ARPA & COBRA obligations: We have only just begun

Not since 2009 has a plan administrator had such an active role to plan in the administration of COBRA.

Importantly, small employers are not required to “look back” to past terminations or reductions of hours the way employers with 20 or more employees are required to do.

Benefits brokers who consult with plan administrators of employer-sponsored group health plans, will need to ready clients for the multiple phases that will follow receipt of qualified beneficiaries’ American Rescue Plan Act (“ARPA”) subsidy elections, which will start rolling in during the next month. Not since 2009 has a plan administrator had such an active role to plan in the administration of COBRA.

Background

The ARPA, included the 100% federal subsidy for COBRA and continuation coverage under state mini-COBRA laws for the period of April 1, 2021 through September 30, 2021. (For the sake of clarity, we will refer only to federal COBRA, although some of the rules also apply to state continuation.) 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. The Treasury Department and IRS released 86 FAQs in Notice 2021-31.

Related: COBRA changes under the American Rescue Plan Act of 2021

Jack McStravock is the Chief Compliance Officer for global insurance brokerage HUB International. He provides ongoing review, analysis, guidance, and assistance with both federal and state insurance laws to support internal HUB colleagues and external clients on health and welfare compliance-related matters.

This guidance explains that the 100% federal subsidy is only available to an employee who experiences either an involuntary termination of employment (other than for gross misconduct) or a reduction of hours of employment resulting in the loss of coverage. These employees or former employees are identified as Assistance Eligible Individuals (“AEI”). In addition, the beneficiaries of the AEIs are also eligible for subsidized coverage. As is always the case with COBRA, to receive the COBRA premium subsidy, individuals must elect COBRA – either at the time of the original qualifying event or during the new election period.

Phase 1: The notice

Sending the ARP COBRA notice not as simple as setting up a mail-merge and mass-mailing a single notice to all affected former employees by May 31, 2021!

The DOL painstakingly created a set of five separate Notices. To determine which election Notice to send, the plan administrator had to know 1.) the reason for the QE and 2.) the date of the QE. Knowing this information helps the client zero in on the type of qualified beneficiary, which leads to the use of the appropriate Notice. To understand what questions clients will have for brokers in the next month, one must first understand what was communicated to qualified beneficiaries in the notices. Let’s break it down.

1. General Notice - an updated COBRA Election Notice provided to new AEIs who experience a COBRA qualifying event on or after April 1, 2021, and through September 30, 2021.

2. Notice of Extended Election Period must be provided to any AEI within their maximum coverage period, who experienced a COBRA qualifying event after November 2019 and before March 30, 2021, who:

3. In the case of each of the above notices, the plan administrator must also send a Summary of the COBRA Premium Assistance Provisions and Request for Treatment as an Assistance Eligible Individual. This form is completed by the potential AEI to formerly request and explain why they should be treated as an AEI so they may receive subsidized COBRA coverage for themselves and their qualified beneficiaries. The form plays an important role in the actions taken by plan administrator in the next several phases of administering the ARP COBRA subsidy program.

4. Model Alternative Notice of ARP Continuation Coverage Election Notice. The DOL has released this “alternative” Model Notice for distribution by employers with 19 or fewer employees. These employers are not subject to federal COBRA and Election rights under state COBRA-like laws (mini-COBRA laws) are different. This notice is for use by fully insured plans subject to state continuation requirements between April 1, 2021 and September 30, 2021. These employers are not subject to federal COBRA. The subsidy is available only to those who:

Importantly, small employers are not required to “look back” to past terminations or reductions of hours the way employers with 20 or more employees are required to do. Also, carriers, not employers, are responsible for providing and paying for the subsidized COBRA coverage under state continuation.

5. Notice of Subsidy Expiration. This notice explains that, among other things, the subsidized coverage is about to end. It is sent between 15-45 days before their premium assistance expires. Importantly, satisfying this obligation is not as simple as queuing up a mass mail-merge for everyone on subsidized coverage and sending it on September 15th. Instead, the subsidized coverage will end at different times for different COBRA participants. In addition to the AEIs whose coverage will end on September 30th, this Notice is also sent when an AEI:

The plan administrator was to deliver the Notice using measures reasonably calculated to ensure actual receipt of the material. If a qualified beneficiary sues the plan administrator for failure to offer COBRA coverage, it will be the plan administrator who has the burden of proof to demonstrate that the election notice was properly sent. Employers who failed 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.

