Employee Benefits & Executive Compensation Blog

The View from Proskauer on Developments in the World of Employee Benefits, Executive Compensation & ERISA Litigation

Calculating the ARP COBRA Premium Subsidy Tax Credit

On May 18, 2021, the IRS released Notice 2021-31 (the “Notice”) providing guidance on the temporary 100% COBRA premium subsidy under the American Rescue Plan Act of 2021 (“ARP”), summarized generally here.  The Notice addresses how to calculate the premium subsidy and the corresponding tax credit available to premium payees, as well as the rules for claiming the tax credit.

Calculating the Tax Credit: Generally

The general COBRA rules provide that a group health plan may charge a qualified beneficiary 102% of the applicable premium for COBRA continuation coverage.  According to the Notice, if the employer does not subsidize COBRA premiums for similarly situated qualified beneficiaries who are not eligible for the subsidy, then the tax credit is equal to the full premium charged to other similarly situated qualified beneficiaries for COBRA continuation coverage.  Additionally, the Notice clarifies that the premium amount includes any administrative costs typically permitted to be charged with respect to COBRA continuation coverage.  Thus, if an employer does not provide a subsidy for COBRA continuation coverage, the employer may claim a tax credit for the full 102% of the applicable premium.

Effect of Employer Subsidies

If the employer subsidizes all or part of the COBRA premium for similarly situated individuals who are not eligible for the subsidy, the amount of the tax credit available to the employer is the premium that would have been charged to an assistance eligible individual in the absence of the premium subsidy.  The Notice clarifies that the tax credit does not include any amount that the employer would have otherwise subsidized.  For example, if the full COBRA cost for continuation coverage (102% of the applicable premium) is $1,000 per month, but the employer only charges terminated employees $250 per month, the tax credit is $250.

The amount of the credit varies based on how the employer structures its severance package.  As an example, assume 102% of the applicable premium is $1,000 per month, and the employer offers a 3-month period during which terminated employees may continue coverage for $200 per month, after which they must pay the full COBRA rate.  Based on the Notice, the analysis is as follows:

  • If the employer considers the 3-month period part of the terminated employee’s COBRA continuation period, the available credit is $200 per month during the 3-month period, and $1,000 per month thereafter.
  • If the employer considers the loss of health coverage and the beginning of the COBRA period to occur at the end of the 3-month severance period, then the employee is not entitled to the ARP premium subsidy during that period (because the coverage is not COBRA coverage) and the employer may not claim the credit. Once the severance period ends, if the former employee (who is an assistance eligible individual) elects COBRA coverage, the credit is $1,000 per month for the remainder of the subsidy period.

The Notice contemplates that employers may change their severance programs to take advantage of the subsidy/credit.  In addition, the Notice clarifies that an employer may claim the credit if it charges the full COBRA premium to all employees and qualified beneficiaries but makes a separate, taxable payment to assistance eligible individuals (i.e., pays a severance amount as taxable compensation rather than subsidizing COBRA as part of the severance packages).

How Much is the Premium Subsidy When Non-Qualified Beneficiaries are Covered?

An assistance eligible individual is any COBRA “qualified beneficiary” who loses group health coverage on account of a covered employee’s reduction in hours of employment or involuntary termination of employment.  COBRA’s definition of a “qualified beneficiary” includes only a covered employee and their spouse and dependent children who were covered under the health plan on the day before the COBRA qualifying event, as well as children born to or adopted by the employee during a period of COBRA coverage.  However, group health plans may extend “COBRA-like” coverage to family members who are not considered qualified beneficiaries (e.g., a domestic partner), and covered employees may add new spouses to their COBRA coverage in accordance with HIPAA’s special enrollment rules.  In such instances, the employer or plan administrator will need to determine what portion of the premium is eligible for the subsidy and how much it may claim as a tax credit.

