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IRS Releases New Guidance Regarding Who Is Eligible for the American Rescue Plan Act’s COBRA Subsidy
On March 11, 2021, the President signed the American Rescue Plan Act of 2021 (“ARPA”) into law. ARPA shifts who pays for Consolidated Omnibus Budget Reconciliation Act (“COBRA”) continuation health coverage. Before ARPA, individuals were required to pay 100% of their own COBRA premiums, plus an administrative fee up to 2%. From April 1 to September 30, 2021, the ARPA requires employers to provide COBRA coverage to “Assistance Eligible Individuals” (AEI) at no cost to the individual, a rule known as the “COBRA subsidy.”
Generally, an AEI means an individual who:
- has lost coverage under an employer-sponsored health, dental, or vision plan due to a reduction in hours or an involuntary termination;
- is within their initial 18-month COBRA coverage period (i.e., the loss of coverage must have occurred after October 1, 2019); and
- is not eligible for other group health coverage or Medicare.
The COBRA subsidy applies to plans sponsored by State or local governments, including small governmental employers (i.e., < 20 employees) that are exempt from federal COBRA but subject to Cal-COBRA. Employers must pay the subsidy but can subsequently recover the subsidy via federal tax credits.
What Notices Must Employers Provide to AEIs and By When?
By May 31, 2021, employers must provide notice of the COBRA subsidy (and certain other COBRA rights under ARPA) to AEIs who first became eligible to elect COBRA before April 1, 2021and have not reached the maximum period for their COBRA coverage (18 months) and/or did not elect COBRA coverage when it was first offered. For example, if an employee was involuntarily terminated in August 2020 and did not elect COBRA coverage, he or she would still be within their COBRA coverage period and entitled to receive the COBRA notice for the extended election period. These AEIs then have 60 days after the notice is provided to elect COBRA coverage. The DOL has issued model notices and related guidance for this purpose—see DOL Model Notices; General Notice and COBRA Continuation Coverage Election Notice; Notice in Connection with Extended Election Periods.
Employers are also required to provide AEIs who experience a COBRA-qualifying event between April 1 and September 30, 2021 with a general ARPA COBRA notice to inform them of their rights for COBRA coverage and the COBRA subsidy.
Finally, employers must, within 15–45 days before an AEI’s subsidy expires, provide the AEI with notice of the subsidy’s expiration.
The following summarizes these notice requirements:
- By May 31, 2021: For AEIs who had qualifying event between Oct. 1, 2019, and April 1, 2021 (including individuals enrolled in COBRA, those who didn’t elect COBRA, and those who elected COBRA and later dropped), employer must provide notice of the premium subsidy and of a second chance to elect COBRA.
- Within customary 44-day period: For AEIs who have qualifying event between April 1 and September 30, 2021, employer must provide COBRA election notice with information about the availability of the premium subsidy.
- Within 15–45 days before subsidy expires: For AEIs whose subsidy will expire, whether because the AEI’s maximum COBRA continuation period is ending or the September 30th ending of the subsidy, employer must provide advance notice of the impending expiration of the subsidy.
For most employers, the third-party COBRA administrator will prepare and distribute the required notices. Employers, however, must identify which individuals are AEIs—and for the first above-described notice, employers must complete this identification process before May 31, 2021.
Which leads to the question: what constitutes an “involuntary termination” qualifying an individual for the COBRA subsidy as an AEI?
What Constitutes an Involuntary Termination?
The ARPA does not define what constitutes an “involuntary termination.” It states only that a “voluntary termination of such individual’s employment by such individual” does not qualify the individual for the COBRA subsidy.
To help employers understand the new tax credit for the COBRA subsidy, the IRS released guidance in Notice 2021-31 on May 18, 2021. Notice 2021-31 defines an “involuntary termination” as “a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services.” Notice 2021-31 emphasizes that whether a termination is involuntary is based on specific facts and circumstances.
Further, the Notice provides guidance regarding the following situations:
- Constructive/good reason termination. Involuntary termination encompasses an employee-initiated termination from employment, where the employee terminates due to employer action that causes a material negative change in the employment relationship for the employee. A material negative change includes a material reduction in hours. Furthermore, even if a termination is designated as voluntary, if the facts and circumstances indicate that, absent the voluntary termination, the employer would have terminated the employee and the employee had knowledge that he/she would have been terminated, the termination is involuntary.
- Employer’s decision not to renew an employee’s contract. Involuntary termination could include the employer’s failure to renew an employee’s contract upon its expiration, if the employee was willing and able to execute a new contract providing terms and conditions similar to those in the expiring contract and to continue providing the services.
- Generally, a retirement is a voluntary termination that does not result in eligibility for the COBRA subsidy. However, an involuntary termination may encompass retirement if, absent the retirement, the employer would have terminated the employee and the employee had knowledge that he/she would have been terminated.
- Illness or Disability. An involuntary termination includes an employer’s action to end an individual’s employment while the individual is absent from work due to illness or disability if there is a reasonable expectation that the employee will return to work after the illness or disability has subsided. An absence from work due to an illness or disability without an employer’s action to terminate may still result in an “involuntary termination” if the employee has an involuntary material reduction in hours and if the absence results in loss of health coverage.
- An involuntary termination includes a termination elected by the employee in exchange for a severance package where the employer indicates that after the offer period for the severance package, a certain number of remaining employees will be terminated.
