IRS Issues Much Needed COBRA Guidance
On May 18, 2021, the IRS furnished much-needed guidance to employers on how to implement the COBRA premium subsidy provisions under the American Rescue Plan Act (ARPA). Notice 2021-31 includes more than seven dozen Q&As, which cover topics including eligibility requirements, applicable coverage periods and limitations, and notice and election procedures.
As summarized in our prior post, ARPA includes a 100% COBRA premium subsidy for “assistance eligible individuals” who elect (or who previously elected) COBRA continuation coverage for the period from April 1, 2021 through September 30, 2021. “Assistance eligible individuals” are generally those whose terminations occur as a result of an involuntary termination of employment (other than due to gross misconduct, for which COBRA is not available) or due to a reduction of hours.
ARPA provides that, by May 31, 2021, employers are required to distribute a notice regarding the COBRA premium subsidies to “assistance eligible individuals.” Given the May 31 deadline, employers were anxiously awaiting guidance from the IRS on many of the aspects of the COBRA premium subsidies. Pending issuance of guidance by the IRS under ARPA, many looked to the guidance that was issued to implement the 2009 American Recovery and Reinvestment Act (ARRA) COBRA subsidy for some indication of how the IRS might interpret ARPA’s provisions. Fortunately, much of the ARPA guidance—particularly relating to what constitutes an involuntary termination of employment—is consistent with that prior ARRA guidance.
Generally, Notice 2021-31 provides that a termination is involuntary if it is 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.” However, the Q&As contained detailed examples about various types of terminations, and employers should consult with their advisors and counsel to determine whether any specific termination may be considered involuntary. For example, a retirement could be considered involuntary if an employee had knowledge that he or would be terminated absent the retirement; a resignation due to material change of geographic location is considered an involuntary termination.
Notice 2021-31 also describes how to calculate the amount of any premium subsidy, including for individuals who are receiving partially or fully subsidized COBRA coverage. Eligibility for assistance, and the amount of the subsidy, is apparently based on the amount of the COBRA premium charged to the individual, meaning that if an employer provided fully subsidized COBRA at no cost to an involuntarily terminated employee, no subsidy (or tax credit) would be available. The Q&As do not directly address how to treat an assistance eligible individual who was provided a taxable amount in cash that related to, but was not required to be used for, COBRA (such as a cash lump sum or installments equal to the cost of COBRA for a specified period). However, under the principles outlined in Notice 2021-31, such an assistance eligible individual would be eligible for a COBRA premium subsidy (because he or she would still be charged in full for COBRA), and the employer (or other eligible person) would be eligible for the refundable tax credit.
The Q&As also answered questions about the extended timeframes that currently apply to COBRA elections and premium payments due to the COVID-19 pandemic. Most critically, the IRS confirmed that notwithstanding those extended timeframes, individuals eligible for a COBRA premium subsidy under ARPA must elect COBRA coverage within 60 days after the COBRA notice is provided.
Employers (and other eligible persons) will typically claim the refundable tax credit for the subsidy on their Form 941. While Form 941 has not yet been updated to reflect ARPA, we expect revised forms will be issued shortly—again, likely along the same lines as the revised Form 941 utilized for the 2009 ARRA COBRA subsidy.
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