The Notice confirms that the IRS uses an incremental approach when determining the amount eligible for the premium tax credit (and subsidy) in these situations.  If the cost of covering a non-qualified beneficiary does not add to the cost of covering the assistance-eligible individual(s), then the amount of the tax credit is the full COBRA premium.  If covering a non-qualified beneficiary adds to the cost of coverage, then the incremental cost to cover the non-qualified beneficiary is not eligible for the COBRA premium subsidy or the corresponding tax credit.

Example: An assistance eligible individual elects COBRA coverage for himself and all of his family members who were covered under the plan on the day before the qualifying event, which includes one dependent child and his domestic partner.  Under the terms of the plan, COBRA coverage for an employee plus-two-or-more-dependents costs $800 per month, and the COBRA premium is $600 per month for self-plus-one-dependent.  Accordingly, the incremental cost of covering the domestic partner is $200 per month.  As a result, the individual will pay $200 per month for COBRA coverage for his domestic partner, and the premium payee may claim the $600 per month as a payroll tax credit for the subsidy.

Takeaway

The Notice provides useful guidance on the calculation of the premium subsidy and the corresponding tax credits in various circumstances.  However, the calculations may be less than straightforward depending on the facts and circumstances, particularly where post-termination coverage is subsidized, or if the plan voluntarily provides continued coverage to individuals who are not otherwise qualified beneficiaries.  When in doubt, reach out to legal counsel for advice.

A Word from the IRS on Involuntary Terminations of Employment for Purposes of the ARP COBRA Premium Subsidy

One important question that arises when determining whether an individual is eligible for the COBRA premium subsidy under the American Rescue Plan Act of 2021 (“ARP”) is whether the employee has experienced an involuntary termination of employment.  (See our prior blogs on the ARP subsidy, here.) The IRS’s recent Notice 2021-31 (the “Notice”) provides helpful guidance on this issue.

What is an Involuntary Termination?

One of the key interpretive questions under ARP is “what is an involuntary termination of employment”?  Given the various factual circumstances that could arise, it is not surprising that this is one of the most frequently asked questions. The Notice helps define an involuntary termination of employment, and in many respects follows previous IRS guidance relating to the 2009 federal COBRA subsidy.

Under the Notice, the basic principle is that an involuntary termination means:

  • a severance from employment;
  • due to the independent exercise of the unilateral authority of the employer to terminate the employee’s employment, other than due to the employee’s implicit or explicit request;
  • where the employee was willing and able to continue performing services.

In the end, the determination of whether a termination is involuntary is based on all the facts and circumstances. Even if a termination is labeled as “voluntary” or is designated as a resignation, it won’t necessarily be voluntary for ARP purposes. The Notice explains that such a termination will be involuntary if the circumstances indicate that the employee was willing and able to work and, absent the employee’s termination, the employer would have terminated the employee and the employee had knowledge of that. Here are some example scenarios from the Notice.

Termination for Cause

A termination by the employer for cause is an involuntary termination. However, if the employee was terminated due to gross misconduct, there will not be a COBRA qualifying event (and, thus, no subsidy).

Employee-Initiated Terminations

An important point made in the Notice relates to employee-initiated terminations. The Notice clarifies that even an employee-initiated termination will be considered involuntary if the employee leaves their job for “good reason” due to an employer action that caused a material negative change in the employment relationship for the employee, akin to a “constructive discharge.” The Notice provides examples such as terminations in response to an involuntary material reduction in hours, and a material change in the geographic location of employment.

The Notice makes clear, however, that an involuntary termination generally does not include a termination by the employee due to: (i) concerns about workplace safety, (ii) personal circumstances such as a health condition of the employee or a family member, the inability to locate daycare, or similar issues,  or (iii) the inability of a child to attend school or because another childcare facility is closed due to the COVID-19 pandemic (though in that case the termination may qualify as a reduction in hours if the circumstances indicate that it is a temporary leave of absence and the parties intend to maintain the employment relationship. An employee’s death also does not qualify as an involuntary termination for ARP purposes.

