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Who’s paying for COBRA?

Both fully-insured and self-insured employers must offer the subsidy, whether they are public, private, or governmental entities.

The Nuts & Bolts

As part of the American Rescue Plan Act of 2021 (ARPA), employees and covered spouses and dependents who lose employer-provided health insurance because of a reduction in work hours or an involuntary termination of their employment will now be entitled to a 100% COBRA premium subsidy for a period of up to six months, so long as the employees’ initial loss of coverage eligibility was not due to “gross misconduct” on their part.  Free healthcare from April through September?  That’s certainly something, isn’t it?  But who’s footing the bill for all of this?  Well, the employers are, sort of.  But they can pay themselves back for it with tax credits.  Let’s take a closer look.

COBRA: The Expensive Version

The Consolidated Omnibus Budget Reconciliation Act, better known as “COBRA”, gives workers and covered family members who would ordinarily lose their employer-provided group health benefits the right to keep those benefits following the loss of coverage for any of several reasons, called “qualifying events”.

COBRA is a Federal law, and it applies to private-sector businesses with 20 or more full-time or part-time employees on at least 50% of its typical business days during the year.  Businesses with fewer than 20 employees are not subject to the law, but tread lightly – many states have enacted their own versions, often referred to by unimaginative types as “Mini-COBRA[i]”, and they are all different.  Pennsylvania’s version, for example, is relatively modest, while Missouri’s essentially points to the Federal COBRA and says: “do all that stuff”.  But, as for COBRA itself, the main idea is that employees are able to keep their employer-provided health insurance for up to 18 months (generally) following termination of employment if they continue to pay the (usually much, much higher) “COBRA premium”.  In other words, it’s a “safety net”, but not one that generally receives a lot of attention because, well, recently-unemployed people typically don’t have piles of disposable income lying around from which to pay those COBRA premiums.

Which employers are affected by this law?

Both fully-insured and self-insured employers must offer the subsidy, whether they are public, private, or governmental entities.

Who is eligible for this new “premium holiday”?

Under the new law, however, effective April 1, 2021, “assistance eligible individuals” (AEI’s) will pay nothing in COBRA premiums from April 1, 2021 until September 31, 2021 or 18 months after termination of, or reduction in, employment, whichever comes first.  It’s important to note that not all of COBRA’s “qualifying events” trigger this 100% premium subsidy – only: (1) an involuntary termination for a reason other than “gross misconduct”, or (2) a “reduction in hours” that would ordinarily disqualify an employee from employer-provided health insurance under the plan’s “actively at work” or “service hours” requirements.

How long does it last?

The COBRA subsidy runs from April 1st through September 30th. Regardless of the availability of the subsidy, COBRA will end whenever eligibility ends – whether because the individual has reached 18 months of coverage, becomes eligible for other employer-provided coverage, etc.  Both fully-insured and self-insured employers must offer the subsidy, whether they are public, private, or governmental entities.

Here’s where it gets a little tricky.  AEI’s are not just those employees who will be terminated after April 1, 2021.  They also include those employees who had been terminated before April 1, 2021, and who had initially declined COBRA continuation coverage.  So, for example, an employee who had been terminated in February of 2021 and lost group health coverage beginning March 1, 2021, and who either declined COBRA coverage or elected and dropped COBRA coverage before April 1, 2021, now has at least an additional 60 days to again elect COBRA coverage for the remainder of the 18-month continuation coverage period that will have begun on April 1st, with the premiums owing from April 1st through September 30th subsidized 100%.  However, if the former employee had instead been terminated, say, in July of 2019, that would put the time frame from April 1st to September 30th beyond the 18-month period for which COBRA would have been available, and, therefore, no premium subsidy would be available.

What happens if other coverage becomes available?

The “premium reduction period” may end before September 30th or 18 months from the qualifying event if an AEI becomes “eligible” for other group health plan coverage or Medicare.  Note that this is different from the requirement that COBRA continuation must end when an employee is actually “enrolled” in alternate coverage.

What happens if the employee has actually paid an otherwise-subsidized premium?

If an AEI pays premiums that are subject to premium assistance provisions, the entity to which the payment was paid must reimburse the AEI for those premiums within 60 days of the date of payment.

Notice Requirements — what do you have to do?

Within 60 days of April 1st or the employee’s eligibility, whichever comes last, your group health plans must provide AEI’s with a notice of assistance availability as well as the option to enroll in different coverage, in addition to the standard “COBRA notice”.  This notice requirement may be met either by amending existing notices or by enclosing a separate document along with them. Specific content requirements apply[ii], however, the Department of Labor has indicated that it hopes to publish “model notices” in advance of April 1st.

Additionally, between 45 and 15 days before the date on which an individual’s subsidy will expire, a Notice of Expiration of Premium Assistance Period must also be sent, unless the subsidy is expiring because the individual has become eligible for other group health coverage or Medicare.  The notice must indicate that:

  • The AEI’s premium assistance will soon expire, including prominent identification of the date of the expiration, and
  • An AEI may be eligible for coverage without any premium assistance through COBRA or coverage under a group health plan.

How do employers recoup these premium payments? 

Employers will receive a dollar-for-dollar credit for COBRA premiums not paid by AEI’s in much the same way as they received credit for having paid for sick leave and emergency family medical leave under the FFCRA – by holding on to payroll taxes otherwise owed to the IRS.  If the amount of credit exceeds the amount owed in payroll taxes for any particular quarter, the employer would then be eligible for a refund of the excess as though it were an ordinary overpayment of payroll taxes.

What should employers be doing now?

In advance of April 1, 2021, employers should:

  • Begin identifying which COBRA qualified beneficiaries are AEIs,
  • Reach out to recently terminated employees who did not elect COBRA coverage but who are now eligible for subsidized coverage,
  • Consider how the premium subsidy provisions may affect upcoming workplace terminations and severance agreements, and
  • Plan to update existing COBRA notices and prepare notices addressing the new notice requirements while we await the full set of implementing guidance and model notices from the Departments required under the statute.

[i] “COBRA puns” are the lowest form of legal humor, and will not be utilized within this professional article.  They are the evidently dreamed up by the same people who name hair salons.

[ii] The COBRA notice required under ARPA-21 also must include:

  • The forms necessary to establish eligibility for premium assistance;
  • The name, address, and telephone number for contacting the plan administrator and other individuals with relevant information regarding COBRA premium assistance,
  • A description of the extended election period under the ARPA-21 rules,
  • Descriptions of:
    • a COBRA qualified beneficiary’s obligation to notify the plan if the individual is no longer eligible for ARPA-21 premium assistance because the individual is eligible for other group health plan coverage; and
    • the penalties for failing to comply with this notice requirement,
  • A description, displayed in a prominent manner, of the qualified beneficiary’s right to subsidized premiums and any conditions concerning eligibility for the subsidized premiums, and
  • A description of a qualified beneficiary’s option to enroll in different coverage, if the employer makes available this option.