IRS issues additional guidance on ARPA COBRA subsidy

On July 26, 2021, the IRS issued Notice 2021-046 to clarify certain issues related to the COBRA premium assistance provisions of the American Rescue Plan Act (ARPA).

The ARPA includes 100% COBRA premium subsidies for up to a six-month period (from April 1, 2021, until September 30, 2021) for individuals who are eligible for COBRA due to an involuntary termination of employment or reduction in hours and are either (1) currently enrolled in COBRA, or (2) in their COBRA continuation period but have not elected or discontinued payments for COBRA coverage.¹

In April 2021, the Department of Labor (DOL) issued a set of FAQs to help individuals understand the ARPA COBRA subsidy provisions, as well as model notices for group health plans and health insurance issuers.² Subsequently in May, the IRS issued Q&As to assist employers with administering the ARPA COBRA subsidy requirements.³

Notice 2021-046 supplements earlier guidance for employers (and their COBRA vendors/third-party administrators) regarding who is an assistance eligible individual (AEI) and which entity is entitled to claim the tax credit. Details and employer implications are outlined below.

Eligibility for COBRA premium assistance — extended coverage periods

Employers are responsible for determining who is eligible for premium assistance. The new guidance covers who is an AEI during an extended election period. Assuming the original qualifying event was a reduction in hours or an involuntary termination of employment, COBRA premium assistance is available to an individual who is entitled to elect COBRA continuation coverage for an extended period due to a disability determination, second qualifying event, or extension under a state coverage continuation mandate if the extended period of coverage falls between April 1, 2021 and September 30, 2021.

The above applies even if the individual had not notified the plan or insurer of the intent to elect extended COBRA continuation coverage before the start of that period. Due to the COVID-19 pandemic, the departments of Labor and Treasury provided relief — known as the Outbreak Period rules — to employer-sponsored group health plans and their participants from having to comply with certain deadlines, including those under applicable COBRA rules for notifying the group health plan of certain qualifying events or disability determination.⁴

Dental and vision coverage

COBRA premium assistance is available for COBRA continuation coverage of any group health plan, including dental-only and vision-only plans, but not health FSAs provided through a section 125 cafeteria plan. Eligibility for COBRA premium assistance ends when an individual becomes eligible for disqualifying group health plan coverage or Medicare.

The Q&As address whether eligibility for this disqualifying coverage ends premium assistance for dental-only and vision-only plans. If an AEI previously elected COBRA coverage with premium assistance for dental-only or vision-only coverage, the AEI will no longer be eligible for the premium assistance if he or she subsequently becomes eligible to enroll in other disqualifying group health plan coverage or Medicare, even if that other coverage does not provide dental or vision benefits.

Claiming the COBRA premium assistance tax credit

The “premium payee” for COBRA continuation coverage is eligible for the premium assistance tax credit. The premium payee is either (1) the multiemployer plan, (2) the common law employer maintaining the group health plan that provides coverage that is subject to federal COBRA (whether fully insured or self-insured), or (3) the insurer providing coverage under a fully insured plan subject to state continuation coverage requirements or “mini-COBRA.”

The Q&As cover who is entitled to claim the premium tax credit:

• Subject to certain exceptions, the common law employer maintaining the plan is entitled to claim the tax credit. The common law employer is the current common law employer for the individuals whose hours have been reduced or the former common law employer for those individuals who have been involuntarily terminated from employment.
• For a group health plan that is subject to federal COBRA and comparable state-mandated continuation coverage that extends beyond the applicable federal COBRA period, the common law employer is the premium payee who is entitled to claim the COBRA premium assistance tax credit. This is true even if the AEI would have been required to pay any required premiums directly to the insurer after the end of the federal COBRA period.
• If a plan (other than a multiemployer plan) subject to federal COBRA covers employees of two or more members of a controlled group, each common law employer that is a member of the controlled group is the premium payee entitled to claim the COBRA premium assistance tax credit with respect to its employees or former employees.
• If a group health plan (other than a multiemployer plan) subject to federal COBRA covers employees of two or more unrelated employers, the premium payee entitled to claim the premium assistance tax credit is the common law employer, unless an exception applies or there is a business reorganization.
• In regard to business reorganizations, if the selling group remains obligated under applicable COBRA rules to make COBRA continuation coverage available to M&A qualified beneficiaries after the sale, the entity in the selling group that maintains the group health plan is the premium payee entitled to claim the COBRA premium assistance tax credit. If the common law employer (which may be an entity in the buying group) is not obligated to make COBRA continuation coverage available, the common law employer is not entitled to the COBRA premium assistance tax credit after the business reorganization.

The tax credit can be claimed on the federal payroll tax return, Form 941, Employer’s Quarterly Federal Tax Return. The deadline for the second quarter Form 941 was August 2, 2021.

Going forward

• Employers should review the Q&As in Notice 2021-46 to ensure that they have completely captured everyone who is potentially an AEI and provided them with the required notices.
• Employers should be sure that their COBRA materials regarding ARPA clearly explain when an individual ceases to be an AEI.
• Employers should ensure that they understand who is entitled to claim the tax credit and are properly completing Form 941.

Footnotes

¹ See “Health and benefit implications of ARPA,” Insider, March 2021.

² See “DOL issues ARPA COBRA subsidy model notices and FAQs,” Insider, April 2021.

³ See “IRS issues guidance on ARPA COBRA premium assistance,” Insider, June 2021.

⁴ See “DOL guidance on end of COVID-19 ‘Outbreak Period,” Insider, March 2021.