Absence Due to Illness or Disability

According to the Notice, absence from work due to illness or disability is not an involuntary termination for ARP purposes (though the individual may qualify for the premium subsidy if they lose health coverage due to the reduction in hours of employment). However, an involuntary termination will occur if the employer takes action to terminate the individual’s employment while they  are out on disability, if, prior to the termination, there was a reasonable expectation that the employee would return to work after the illness or disability had subsided.

Participation in a Window Program

Involuntary terminations also include situations where an employee with an impending termination participates in a window program, in which the employee is offered severance in exchange for agreeing to terminate employment within a specified time period. The Notice provides that, for this purpose, the window program must meet the requirements for such programs under the relevant IRS regulations.

Limited duration contract/seasonal employees

Some employees work under a limited duration employment agreement. For example, an employee might be hired for a six-month period, or for a particular season. In these cases, the question arises as to whether reaching the end of that period means that there has been an involuntary termination of employment.

As a general rule, the IRS view is that an employer’s decision not to renew an employee’s contract will 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 or continue without a contract. However, in a slight departure from the 2009 COBRA subsidy rules, the Notice provides that if the parties understood at the time they entered into the contract, and at all times while the services were being performed, that the contract was for specified services over a set term and would not be renewed, the completion of the contract without it being renewed is not an involuntary termination.

Retirement

The IRS’ general view is that a retirement is not an involuntary termination. However, if the facts and circumstances indicate that, absent retirement, (i) the employer would have terminated the employee, (ii) the employee was willing and able to continue employment, and (iii) the employee had knowledge that they would be terminated, the retirement will be considered an involuntary termination. Moreover, in many cases, to “retire” simply means that the employee has met certain age and service conditions at the time of a termination of employment. So, if the employer terminates an employee who meets the applicable age and service requirements, the employee could retire, but still was involuntarily terminated.

More to Come

Even with the issuance of IRS Notice 2021-31, there are many unanswered questions that arise in connection with the ARP COBRA premium subsidy, particularly related to eligibility for the subsidy and the tax credit.  Stay tuned for important updates on these issues.

All Good Subsidies Must Come to an End, Part II: The IRS Adds Some Nuances

In an earlier post we reviewed the end dates for the ARP COBRA premium subsidy provided by the American Rescue Plan Act of 2021 (“ARP”), and addressed the required expiration notice.  This post revisits the topic in light of the new guidance in IRS Notice 2021-31 (the “Notice”).

In general, for individuals otherwise eligible for the COBRA premium subsidy, the subsidy ends on the earliest of:

  • The end of the subsidy period set forth in the statute (September 30, 2021),
  • When the individual reaches the end of their maximum COBRA continuation period, or
  • The first month of coverage beginning on or after the first date that the individual becomes eligible for other, disqualifying coverage.

However, the new IRS guidance provided some clarifications and nuances, addressed below.

End of the Statutory Subsidized Period (September 30, 2021)

ARP makes subsidized COBRA coverage available to eligible individuals through September 30, 2021.  In the Notice, the IRS explained that, for individuals still eligible for the premium subsidy on September 30th, the subsidy will not necessarily end on that date. Instead, the subsidy continues until the end of the last “period of coverage” beginning on or before September 30, 2021.  A “period of coverage” means a month or shorter period with respect to which premiums would normally be charged.  For example, if premiums are usually assessed on a bi-weekly period basis, including the period from September 25th to October 8th, the subsidy would not be prorated to September 30th, but would instead cover the entire period.

The IRS also clarified in the Notice that COBRA coverage continues automatically when the premium subsidy period expires, subject to timely payment of premiums according to the terms of the plan and the extended due dates under the COVID-19 Emergency Relief Notices.

