By: HUB’s EB Compliance Team

The American Rescue Plan Act’s (ARPA) federally-funded, 100 percent COBRA subsidy has generated much attention -- and perhaps even more questions. While some questions are answered in the recently-issued IRS guidance, when it comes to notice issues the April 7, 2021 Department of Labor FAQ, and the agency’s newly-issued model notices, offer valuable insight.

Who needs to receive the Notices in connection with ARPA’s Extended Election Period? 

Among the DOL’s five new model documents, some employers may find notifying certain individuals of their “second bite at the apple” COBRA opportunity, the most challenging ARPA task. This is because the model “Extended Election Period” notice must be provided to designated individuals who lost coverage within a mandated “look-back” period. 

The look-back obligation directs that the employer notify anyone (employee and/or family members) that lost health coverage from November 1, 2019 to March 31, 2021 due to the covered employee’s involuntary termination or reduction in hours, and failed to elect, or elected and then subsequently lost COBRA. In other words, these individuals must all get a second chance to elect COBRA as long as they satisfy ARPA-eligibility conditions. This does not apply to other qualifying events (such as a child aging off health plan coverage eligibility, or a spouse losing health coverage due to a divorce). The “Summary of COBRA Premium Assistance Provisions Under the American Rescue Plan Act of 2021” (which generally explains subsidy rules and potentially subsidy-disqualifying eligibility) must accompany the Extended Election Period notice.

By contrast, the updated “Model ARPA General Notice and Election Notice” must be provided to anyone experiencing a COBRA Qualifying Event for any reason from April 1, 2021 through September 30, 2021.  The Model ARPA General Notice must also include the “Summary of COBRA Premium Assistance Provisions Under the American Rescue Plan Act of 2021.” This means all individuals who become eligible for COBRA from April 1 through September 30 have to receive information about the subsidy, even though only subsidy-eligible individuals (sometimes called “assistance eligible individuals” or “AEIs”) are entitled to receive “free” COBRA. The DOL’s recent FAQ specifically warns that failure to use the newly-issued model-notices subjects an employer to COBRA notice penalties. 

Do I need to send a notice to someone who I know has Medicare, or who I know is Medicare aged / eligible (or who I know has or is eligible for other group health coverage)? 

Even though Medicare (or group health plan) eligibility makes someone ineligible for the subsidy, the Model ARPA General Notice and Election Notice and Extended Election Period Notice should be sent to all applicable employees identified above to satisfy COBRA notification responsibilities. Failure to send the notice could result in penalties.

That said, if an individual claims to be an AEI when the employer reasonably believes the person is currently eligible for other coverage, or Medicare (and therefore not subsidy-eligible), the employer should request additional proof and document all correspondence with the individual. Proof is important since improperly obtained subsidy-related tax credits will likely need to be repaid. 

If we just went through a business re-organization transaction, who is responsible for sending the ARPA notices and offering subsidized coverage?

The short answer is that the party that’s responsible for offering COBRA following the transaction should provide the ARPA notices and the subsidy.    

The general COBRA rule is that, unless the purchase and sale agreement specifies otherwise, COBRA duties remain with the seller to the extent that the seller continues to maintain any group health plan. For this purpose, this includes any plan sponsored by another entity inside the seller’s control group (if applicable). In that case, the seller would be responsible for providing COBRA and the subsidy.

On the other hand, if the seller (and all the members of its controlled group) ceases to offer any group health plan, then the obligation to offer COBRA shifts to the buyer (this phenomenon is sometimes referred to as “springing COBRA liability” if the seller terminates its plan after the closing). In this case, the buyer would be responsible for providing COBRA and the subsidy.

In addition, applicable regulations notably distinguish stock and asset purchase transactions in the COBRA context. 

  • Stock/Equity Transaction: In a stock/equity purchase, a qualifying event that triggers a right to elect COBRA does NOT occur for an individual that retains his or her job position (e.g. the person continues working at the “same desk”). From a legal perspective, the individual is an “ongoing employee” that never separated from the employer. Even if the incoming buyer failed to offer the “same-desk” worker any health coverage at all, the “loss of coverage” that coincides with the transaction does NOT (by itself) relate to a termination of employment (or hours reduction). 
  • Asset Purchase Transaction: The analysis in an asset transaction requires a few more steps. First, the buyer must be a “successor” employer, which generally means the buyer is continuing the seller’s business without interruption or substantial change. If that is true, then a COBRA qualifying event for the seller’s health plan DOES occur for anyone who continues working at the same-desk even if the incoming buyer extends a health coverage offer that avoids a loss of health coverage. The reason: a termination of employment with the seller has technically occurred that “severs” the individual’s connection with the seller as an employee, and as a plan participant.   

With regard to the subsidy, if the buyer offers coverage to the seller’s employees that it hires right at the closing, then those employees would not be AEIs. The eligibility for new employer-provided coverage from the buyer automatically extinguishes subsidy eligibility. That means, even if COBRA is triggered following an asset transaction, FREE continuation health coverage is unavailable. 

However, there are some limited circumstances where the seller’s former employees may elect COBRA to get the subsidy. For example, if the successor employer treats the “same desk” individual as a “new hire” and imposes a waiting period, then the person is potentially an AEI and subsidy-eligible during the waiting period. Similarly, if the successor employer puts an individual into a variable-hour measurement period (as directed for certain employees under the Affordable Care Act employer mandate), then the individual could also be an AEI following the transaction because the employee is not eligible for the buyer’s coverage during the variable hour employee’s initial measurement period.  

There are additional nuances for determining which party is required to offer COBRA (and the accompanying subsidy). For example, as noted above, the seller and buyer can agree to different results in the purchase agreement. HUB International’s white paper “Employee Benefits Considerations in Mergers & Acquisitions” provides further detail about COBRA and related considerations in connection with such transactions. Existing guidance does not address whether the obligation to offer the subsidy can also be allocated by contract, although it would likely follow the obligation to offer COBRA.  

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only, and is not intended to constitute legal or tax advice as to an organization’s specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your organization’s particular needs.