- Concerns About Workplace Safety. If an employee ends employment due to general concerns about workplace safety, the separation is not generally treated as an involuntary termination. However, the termination would be involuntary if the employee can demonstrate that the employer’s actions or inactions resulted in a material negative change in the employment relationship, similar to a constructive discharge. A separation due to the employee’s personal circumstances unrelated to an employer’s actions or inactions, such as a health condition of the employee or a family member, will not be an involuntary termination.
- Child Care and School Unavailability. If an employee chooses to end employment because his/her child is unable to attend school or because childcare is not available due to COVID-19, the employee-initiated termination is not an involuntary termination.
While Notice 2021-31 provides guidance illustrating what constitutes an involuntary termination, the Notice does not cover all situations.
When Does an Elected Official Suffer an Involuntary Termination?
One question that public agencies may face is whether a former elected official who loses agency-sponsored health coverage is eligible for ARPA’s COBRA subsidy. Again, the answer will depend on the facts and circumstances. Applying the Notice 2021-31 guidance, we believe that the following outcomes are likely:
|Event causing coverage loss||Description||Is the official eligible for the COBRA subsidy as an AEI?|
|Lost reelection:||An elected official who loses a reelection bid in December 2020||Probably yes|
|Term limits||Due to term limits, an elected official cannot run for reelection in December 2020 due to term limits.||Probably yes|
|An elected official is eligible to run for reelection in December 2020, but decides not to||Probably no|
What About Involuntary Terminations for “Gross Misconduct”?
While employees are eligible for the COBRA subsidy when they are involuntarily terminated, one exception is that employees who are terminated for “gross misconduct” do not qualify for COBRA continuation coverage (and by extension, are ineligible for the COBRA subsidy). (See Notice 2021-31 and U.S. Department of Labor’s FAQs About COBRA Premium Assistance Under the American Rescue Plan Act of 2021.) The tricky thing is that neither COBRA nor the ARPA defines “gross misconduct”. The “gross misconduct” standard is a higher standard to meet than showing an individual was terminated for cause. Employers are advised to consult with legal counsel before denying a former employee COBRA continuation coverage and subsidy for a termination for gross misconduct.
What Constitutes a Reduction in Hours?
An individual is an AEI when they experience a reduction in hours—whether voluntary or involuntary—resulting in the loss of their employer-sponsored health coverage. The U.S. Department of Labor’s FAQs About COBRA Premium Assistance Under the American Rescue Plan Act of 2021 specifies that a reduction in hours includes reduced hours due to a change in a business’s hours of operations, a change from full-time to part-time status, taking 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 hours are reduced.
Notice 2021-31 clarifies that furloughs, which are a temporary loss of employment or a complete reduction in hours with a reasonable expectation of return to employment, may be a reduction in hours regardless of whether the employer initiated the furlough. A reduction in hours also includes a work stoppage, either as the result of a lawful strike initiated by employees or their representatives or a lockout initiated by the employer.
What About Other Reasons for Loss of Coverage?
Notice 2021-31 provides guidance that other reasons for loss of health coverage that do not stem from an involuntary termination of employment or a reduction in hours do not qualify for COBRA subsidy. For example, if a divorce or a dependent child who ceases to be a dependent child (such as due to aging out of eligibility) results in the loss of health coverage, these events are not involuntarily terminations of employment resulting in qualification for COBRA subsidy. Additionally, the death of an employee does not constitute an involuntary termination.
What Penalties Apply If an Employer Fails to Provide the Required Notice?
Employers are subject to an IRS penalty of $250 for each failure to provide the required notice. (Higher penalties apply if the failure is intentional, i.e., fraudulent.) Employers, however, can avoid penalty by demonstrating they the failure was due to reasonable cause and not willful neglect.
Has the IRS Issued Guidance Regarding Employer Tax Credits for Recovering COBRA Subsidies?
Generally, government employers will be eligible to claim COBRA premium assistance credits to recover the COBRA subsidies that have been paid for AEIs. The credit is allowed against the employer’s Medicare (HI) tax for the calendar quarter in which the premium assistance is provided. The credit cannot exceed the Medicare tax for the quarter. However, any excess credit is refundable, and government employers may apply for an advance on IRS Form 7200, “Advance Payment of Employer Credits Due to COVID-19”. (The IRS has recently released a revised draft of Form 7200 that includes a new line for the COBRA premium assistance tax credit.)
Caveat: As discussed herein, the ARPA was signed into law on March 11, 2021, requiring employers (including government agencies) to provide COBRA subsidies to AEIs. Government employers are then eligible to apply for offsetting tax credits. The COBRA subsidies and related credits will be accounted for on Form 941. The most recently published Form 941 and instructions were issued in March 2021 and are only to be used for the quarter ended March 31, 2021. This form does not discuss any provisions of the ARPA or IRS Notice 2021-31, and does not provide any lines or instructions related to COBRA subsidies and related tax credits. Government agencies will need to wait for future direction from the IRS, and Form 941 and instructions for the quarter ending June 30, 2021, for guidance on how to report COBRA subsidies and apply for related tax credits.
This Special Bulletin is published for the benefit of the clients of Liebert Cassidy Whitmore and attendees of the Government Tax Seminars, LLC. The information in this Special Bulletin should not be acted upon without professional advice. Employers are encouraged to discuss this with their own counsel/CPA.