Maximum COBRA Continuation Period

The COBRA premium subsidy ends when an assistance eligible individual is no longer eligible for COBRA continuation coverage. The IRS guidance clarified that an otherwise assistance eligible individual continues to be eligible for the subsidy if they remain on COBRA for an extended period (beyond the 18-month period applicable to an involuntary termination or reduced work hours), due to a Social Security disability determination, second qualifying event, or an extension under a State mini-COBRA law. For example, if an individual who was involuntarily terminated on April 1, 2019 is still receiving continuation coverage due to New York’s mini-COBRA extension (i.e., continuation coverage for up to 36 months), then they will be entitled to the premium subsidy from April 1, 2021 through the end of the period of coverage beginning on or before September 30, 2021, assuming they remain assistance-eligible (i.e., not eligible for other disqualifying coverage).

Additionally, the IRS guidance specified that the death of the employee or former employee who experienced the reduction in hours or involuntary termination will not end their spouse’s or children’s eligibility for the COBRA subsidy.

Disqualifying Coverage

The COBRA premium subsidy ends when an assistance eligible individual becomes eligible for (even if not enrolled in) disqualifying coverage. Disqualifying coverage includes Medicare or another group health plan, but does not include excepted benefits, a qualified small employer health reimbursement arrangement (QSEHRA), or a health FSA.  The IRS explained in the Notice that if an individual meets the eligibility requirements for disqualifying coverage but there is a waiting period before such coverage starts, the individual will continue to be eligible for the premium subsidy during the waiting period.

If an employee retires and becomes eligible for retiree coverage that is not COBRA continuation coverage, such retiree coverage may or may not constitute disqualifying coverage. In its guidance, the IRS distinguished between retiree coverage offered under the same group health plan, in which case such coverage would not be disqualifying, and coverage offered under a separate plan, which would be disqualifying. The rules for determining whether plans offered by the same employer (such as an active plan and a retiree plan) constitute one or more group health plans can be complicated, and generally turn on the documentation and plan operation.  Legal counsel can help determine whether a retiree plan may be considered part of the active plan (i.e., not disqualifying from the subsidy).

The IRS also clarified that if an individual is eligible for coverage under another plan that would otherwise be disqualifying, but the coverage under that plan is COBRA continuation coverage, such other coverage will not render the individual ineligible to receive a premium subsidy.

Take Away

Generally, the IRS guidance is consistent with the text of ARP and the DOL’s discussion of when premium subsidies end. However, the IRS provided some clarifications with respect to specific scenarios. When in doubt, reach out to legal counsel for more information about when an individual’s subsidy will end.

Guide to New IRS Guidance on COBRA Premium Subsidy

On May 18, 2021, the IRS released Notice 2021-31, which provides implementation guidance on the COBRA premium subsidy available under the American Rescue Plan Act of 2021 (ARP).  As discussed in our prior blog posts, ARP includes a 100% COBRA premium subsidy for qualifying individuals during periods of COBRA continuation coverage from April 1, 2021 through September 30, 2021.

The guidance in Notice 2021-31 includes helpful information for employers and plan sponsors administering the COBRA premium subsidy and claiming the related tax credit.  At the same time, however, the Notice introduces new questions regarding the subsidy that may require future Treasury and IRS input.  Read below for more details about the guidance, and stay tuned for additional blog posts that dive into the issues summarized below.

  • Eligibility for COBRA Premium Assistance and Self-Certification

To receive COBRA premium assistance, an individual must be an “Assistance Eligible Individual,” which is defined in Notice 2021-31 as any individual who: (1) is a qualified beneficiary as the result of the covered employee’s reduction of hours or involuntary termination of employment; (2) is eligible for COBRA coverage for some or all of the COBRA premium subsidy period (April 1, 2021 through September 30, 2021); and (3) elects COBRA.

Notice 2021-31 confirms that an employer or other plan sponsor may require individuals to self-certify or attest that they meet the eligibility criteria to receive the COBRA premium subsidy and are not eligible for other disqualifying health coverage or Medicare.  An employer or other plan sponsor may rely on the individual’s attestation for the purpose of substantiating eligibility for the tax credit unless the entity has “actual” knowledge that the attestation is incorrect.

