Section 9501 of the American Rescue Plan Act of 2021 (the “ARPA”)[1] requires certain employers to offer free COBRA coverage to certain individuals between April 1, 2021 and September 30, 2021. The ARPA provides tax credits to employers to offset the cost of the COBRA coverage. The right to free COBRA coverage extends to some individuals whose right to COBRA coverage previously ended.

The original version of this blogpost, written shortly after passage of the ARPA, reviewed eligibility free coverage and extended coverage, how the tax credits work, and potential issues pertaining to insurance coverages. On April 7, 2021, the Department of Labor (the “DOL”) issued guidance on the law in the form of “Frequently Asked Questions” and various model notices that can be used in connection with the law.[2] This post reflects the DOL’s recent guidance.

Background

COBRA[3] is a federal law that generally obligates employers (including state and local government employers) with group health plans to offer covered employees and covered dependents (“COBRA qualified beneficiaries”) the right to continue coverage under the group health plan in certain circumstances where the coverage otherwise would cease. Under this law, group health plans include medical, prescription drug, dental and vision plans. Under the COBRA law, there is a small employer exemption that applies if all employers maintaining the group health plan normally employed fewer than 20 employees on a typical business day in the preceding calendar year.

Some states have “mini-COBRA laws” that are designed to possibly apply to employers with less than 20 employees, as well as to “church plan” employers that are exempt from ERISA. This Blogpost does not address the application of Section 9501 of the ARPA to state level “mini-COBRA laws”.

COBRA requires an employer to offer continuation of coverage for 18 months when coverage is lost due to a covered employee’s reduction in work hours or termination of employment (other than on account of gross misconduct). Extensions of the 18 month coverage period are available in certain circumstances, such as a disability, death, divorce of the covered employee, or a child ceasing to be a dependent under the terms of the plan.

A qualified beneficiary’s right to COBRA coverage ceases if the individual becomes covered under another group health plan that does not contain an exclusion or limitation with respect to a preexisting condition. COBRA rights also cease if a qualified beneficiary becomes entitled to Medicare, after electing COBRA coverage.

Employers are permitted to charge qualified beneficiaries up to 102% of the group health plan’s costs of the coverage.

Free COBRA Coverage

Under Section 9501 of the ARPA, group health plans subject to COBRA[4] must provide free COBRA coverage and additional enrollment rights to “assistance eligible individuals”.

Assistance eligible individuals include COBRA qualified beneficiaries who are enrolled in COBRA coverage under a group health plan on or after April 1, 2021, if coverage under the plan is lost or previously was lost due to a covered employee’s:

  • reduction in work hours (e.g., layoff, furlough, etc.), or
  • termination of employment (other than a voluntary termination).

Thus, on a prospective basis, free COBRA coverage must be offered for losses of coverage that occur from April 1, 2021 through September 30, 2021 due to a covered employee’s reduction in work hours or termination of employment (other than voluntary).

In addition, an assistance eligible individual include a person who, as of April 1, 2021, falls within one of the categories described below:

  • A qualified beneficiary who is enrolled in COBRA coverage due to a covered employee’s reduction in hours or termination of employment (other than voluntary); and
  • A qualified beneficiary who is currently in a regular COBRA coverage election period due to a covered employee’s reduction in hours or termination of employment (other than voluntary).

Under these circumstances, the offer of free COBRA coverage must be made effective as of April 1, 2021.

Nevertheless, free COBRA coverage does not have to be extended past the end of what would have been the normal expiration date for the underlying COBRA coverage period (e.g., 18 months from the date of a covered employee’s termination of employment or reduction in work hours).

The offer of free COBRA coverage also will cease if an individual becomes eligible for other group health plan coverage (including under a spouse’s plan) or eligible for Medicare, regardless of whether the individual actually become s covered under the other plan or Medicare.

The law requires that individuals receiving free COBRA coverage notify the group health plan of their eligibility for other group health plan or Medicare. Individuals who fail to do so may be subject to a tax penalty . The tax penalty generally is $250, but can be a much higher amount if the failure is intentional.

