The American Rescue Plan Act (the Act) included certain temporary COBRA subsidy provisions that allow “Assistance Eligible Individuals” (AEIs) to receive COBRA subsidies from April 1, 2021 to September 30, 2021 (the assistance period). The IRS recently provided COBRA subsidy guidance to employers in the form of Notice 2021-31. This legal alert discusses some of the highlights of this guidance.


An AEI is any qualified beneficiary who, during the assistance period, (1) is eligible for COBRA coverage due to termination of the covered employee’s employment (except for a voluntary termination) or reduction of the employee’s hours, and (2) elects COBRA coverage. An AEI will be treated as having paid 100% of any premium required for COBRA coverage during the assistance period. The effective subsidy is referred to as “premium assistance.”

Under Notice 2021-31:

  • Employers may require employees to “self-certify” to being subsidy-eligible. This includes self-certifications that the individual has not received other disqualifying coverage.
  • Employers who claim the tax credits to offset the subsidy should maintain records substantiating that the individual was eligible for the premium assistance, including any self-certification by an eligible employee.
  • A qualified beneficiary must become initially eligible for COBRA due to a reduction of hours or involuntary termination; if these events occur after a different initial COBRA qualifying event, the beneficiary will not be eligible for premium assistance.
  • An individual does not have to have their hours involuntarily reduced in order to be eligible for the premium assistance – their reduction in hours can be either voluntary or involuntary and they may still be eligible for the subsidy.
  • Determining whether a termination is involuntary is based on the facts and circumstances.
  • Involuntary terminations by the employer include good reason terminations by the employee where there is an “employer action that results in a material negative change in the employment relationship for the employee analogous to a constructive discharge.”
  • Involuntary terminations will generally not include retirements, although if the employer would have terminated the employee had they not retired, the employee was “willing and able to continue employment,” and the employee was aware of the potential termination, then the termination would be considered involuntary.
  • Similarly, involuntary terminations may include an employee’s voluntary resignation if the facts and circumstances meet the same factors as for retirements.

Premium assistance

  • The premium assistance is available for any COBRA-eligible group health plan other than a health FSA offered under a cafeteria plan. This includes dental and vision-only plans.
  • The premium assistance also covers Health Reimbursement Accounts (HRAs) unless they are health FSAs.
  • There is no premium assistance off-setting if an AEI wants to enroll in coverage with a premium greater than the premium for the coverage that the AEI was enrolled in at the time of their qualifying event. This means that if the individual was enrolled in a plan with an $800/month premium when their hours were reduced or they were involuntarily terminated, they will not receive any premium assistance if they sign up for coverage with an $900/month premium.

Premium assistance credits

  • Employers who sponsor either a self-funded health plan or a fully-insured health plan that is subject to federal COBRA are eligible for the premium assistance credit (recipients of the premium assistance credits are called premium payees). For fully-insured plans that are subject to state continuation coverage, the insurer is the premium payee, and, and multiemployer plans themselves (and not the contributing employers) are also premium payees.
  • Premium payees can claim the credit by reporting the amount on Form 941. The premium payee may first reduce their deposit of federal employment taxes up to the amount of their anticipated credit, and if that does not cover the amount they are owed they can request an advance credit refund by filing Form 7200. The IRS guidance states that the premium payees can file their Form 7200s after the end of the payroll period in which they are entitled to the credit.
  • While the premium assistance itself is excludable from an AEI’s gross income under Section 139I of the Internal Revenue Code, the premium assistance credit is included in gross income of the premium payee.