In a somewhat surprising twist, Notice 2021-31 states that individuals whose initial 18-month COBRA period was extended due to a disability determination, second qualifying event, or an extension under State mini-COBRA, are eligible for the COBRA premium subsidy during their extended COBRA period, provided that the original qualifying event was a covered employee’s reduction in hours or involuntary termination of employment and the individual elected COBRA coverage and remained on such coverage during the extended period.  More context on this rule—including what notices (if any) these individuals are required to receive—would be helpful for implementation purposes.

  • Reduction in Hours/Involuntary Termination of Employment

To qualify as an Assistance Eligible Individual, the qualified beneficiary must have lost coverage as a result of the covered employee’s “reduction in hours” or “involuntary termination of employment.” Notice 2021-31 provides guidance on the definition of “involuntary” for this purpose, and includes pandemic-specific examples relating to terminations resulting from workplace safety issues and inability to obtain childcare.  The Notice also addresses issues relating to furloughs and work stoppages, and includes examples of qualifying terminations in the context of window arrangements and retirement.

  • Coverage that Qualifies for COBRA Premium Assistance

COBRA premium assistance is available for COBRA coverage that is otherwise available under a group health plan subject to ERISA, the Internal Revenue Code, or the PHSA (except for health FSAs), as well as coverage pursuant to a state law that requires continuation coverage comparable to federal COBRA coverage.  Notice 2021-31 addresses several questions regarding the “type” of COBRA coverage that qualifies for COBRA premium assistance.  The Notice confirms that COBRA premium assistance is available for coverage under a vision-only or dental-only plan, and provides details about qualifying retiree coverage and coverage under a health reimbursement account (HRA).  The Notice also supplies guidance on what types of state continuation coverage qualify for COBRA premium assistance.

  • Extended COBRA Election Period

One key feature of the COBRA premium assistance available under ARP is the “extended election period”—a special election window for individuals who previously declined or discontinued COBRA coverage, but who would be Assistance Eligible Individuals if enrolled in COBRA during the COBRA premium subsidy period (April 1, 2021 through September 30, 2021).  For the most part, the Notice is silent on “who” is eligible for the extended election period—a question on which stakeholders were hoping for more detail from the IRS.  However, the Notice answers a “grab bag” of other questions on the extended election period.  One point addressed in the Notice is that individuals who were offered COBRA coverage for both comprehensive medical and also dental and vision coverage but previously elected COBRA coverage only with respect to dental or vision coverage must also be offered the extended election period with respect to the comprehensive medical coverage.  The Notice also confirms that the extended election period is not available if the continuation coverage is provided solely under a state program.

  • Implications of Special Emergency Disaster Relief

In response to the COVID-19 pandemic, the DOL, HHS, and IRS provided a special tolling period for certain deadlines under employee benefit plans, including the deadline for qualified beneficiaries to elect COBRA coverage and make COBRA premium payments.  Notice 2021-31 confirms that this special tolling relief does not apply to the 60-day deadline for an individual to elect COBRA continuation coverage with premium assistance or to the plan administrator’s obligation to furnish extended election period notices by May 31, 2021. Stay tuned for a future blog post covering additional details about the interaction between the special tolling relief and COBRA premium assistance.

  • Calculation of COBRA Premium Assistance Credit

COBRA premium assistance is implemented by means of a tax credit, whereby the person to whom COBRA premiums would otherwise be payable may claim a tax credit in the amount of the premium.  In general, the credit for the applicable quarter is equal to the amount of the COBRA premiums that are not paid by Assistance Eligible Individuals, including any applicable administrative fee.  Notice 2021-31 provides guidance on the calculation of this tax credit, including details on how to calculate the credit if the employer subsidizes COBRA premiums for individuals who are not eligible for COBRA premium assistance and how to allocate the credit if COBRA coverage also is provided to individuals who are not eligible for the subsidy.

