their career to serve our country. This is called the “escalator position.” As with the duty of reemployment there are exceptions to the duty to restore to the “escalator position” but they are few and narrowly construed.

With specific regard to health benefits, employees have a COBRA-like continuation coverage right upon leaving for military service that, provided they pay applicable premiums at 102% of the active employee’s rate, can last for as long as two years following commencement of military service. Upon return to employment those employees would simply transition to the same coverage they enjoyed as active employees. Employees who let their group health coverage lapse while on military leave have the right to have their coverage reinstated. If no waiting period or exclusions would have applied to the servicemember had their coverage been uninterupted, none may apply upon restoration of such coverage. USERRA regulations allow an employer to permit a servicemember to delay reinstatement of health plan coverage until a date that is later than the date of reemployment, but the employer is not required to do so, and employers who wish to do so are advised to first checkwith their insurers to make sure that such coverage will be honored.  Employers planning to delay coverage within USERRA guidelines should also be aware that they may have different insurance reinstatement obligations under the Servicemembers Civil Relief Act.  In short, any plan other than to provide immediate reinstatement of coverage upon reemployment should be discussed with legal counsel and otherwise vetted before implementation.

With regard to retirement plans, the reemployed servicemember is treated as though he or she had remained continuously employed for purposes of pension plan participation, vesting, and accrual of benefits. USERRA treats military service as continuous service with the employer for benefit plan purposes, such that “break in service” rules are not triggered. USERRA pension protections apply to defined benefit plans and defined contributions plans as well as plans provided under federal or state laws governing pension benefits for government employees.

If pension plan contributions are not dependent on employee contributions, the employer must make them within 90 days after reemployment or when contributions are normally made for the year in which the military service was performed, whichever is later. If pension plan contributions are derived from employee contributions or elective deferrals, (such as employer matching contributions to a 401(k) plan) or from a combination of employee contributions or elective deferrals and matching employer contributions, the reemployed service member may make his or her contributions or deferrals during a time period starting with the date of reemployment and continuing for up to three times the length of the employee’s immediate past period of military service, with the repayment period not to exceed five years. The employer is not required to restore retirement plan contributions in advance of a servicemember’s actual return to work.

More information is available in a convenient question and answer format in the Department of Labor’s Final Regulation under USERRA, published December 19, 2005, which you can review here.

Insurers, TPAs May Bear Sizeable Excise Tax Burden for COBRA Violations

Since 1989, failures to comply with the continuation coverage requirements of COBRA have potentially triggered excise taxes under IRC § 4980B on those responsible for the error, equal to $100 per affected person, per day. However the Internal Revenue Service rarely imposed and collected the tax and there previously has been no affirmative duty on taxpayers to report or pay it.

That situation changed for plan years beginning on or after January 1, 2010. Now there is an affirmative obligation on employers and other responsible parties — including insurers and third party COBRA administrators – to report and pay the excise tax on IRS Form 8928. (A draft version is available online.) The tax is equal to $100 per affected person, per day, for each day of the noncompliance period. (A cap of $200/day applies when a failure affects more than one qualified beneficiary.) The noncompliance period begins on the day the failure first occurs and ends on the earlier of (a) the day the failure is corrected; or (b) the date which is 6 months after the last day in the maximum applicable COBRA period.

Examples of failures that would trigger excise taxes are COBRA notice failures (missing, late, or incomplete initial or qualifying event notices); COBRA premium violations (overcharging, or not complying with grace period rules); and procedural failures such as not allowing COBRA recipients to make changes at open enrollment, or on special enrollment events.

The maximum excise tax that may apply to an employer for unintentional failures – those which are due to reasonable cause and not willfull neglect — is equal to the lesser of (a) $500,000 or (b) an amount equal to 10% of the employer’s aggregate health plan expenditure during the prior tax year.  For insurers and third party administrators, however, the maximum excise tax for unintentional failures is $2,000,000.

For willful violations, the $500,000 and $2,000,000 tax caps would not apply. Additionally, minimum excise taxes apply in the event a COBRA failure is discovered on audit. The minimum tax amounts are the lesser of (a) $2,500 or (b) the excise tax calculated without application of certain exceptions noted below. This minimum amount increases to $15,000 where the failures for any year are more than de minimis.

Taxes must be paid, and Form 8928 filed, on or before the due date (without extension) of the employer or other responsible party’s federal income tax return (or that of insurer, HMO or TPA, where applicable). An automatic 6-month extension of the filing deadline only is available by filing Form 7004, however the excise tax still must be paid on the original deadline.

Interest is charged on taxes not paid by the due date even when a filing extension applies. Penalties of as much as 25% of the unpaid tax amount also separately apply for late filing of Form 8928, and for late payment of excise taxes, respectively.

Certain exceptions to the excise tax obligation do apply. First, the tax will not apply during the period where the employer or responsible party did not know, or by exercising reasonable diligence would not have known, that a COBRA violation had occurred. Second, once a COBRA violation is discovered, no excise tax will apply if the failure was due to reasonable cause and not willful neglect, and it is corrected within 30 days of discovery. “Correction” for these purposes means retroactively undoing the error, and putting the affected parties in at least the same financial position they would have been in, had the failure not occurred. When the error is failure to offer COBRA coverage, correction will include a retroactive offer of coverage back to the date it originally would have been available, in exchange for which the former employee must pay applicable premiums and the COBRA administrative charge. An employer or other responsible party generally cannot demand a lump sum payment of past-due premiums but must instead work out a payment schedule.

Although not an “exception,” there are additional prerequisites that must be met in order for the excise tax to apply to insurers or third party administrators. First, the insurer or TPA must be the cause of the COBRA error (other than as a result of employer action or inaction), and it must have assumed responsibility for the error under a legally enforceable written agreement. TPAs in particular will want to review their service agreements in this regard, and be sure to carve out responsibility for errors arising from employer action or inaction.

Church and governmental plans are exempt from the excise tax for COBRA violations. And finally, the IRS may waive all or part of the excise tax where the failure was due to reasonable cause and not willful neglect, and where the amount of tax is excessive relative to the failure involved. In such instances, a statement of reasonable cause should be filed with the Form 8928 that also addresses the need to abate excessive taxes. Generally it is necessary to pay the tax with the filed return and hope for reimbursement later, but given the potentially extremely large tax amounts at issue it is possible that the IRS could accept the return without the full tax payment. A seasoned tax advisor should be consulted in such instances.

Excise taxes apply under IRC §4980D to a number of other health plan failures, including violations of HIPAA, the Genetic Information Nondiscrimination Act (“GINA”), the Mental Health Parity and Addiction Equity Act, and prospectively will apply to violation of as yet un-issued regulations that will govern non-discrimination under insured health plans. Excise taxes under 4980E and 4980G also apply to failures to make “comparable employer contributions” under Archer MSA arrangements and HSAs, respectively.  Only employers, not TPAs, however, are subject to these other types of health plan excise taxes. Future posts will discuss these other excise taxes in more detail.