Special Enrollment Rights for Free COBRA Coverage

The ARPA also provides special COBRA enrollment rights under a group health plan, and free COBRA coverage, for the following “assistance eligible individuals” who are not enrolled for COBRA coverage as of April 1, 2021:

  • An individual who previously had the right to elect COBRA coverage due to a covered employee’s reduction in work hours or termination of employment (other than voluntary), but declined to elect COBRA coverage.
  • An individual who previously had the right to elect COBRA coverage due to a covered employee’s reduction in work hours or termination of employment (other than voluntary), elected to receive COBRA coverage, and subsequently had that coverage discontinued before April 1, 2021.

In either situation, the individual will be an assistance eligible individual only if the maximum COBRA coverage period that would have been available to that person extends past April 1, 2021.

The DOL FAQs note that 18 months is the general COBRA coverage period for qualifying events that are a covered employee’s termination of employment or reduction in work hours. Thus, in general, an assistance eligible individual will include a covered employee or covered dependent who lost coverage on or after October 1, 2019 due to a covered employee’s termination of employment (other than voluntary) or reduction in work hours.

However, it also appears that if an extension of the general 18 month COBRA coverage period was provided (or would have been available) to an individual because of the occurrence of an intervening COBRA qualifying event (e.g., disability, death, divorce of the covered employee, or a child ceasing to be a dependent under the terms of the plan), the term “assistance eligible individual” will include a person whose extended COBRA coverage period would run past April 1, 2021.

If any of the foregoing rules apply, the offer of extended COBRA coverage must be made available with an effective date of April 1, 2021. However, the FAQS of the DOL provide that an individual who has a special enrollment right can elect free COBRA coverage prospectively from the date that notice of his or her rights is received. (See discussion of notices below.)

If an individual elects to be enrolled pursuant to a special enrollment right, COBRA coverage must be offered until the end of what would have been the normal expiration date for the underlying COBRA coverage period (e.g., 18 months from the date of a covered employee’s termination of employment or reduction in work hours, or any extended period of coverage beyond that original 18 month period). However, the free COBRA coverage period will last only until September 30, 2021. After September 30, 2021, the group health plan can charge the usual COBRA premium for the coverage.

Termination of Employment Issues

Under Section 9501 of the ARPA, the offer of free COBRA coverage does not have to be made if the employee’s termination of employment was “voluntary.” This is a new concept under the COBRA law, and there are many be many questions about this “voluntary” standard. This point is not explicitly addressed by the DOL’s FAQs.

For example, it is not clear whether a mutual termination of employment is considered “voluntary” under the law. Nor is it entirely clear whether a covered employee will be an assistance eligible individual if the employee had a reduction in work hours (e.g., a “furlough” or “layoff”) that subsequently led to the employee’s termination of employment.

Given the intent of the law, the fact that there are tax credits being provided to help offset the employer’s costs, and that an employer can be subject to liability for failure to offer free COBRA coverage, we believe it would be wise for employers to be cautious when determining that an offer of free COBRA coverage does not have to be made because an employee’s termination of employment was voluntary.

In addition, note that previously, COBRA coverage did not have to be offered if an employee’s termination of employment was on account of “gross misconduct”. The DOL FAQs have confirmed that exception still applies. Thus, if a qualified beneficiary was not offered COBRA coverage previously because an employee’s termination on account of gross misconduct, free COBRA coverage does not now have to be offered to that person. Nor would free COBRA coverage have to be offered prospectively to an employee whose termination of employment is on account of gross misconduct.

Notice and Election Issues

The ARPA requires the Department of Labor to issue model notices for employers to use to advise qualified beneficiaries of their rights under the law. The DOL has now issued the following model notices:

  • Model General Notice and COBRA Continuation Coverage Election
  • Model Notice in Connection with Extended Election Period
  • Model Alternative Notice
  • Model Notice of Expiration of Premium Assistance (the “Expiration Notice”)
  • Summary of the COBRA Premium Assistance Provisions under the American Rescue Plan Act of 2021 (the “Summary”)

Plan administrators are required to give notices to existing assistance eligible individuals by May 31, 2021. The Notices explain that an individual’s right to free COBRA will cease if the individual is eligible for coverage under another group health plan

A Summary of the law is included with the COBRA notices. It will be important to include the Summary because it explains the tax penalty that may apply if an individual fails to notify the group health plan that the individual is eligible for coverage under another group health plan or Medicare.