  • Claiming the COBRA Premium Assistance Credit

The COBRA premium assistance tax credit is available to the premium payee for the COBRA continuation coverage.  Notice 2021-31 includes details on “who” qualifies as a premium payee for purposes of claiming the credit and “when” the premium payee can first claim the credit, as well as details for premium payees wishing to request an advance of the anticipated tax credit.  The Notice also provides directions on how to claim the tax credit for premium payees without any employment tax liability (such as a multiemployer plan with no employees), as well as premium payees that use a third-party payer to report and pay employment taxes to the IRS.

*          *          *

This blog post is intended as a general overview of Notice 2021-31.  Look out for additional blog posts taking a closer look at the guidance, including details on calculating and claiming the COBRA premium subsidy tax credit.

 

The Wait is Over: Treasury and IRS Release COBRA Premium Subsidy Guidance

Today, the Treasury Department and the IRS released detailed questions and answers providing guidance on various implementation issues related to the COBRA premium subsidy under the American Rescue Plan Act of 2021 (ARP).

By way of background, ARP includes a 100% COBRA premium subsidy for qualifying individuals during periods of coverage from April 1, 2021 to September 30, 2021.  The COBRA premium subsidy is implemented by means of a tax credit, whereby the person to whom COBRA premiums would otherwise be payable claims a tax credit in the amount of the premium.

Today’s guidance provides detailed information about how to calculate and claim that tax credit.  It also provides information about other implementation issues, including the following:

  • who is eligible for the premium subsidy,
  • when a termination of employment is considered involuntary for subsidy purposes,
  • the types of coverage to which the subsidy applies,
  • the period of coverage to which the subsidy applies,
  • the right to make a special COBRA election, and
  • the interaction with state mini-COBRA coverage.

A link to the guidance is here.  Continue watching our blog for more information about this guidance over the coming days and weeks.

 

The Pocket Guide to COBRA Subsidy Notices

The American Rescue Plan Act of 2021 (ARP) requires that plan administrators distribute new COBRA notices to individuals in connection with the COBRA premium subsidy, as discussed in our prior blog posts.  To help keep track of who gets which COBRA notice and the applicable deadline to send each notice, we have prepared a “pocket guide” chart for plan administrators, which can be downloaded here.

 

You’ve Sent the COBRA Special Extended Election Period Notices – What’s Next?

Due to tight timelines and an initial sprint to issue the special extended COBRA election period notices by the May 31st deadline, plan administrators may not have focused on the other COBRA-related notice requirements under the American Rescue Plan Act (ARP). This blog post focuses on these other notices – for individuals who become entitled to COBRA coverage on or after April 1st, and for individuals approaching the end of their ARP-subsidized coverage period.

Individuals Who Become Entitled to COBRA Coverage on or After April 1, 2021

The DOL issued new model COBRA notices for qualified beneficiaries who become entitled to COBRA coverage during the period from April 1, 2021 through September 30, 2021. These updated models are to be used for notifying qualified beneficiaries of their COBRA rights in connection with all types of qualifying events, not just reduction of hours or involuntary termination of employment.  The models contain an updated COBRA election form.

In addition, the DOL’s “Summary of the COBRA Premium Assistance Provisions under the American Rescue Plan Act of 2021” must be included with the COBRA notice in order to comply with the ARP notification requirements.  This Summary contains a form to request the COBRA premium assistance (i.e., the COBRA premium subsidy), as well as a form for a participant to notify the plan of subsequent eligibility for other group health coverage or Medicare (and, thus, ineligibility for the subsidy). The model notices expire on October 31, 2021, although they will not apply to qualifying events occurring after the subsidy period ends on September 30, 2021.

The normal deadlines for plan administrators to provide COBRA notices apply. However, the rules governing the deadlines for participant elections are a bit more complex.

