By: HUB’s EB Compliance Team
As we previously discussed, the American Rescue Plan Act (“ARPA”), included the 100% federal subsidy for COBRA and continuation coverage under state mini-COBRA laws from April 1, 2021 through September 30, 2021. (For the sake of clarity, we will refer only to COBRA, although some of the rules apply to both.) As is often the case with legislative language, the release of ARPA led to a wave of questions on how the subsidy works. To address these questions, the Department of Labor (“DOL”) released an FAQ and model notices.
Initial Subsidy Eligibility
To be an Assistance Eligible Individual (“AEI”), an employee must experience either an involuntary termination of employment (other than for gross misconduct) or a reduction of hours of employment resulting in the loss of coverage. The FAQs aren’t clear as to whether a reduction of hours resulting in the loss of coverage could in fact be voluntary. The following examples are provided as reasons for reductions of hours that, if they resulted in a loss of coverage, would qualify for the subsidy; reduced hours due to change in a business’s hours of operations, a change from full-time to part-time status, taking of a temporary leave of absence, or an individual’s participation in a lawful labor strike, as long as the individual remains an employee at the time that hours are reduced. More guidance from the DOL or Treasury on this, as well as a more precise definition of “involuntary termination” would be helpful.
As is always the case with COBRA, to receive the COBRA premium subsidy, individuals must actually elect COBRA – either at the time of the original qualifying event or during the new April – May, 2021 election period.
An AEI who is eligible for other group health coverage, such as through a new employer’s plan, a spouse’s plan or Medicare (“Disqualifying Coverage”), is not eligible for a COBRA subsidy. The Disqualifying Coverage does not require the AEI’s actual enrollment. Mere eligibility is enough to disqualify the AEI from the subsidy. Other group health coverage does not include plans that only provide excepted benefits, qualified small employer health reimbursement arrangements (“QSEHRAs”), or health flexible spending arrangements (“FSAs”).
Individual insurance plan coverage, such as plans offered on the marketplace exchange as well as Medicaid do not preclude subsidy eligibility. Individuals who receive both a COBRA subsidy and premium tax credits from the marketplace exchange for the same period of time may need to repay the premium tax credits.
Ongoing Subsidy Eligibility
The subsidy period runs from April 1, 2021 through September 30, 2021 (the “Subsidy Period”), however ARPA does not guarantee those who are initially eligible for a subsidy will remain eligible for this entire period. Accordingly, subsidy eligibility can be lost if COBRA eligibility ends during the Subsidy Period and/or if an individual becomes eligible for Disqualifying Coverage.
Individuals are responsible for notifying their plans if they become eligible for other group health coverage or Medicare while receiving a subsidy. Failure to do so may result in a tax penalty for the individual. Penalties range from $250 up to 110% of the amount of the subsidy received after eligibility has been lost.
The COBRA subsidy applies to all group health plans (including medical, prescription drug, dental and vision plans) sponsored by private-sector employers or employee organizations (such as unions) subject to the COBRA rules under the Employee Retirement Income Security Act of 1974 (“ERISA”). The subsidy also applies to plans sponsored by state or local governments subject to the continuation provisions under the Public Health Service Act (“PHSA”).
The subsidy also applies to group health insurance required under state mini-COBRA laws. While not all states have mini-COBRA laws, small employers (those with less than 20 employees), who are not subject to federal COBRA, need to be aware that state mini-COBRA may still apply to their plans. Notably, the availability of the subsidy does not change or otherwise modify any provisions of state mini-COBRA laws. As such, eligibility for subsidies under state mini-COBRA laws only applies to individuals in their initial state COBRA election period, those currently enrolled in state mini-COBRA and those who experience a COBRA Qualifying Event during the Subsidy Periods. Small employers subject to mini-COBRA laws are not required to “look back” to previous terminations or reductions of hours (federal COBRA employers must “look back” to November 2019 to identify AEIs).
AEIs will not receive a direct subsidy payment. Instead, AEIs will not be required to pay any portion of the COBRA premium during the subsidy period. The subsidy amount includes the 2% administrative fee typically included in COBRA premiums. Employers and plan sponsors who pay a Third Party Administrator (“TPA”) to administer their COBRA will need to work with the TPA to determine how the administrative fee will be paid.
It’s likely that many AEIs have already paid their April COBRA premium. AEIs who have already paid COBRA premiums during the Subsidy Period will be entitled to a refund or receive a credit toward future COBRA premiums. Employers and plan sponsors should determine how they will handle premiums already paid and be consistent in their approach. When determining their approach employers must consider the balance between the administrative work involved with providing refunds, and the possibility that some individuals may not wish to continue COBRA after the subsidy ends.
Generally, individuals who are eligible for COBRA have 60 days after the date that they initially receive their COBRA election notice to elect COBRA. However, due to the COVID-19 National Emergency, the Outbreak Period substantially extended the amount of time individuals have to elect COBRA. Just as with the normal COBRA election period, the duration of the Outbreak Period is tied to when the COBRA qualifying event occurred.