Employers must provide the Expiration Notice 15-45 days before an individual’s premium assistance is scheduled to end.

Once an assistance eligible individual receives a notice, the individual is entitled to a 60 day period to elect the COBRA coverage. Coverage elections may be made retroactively to the earliest date the individual was an assistance eligible individual (e.g., as early as April 1, 2021). Alternatively, an assistance eligible individual can make a free COBRA coverage election prospectively.

Clearly, notices will need to be issued to qualified beneficiaries associated with an employee’s loss of coverage due to a termination of employment (other than voluntary) or reduction in work hours that has occurred since October 1, 2019.

As is discussed above, it also appears that notices should be sent to qualified beneficiaries associated with an employee’s loss of coverage due to a termination of employment (other than voluntary) or reduction in work hours that occurred on or after April 1, 2018 and before October 1, 2019, if there was an extension of the 18 month coverage period that had to be provided because of an additional COBRA qualifying event (assuming the maximum coverage period would then have been extended past April 1, 2021).

Plan administrators should be gathering information now to get ready to send out the required notices. Unfortunately, the DOL FAQs do not provide much practical guidance on the notice requirements. In general, COBRA notices can be sent by first class mail to the last known address of a qualified beneficiary. However, it might be advisable under some circumstances to send a letter that has a return receipt.

The DOL FAQs do not provide any guidance on what a plan administrator or employer should do if there are missing qualified beneficiaries. It is advisable for an employer to at least take some common sense actions to locate them. For example, former co-workers may know the whereabouts of a missing qualified beneficiary. The employer also might have a telephone number or home e-mail address that might be used to contact a missing qualified beneficiary.

Tax Credits and Insurance Company Issues

In an effort to help offset the costs of providing free COBRA coverage, the law makes available tax credits against employer Medicare taxes. The tax credits are based on the COBRA premiums that would have been payable by the qualified beneficiary for the relevant free COBRA coverage.

The DOL FAQs state that the Treasury Department and IRS have reviewed the FAQs and have approved them. However, the DOL FAQs do not provide any guidance regarding the tax credits. It is not clear when taxpayers might expect to see guidance from the Treasury Department or IRS in relation to the tax credits.

This portion of the law has an unusual twist. Except as may otherwise be provided by the Secretary of the Treasury, the tax credits are provided to the following persons:

  • If the plan is a multiemployer plan, the multiemployer plan itself.
  • If the plan is fully or partially self-insured, to the employer that sponsors the plan (including state and local governmental employers).
  • If the plan is not described above, to the insurance company.

If an employer has a fully insured plan, presumably the employer will have to continue to pay premiums to the insurer for the enrollment of any qualified beneficiaries. However, the law provides that the tax credit goes to the insurance company, and not to the employer.

Under this scenario, the law does not seem to obligate an insurer to give the employer any portion of the tax credits as an offset to employer premiums. Thus, apparently an employer will need to negotiate with an insurer to have the insurer’s tax credits used as an offset the employer’s premiums that are due under the plan for the qualified beneficiaries.

In the case of a self-insured plan, the employer will directly receive the tax credits. However, a secondary issue might be lurking in relation to the employer’s coverage under a stop-loss insurance policy.

The law does not address stop-loss policy coverage. Thus, self-insured employers may want to promptly determine whether the plan’s stop-loss coverage will apply to claims incurred by COBRA qualified beneficiaries who obtain free COBRA coverage through September 30, 2021 or otherwise take advantage of extended enrollment rights under the ARPA for periods after September 30, 2021. If the stop-loss policy will not apply to claims from those qualified beneficiaries, the employer may want to try to negotiate with the stop-loss carrier for additional coverage.