IRS Issues New COBRA Subsidy Guidance as Deadlines Approach

The IRS recently provided follow-up guidance for employers on the federal government's 100-percent premium subsidy for eligible COBRA health care enrollees, enacted earlier this year as part of the American Rescue Plan Act (ARPA). The subsidy is available for assistance eligible individuals (AEIs) for COBRA coverage between April 1 and Sept. 30.

Meanwhile, for many AEIs, the 60-day sign-up period for the COBRA subsidy, which began after they received a subsidy notice, has ended. COBRA administrators should also prepare to send a final notice informing subsidy recipients that this assistance ends on Sept. 30.

Notices and Deadlines

Under U.S. Department of Labor guidance issued in April, most AEIs should have been sent an updated COBRA notice by May 31 informing them about the subsidy.

For AEIs who lost their jobs before April 1, "the window to take advantage of the subsidized coverage" closed by July 31 if they received the required notice by the May 31 deadline, reported Kaiser Health News.

AEIs who lost their jobs after April 1 would still qualify for the subsidy through Sept. 30, and the usual COBRA notification deadlines would apply:

• Employers subject to COBRA requirements are required to notify their group health plan administrator within 30 days after an employee's employment ends or their employment hours are reduced.
  

• Within 14 days of that notification, the plan administrator is required to notify the individual of the individual's COBRA rights. If the employer also is the plan administrator and issues COBRA notices directly, the employer has the entire 44-day period in which to issue a COBRA election notice.

AEIs, on receiving notice, would have 60 days to respond, although the Sept. 30 COBRA subsidy termination could fall within that period for those receiving COBRA notifications.

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Subsidy Expiration Notices

The ARPA also requires that health plans provide AEIs with a Notice of Expiration of Premium Assistance that explains the subsidy will expire soon for them—either because their COBRA eligibility has reached its maximum time limit (generally 18 months) or because the subsidy period is ending as of Sept. 30, although former employees may still be eligible for COBRA coverage without any premium assistance after that date.

Group health plans should send the expiration notice to AEIs 15 to 45 days before their premium assistance expires. For AEIs whose coverage expires with the Sept. 30 end of the subsidy period, notices should be sent between Aug. 16 and Sept. 15.

New Guidance

IRS Notice 2021-46, released on July 25, supplements prior guidance under Notice 2021-31 and addresses issues about eligibility for and implementation of the subsidy.

"The Q&A guidance is intended to help employers and their COBRA vendors/third-party administrators determine who is an [AEI], calculate the premiums for tax credit purposes and claim such credits," according to regulatory advisors at Willis Towers Watson. "Employer plan sponsors should review the Q&As in the IRS notice and discuss their implications with their carriers/third-party administrators as soon as possible."

The guidance "contains some unexpected surprises, which is unfortunate because plans and issuers have spent the past few months implementing the subsidy in good faith based on the statute and guidance in Notice 2021-31," attorneys at Groom Law Group in Washington, D.C., noted. For example, the attorneys wrote, "certain insurers and plan sponsors that thought they would qualify as premium payees, and thus be eligible to claim the tax credit, may no longer be able to."

Below are key issues that the new guidance addresses:

Eligibility issues

The notice states, for the first time, that if AEIs' original 18-month COBRA continuation coverage expires, but they are entitled to elect extended continuation coverage, they can still qualify for the subsidy for the extended period of coverage if it falls between April 1, 2021 and Sept. 30, 2021.

"An AEI might be eligible for extended continuation coverage due to a disability determination, second qualifying event, or an extension under State mini-COBRA," the Groom attorneys wrote.

In the new guidance, explained advisors at TRI-AD, an employee benefits administration firm:

"... the IRS has indicated that all individuals who still have a right to enroll in COBRA and/or make COBRA payments between April 1, 2021–Sept. 30, 2021, are eligible for the subsidy, unless eligible for other major group health coverage or Medicare. ... In other words, they don't need to be currently enrolled in COBRA and making payments. This may require employers to offer these AEIs COBRA coverage and the subsidy if the employer or plan administrator are notified by these individuals of such events."

In its earlier Notice 2021-31, the IRS took the more-limited position that individuals who incurred a second qualifying event or disability "and remained on COBRA" were eligible for the subsidy, TRI-AD noted.

Dental and vision coverage

The notice clarifies that if an AEI previously elected COBRA continuation coverage for dental-only or vision-only coverage, their subsidy eligibility ends when the AEI becomes eligible for any other disqualifying group health plan or Medicare, even if the new coverage does not include dental or vision coverage.

In its prior guidance, "the IRS did not specifically address whether an AEI is eligible for the subsidy for dental and vision if they are eligible for major health coverage or Medicare," TRI-AD pointed out.

State continuation coverage

The notice confirms that individual-state continuation coverage provides comparable coverage to COBRA continuation coverage (and thus permits AEIs to access the subsidy) even if the state program only covers a subset of state residents.

The notice additionally provides that if a plan is subject to both state-mandated continuation coverage and federal COBRA, the employer is the "premium payee" eligible to claim the tax credit and not the insurer—even if the state-mandated continuation coverage requires the AEI to pay premiums directly to the insurer after the period of federal COBRA ends.

Claiming the tax credit

The notice also provides further technical guidance on claiming the tax credit in connection with the subsidy.

To claim the premium assistance credit, employers should report the credit and number of individuals receiving assistance on their federal employment tax returns, usually Form 941, which is generally due by the last day of the month following the end of the current quarter.

Some employers "now may need to make amendments … to their Form 941 filings," Groom Law Group noted.