AEI’s who originally failed to elect COBRA and/or allowed their coverage to lapse now have a new opportunity to elect COBRA. These individuals must be provided the Notice of Extended Election Period (see below). AEIs have just 60-days from the receipt of the Notice of Extended Election Period to enroll in COBRA, or forfeit their right to the subsidy. Although the Outbreak Period provides additional time, perhaps beyond September 30, 2021 to elect COBRA, it does not apply to the extended election period under ARPA. In other words, the extended election period is limited to 60 days from the date notice is provided, and the outbreak period does not provide an additional benefit here. The effect of this is that the timing of the COBRA election matters, and failure to elect COBRA in a timely manner could result in the AEI retaining the ability to elect COBRA but forfeiting their right to a subsidy.
Coverage under this new election period will begin on April 1, 2021 for those whose COBRA qualifying event occurred before this date.
State mini-COBRA laws vary in the amount of time they provide eligible individuals to elect coverage. The Outbreak Period and new 60 day extended election period under ARPA applicable to federal COBRA, do not apply to state mini-COBRA. ARPA does not extend election periods under state mini-COBRA laws. Employers subject to state mini-COBRA should familiarize themselves with their state’s mini-COBRA rules.
Perhaps the most important piece for employers to understand are the plethora of notices that need to be provided regarding the COBRA subsidy.
- A General Notice which includes an updated COBRA Election Notice must be provided to individuals experiencing a COBRA qualifying event on or after April 1,2021 through September 30,2021. The General Notice must also include the Summary of the COBRA Premium Assistance Provisions Notice described below.
- A Notice of Extended Election Period must be provided to any AEI (or any individual who would be eligible if a COBRA continuation coverage election were in effect) who had a qualifying event before April 1, 2021. Individuals who would have exhausted their COBRA eligibility before April 1, 2021 (generally, those with COBRA qualifying events before October 1, 2019), if COBRA had been elected or not discontinued, do not need to receive this notice. Where required, this notice must be provided not later than May 31, 2021.
- A Notice of Subsidy Expiration must be provided at least 15, but no more than 45 days before the individual’s subsidy ends. This notice must explain that the subsidy will expire soon, the date of the expiration, and that the individual may be eligible for coverage without any premium assistance through COBRA, under a group health plan, Medicaid or the marketplace exchange.
- The Summary of the COBRA Premium Assistance Provisions must be included with the new General Notice and the Notice of Extended Election Period. Note this document includes the Request for Treatment as an Assistance Eligible Individual, which must be completed by the COBRA qualified beneficiaries before granting the individual access to COBRA premium subsidies.
Employers who fail to provide these notices could be subject to excise taxes for failing to satisfy the COBRA continuation coverage requirements under the Internal Revenue Code. These taxes may be as much as $100 per qualified beneficiary, but capped at $200 per family, for each day that the employer is in violation of the COBRA rules.
ARPA and Exchange Coverage
AEIs may be enrolled in coverage through the marketplace exchange today and wish to drop this coverage in favor of COBRA due to the subsidy. The FAQ confirms AEIs can terminate enrollment in marketplace exchange coverage (or an off-exchange individual plan) and elect to enroll in COBRA in order to receive the COBRA subsidy. In addition, AEIs will have the right to re-enroll in marketplace exchange coverage or an individual insurance plan once the COBRA premium subsidy ends.
While this is extremely beneficial from a premium perspective for AEIs, they are well served to consider the impact changing plans mid-year will have on their out-of-pocket costs, particularly the reset of any amounts paid towards deductibles and out-of-pocket maximums. Any monetary advantage an AEI could receive via a COBRA subsidy, could quickly disappear once out-of-pocket costs are taken into consideration.
- Employers should compile a list of employees who were involuntarily terminated or experienced a reduction of hours of employment on or after November 1, 2019 (this applies to employers subject to federal COBRA only). Employers subject to state mini-COBRA laws should capture a list of employees who are in their mini-COBRA election period under state law or who enrolled in state mini-COBRA.
- Employers who outsource their COBRA administration should confirm the TPA will be issuing the Notice in Connection with Extended Election Period to all AEIs who did not elect COBRA on or after November 1, 2019 or the date of the COBRA qualifying event (if later). If the TPA will not be issuing the Notice, the employer should be prepared to issue the notice no later than May 31,2021. For state mini-COBRA, the employer should contact the carrier (if the carrier administers state mini-COBRA) to confirm who will be distributing the notices.
- Employers working with their COBRA TPAs should identify COBRA qualified beneficiaries who paid their COBRA premiums for April 2021, and reimburse the COBRA premiums or determine if premiums paid will be credited towards a future month once the individual submits a signed Request for Treatment as an Assistance Eligible Individual certifying they do not have access to other group health coverage or Medicare.
- Employers should discuss with their COBRA TPAs how the TPA will notify the employer of COBRA qualified beneficiaries and their eligible family members electing COBRA coverage and when individuals certify they are AEIs. The employer must develop an open line of communication with their COBRA TPA, as employers will most likely pay premiums to carriers and will need to know when a COBRA qualified beneficiary ceases to be eligible for COBRA premium subsidies.
- Employers should also consider the impact that an increase in covered number of lives (COBRA qualified beneficiaries) will have on their plans and their utilization. Insurance carriers and stop-loss carriers reserve the right to rerate plans when there is an increase in the number of covered lives (usually 10% or more), especially if those covered lives are COBRA qualified beneficiaries.
While the FAQs are helpful, there are still many unanswered questions, including some raised by the FAQ itself. As is often the case, agency guidance may be issued in multiple parts. Notably, these FAQs were issued by the DOL and many unanswered questions fall under the purvey of Treasury and the IRS.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.