The Department of Labor issued guidance April 7 to help employers comply with the new COBRA premium subsidy provisions of the recently-enacted American Rescue Plan Act. For periods of coverage from April 1 through Sept. 30, certain COBRA participants and their covered dependents are entitled to subsidized continuation coverage under both federal COBRA and state “mini-COBRA.” Employers (or insurers in the case of mini-COBRA) will recoup these premium advances through a refundable employment tax credit.
The premium subsidy covers 100% of the cost of coverage and applies to major medical, dental and vision plans offered by employers but not to flexible spending accounts. Employers will also have to meet certain notice requirements for eligible former employees.
Plan participants are eligible if they meet these three conditions:
- Lose coverage due to an involuntary termination (other than for gross misconduct) or due to a reduction in hours
- Elect COBRA continuation coverage for the period from April 1 through Sept. 30
- Are not eligible for Medicare or another group health plan
This may include employees whose service ended before April 1 but who have not exhausted their COBRA eligibility. These earlier-eligible employees have a special COBRA re-election opportunity that applies both to individuals who did not make a COBRA election and to those who let their coverage lapse before the end of the maximum period.
Employers should take care in determining whether an employee whose hours have been reduced is entitled to the subsidy. A reduction in hours does not need to be involuntary to trigger the premium subsidy.
The subsidy is available through Sept. 30. However, the subsidy will end earlier if the individual reaches the end of the maximum coverage period under COBRA or becomes eligible for Medicare or another group health plan. Unlike the ordinary COBRA rules, which require actual enrollment, eligibility for Medicare or another group health is enough to end entitlement to the premium subsidy.
Notice and Election Requirements
By May 31, employers must provide notice of the subsidy and the special re-election right to participants who lost coverage as a result of an involuntary termination or reduction in hours before April 1, if still within the 18-month COBRA period. This special re-election right does not apply to participants covered by state mini-COBRA.
Employees who lose coverage as a result of an involuntary termination or a reduction in hours after April 1 must receive notice of the subsidy either as part of their regular COBRA election packet or, if separately, within the regular COBRA notice time period. In addition, any COBRA-covered participant whose subsidy will expire before Sept. 30 must receive a notice between 15 and 45 days before the expiration date. The DOL provides model notices on its website.
Once informed of the right to the premium subsidy, eligible individuals have 60 days from the date of the notice to elect COBRA in order to receive the subsidy, which will be retroactive to the date the individual lost coverage or April 1, if later. The notice and election periods for the subsidy are not affected by the one-year deadline extensions authorized by the DOL due to COVID-19. Thus, both plans and participants must strictly comply with these notice periods.
The IRS has not yet issued guidance on the method for recoupment of the premium advance. However, the statute provides that the premium advance will be reimbursed through a refundable credit against Medicare payroll taxes. The credit may be claimed by the entity to whom the COBRA premiums are payable. Generally, for self-insured plans and insured plans subject to federal COBRA, the employer will receive the tax credit. For insured plans not subject to COBRA or other plans subject to state continuation coverage, the insurer will receive the credit.