Phase 2: COBRA elections – Qualification and disqualifications

Generally, individuals who are eligible for COBRA have 60 days after the date that they initially receive their COBRA election notice to elect COBRA. State mini-COBRA laws vary in the amount of time they provide eligible individuals to elect coverage. The plan administrator or COBRA vendor will need to convert affirmative elections into bound coverage. But before they can do that, they must first carefully review the Request for Treatment as an Assistance Eligible Individual, to match requests against the list of the employer’s previously identified AEIs.

The Q&As clarify that even an employee-initiated termination will be considered involuntary if the employee resigns, retires or a contract is not renewed, if the employee’s action was due to the employer’s action that: caused a material negative change in the employment relationship; forced the termination of the employee; or not to renew an employee’s contract to be considered an involuntary termination, if the employee was willing and able to continue the employment relationship and willing to execute a new contract with similar terms. An employee’s death also does not qualify as an involuntary termination for ARP purposes.

The Q&As also make clear, that an involuntary termination generally does not include a termination by the employee due to concerns about workplace safety; the health condition of the employee or a family member; the inability to locate daycare; or the inability of a child to attend school or because another childcare facility is closed due to the COVID-19 pandemic, however, that termination may qualify as a reduction in hours under the right circumstances.

Ultimately, the employer documents the final decision in the space provided on the form.

In addition to being asked whether they want to be treated as an AEI, the qualified beneficiary will also have to attest whether they have other disqualifying coverage, such as employer provided group health coverage or Medicare. 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 for other coverage is enough to disqualify the AEI from the subsidy. If the individual fraudulently fails to disclose this other coverage to the group health plan, the individual is subject to a penalty equal to the greater of $250 or 110 percent of the premium assistance improperly received COBRA premium assistance.

If COBRA subsidized coverage is denied, because the requestor is not an AEI or because they have other disqualifying coverage, it makes sense to send the qualified beneficiaries a Notice of Unavailability of Continuation Coverage Group within 14 days after the request is received to explain the reason for denying the request. A plan is not required to provide such a notice; however, many plans elect to do so to avoid confusion, minimize calls, and to limit potential liability.

This Request for Treatment as an Assistance Eligible Individual is very important to 1.) document the actions the employer took relative to each person sent a notice; and, as we will see in the Tax Credit Phase, 2.) as evidence to support a claim for a tax credit.

Phase 3: Claiming the tax credit

Employers will receive a tax credit against its share of Medicare payroll taxes for the subsidized premium amount paid between April and September 2021. While the activity of claiming the tax credit will happen later in 2021, employers should become familiar now with the process and justifications that may be needed later to support the claim.

IRS Notice 2021-31 clarifies that the “premium amount” includes any administrative costs typically permitted to be charged with respect to COBRA continuation coverage. The equivalent of the COBRA subsidies paid, will be repaid to the plan sponsor as a credit against quarterly Medicare payroll taxes, using Form 941.

This will not be a simple task, so it is important not to wait until the time of filing to coordinate with others to gather the information needed to file. To be able to claim the tax credit, the employer must first know how much they paid or are projected to pay in COBRA subsidies. This will require communication with the COBRA vendor or accounts payable for plans that self-administer COBRA. The employer will also have to know what it owes in quarterly Medicare payroll taxes.

To obtain this information coordination and communication will be required between payroll/payroll provider and the employer’s tax advisor. The tax advisor will prepare the Form 941. IRS Notice 2021-31 includes extensive guidance on claiming the credit for those using third-party payers. Generally, refund is due within 60 days, but DOL guidance contemplates that it could be applied to future payments. For state mini-COBRA, the credit is claimed by the carrier.

It is important to understand that an employer cannot claim the tax credit if they are subsidizing COBRA themselves (such as in a severance agreement). (Q&A-64) Some employers rushed to adjust such agreements to defer their COBRA funding until after the ARPA program concludes and the IRS failed to describe whether such changes affected subsidy payments. If an employer receives a premium payment from a subsidy-eligible individual for coverage during the subsidy period of April-September 2021, the employer cannot claim the credit until the employer reimburses the individual. (Q&A-85).

It is clear, we have only just begun to ready clients for the multiple phases that will follow receipt of qualified beneficiaries’ COBRA subsidy elections, which will start rolling in during the next month.

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