  • To receive COBRA premium assistance under ARP, an assistance eligible individual who meets the subsidy requirements must elect COBRA and return the premiums assistance election form within 60 days. (Although the DOL model notices indicate that this 60-day period starts upon receipt of the notice, we understand that the DOL did not intend to modify the general standard which is based on when notice is provided).
  • The extended COBRA election and payment deadlines under earlier COVID-19 relief continue to apply for COBRA elections, but do not apply to elections of COBRA with the premium subsidy. This means the period for qualified beneficiaries to elect unsubsidized COBRA coverage is tolled until the end of the “Outbreak Period”, up to a maximum of one year (as explained in more detail in our earlier posts).

The model DOL COBRA notice includes optional language if the employer or other plan sponsor is allowing assistance eligible individuals to change their plan coverage option. This is permissible if the other option is offered to similarly-situated active employees and does not cost more than the coverage the individual was enrolled in at the time of the COBRA qualifying event. Plans are not required to allow individuals to change their COBRA coverage options; but if changes are being allowed, the applicable optional language should be included in the COBRA notice.  Individuals will have 90 days to elect a change in coverage options.

Plan administrators should also note that the DOL updated the model COBRA notices with respect to some issues unrelated to ARP. It remains to be seen whether the DOL will carry over these updates into the general model COBRA notice once these models expire.

Notice Regarding the Expiration of the COBRA Premium Subsidy

Another notice that plan administrators have to provide is a notice that the ARP COBRA premium subsidy will expire for an assistance eligible individual.  This notice must be sent within 15-45 days before the subsidy expires (unless the subsidy expires due to the individual becoming eligible for other group health coverage or Medicare). This notice of expiration must alert assistance eligible individuals to the fact that the COBRA premium subsidy will be expiring soon and specify the date of expiration. The notice must also inform them that they may be eligible for unsubsidized COBRA coverage, or coverage through Medicaid or the Health Insurance Marketplace. A model expiration notice can be found here.

Because an individual’s COBRA premium subsidy will end when their maximum COBRA period ends (or September 30th, if earlier), plan administrators will want to quickly identify whether anyone entitled to the special 60-day election period is nearing the end of their potential COBRA period.  For example, if a qualified beneficiary lost coverage due to a reduction of hours of employment on November 1, 2019, their 18-month COBRA coverage period (if elected) would end on April 30, 2021.  Although counter-intuitive, under a strict reading of the law, the plan administrator would have until May 31st to notify the individual of their special enrollment opportunity and potential COBRA premium subsidy for April, but would have had to send notice of the subsidy’s expiration by April 15th.  Perhaps more commonly, the deadline for sending an expiration notice may occur after the special election notice is sent, but before the 60-day election period has expired.

The guidance does not provide any indication of deadline relief with respect to subsidies expiring shortly after issuance of the model notice, so plan administrators should consult with counsel and use good faith efforts to meet the deadline or, if not possible, to notify individuals as soon as practicable.

More Information to Come

Stay tuned for more insights about the new DOL guidance on the COBRA premium subsidy, and on the expected IRS guidance regarding how to implement the subsidy and apply for the tax credits.

ARP COBRA Subsidy Special Election Opportunity: Who Gets a Second Bite at the Apple, and How Do They Take It?

The American Rescue Plan (“ARP”) offers a special 60-day election period for certain individuals who previously declined or discontinued COBRA coverage (“Assistance Eligible Individuals” or “AEIs,” as defined in ARP). These individuals may elect COBRA coverage prospectively, beginning April 1st, at no cost, as long as they are not eligible for Medicare or other group health coverage (with certain exceptions).

This post examines who gets this “second bite at the apple” during the special election period based on the recent guidance issued by the U.S. Department of Labor (“DOL”), and what notice requirements are imposed on plan administrators with respect to this special election period.  The DOL guidance, issued on April 7, 2021, includes model notices and FAQs, which answer some questions about the second election opportunity and the ARP subsidy in general, but also raise additional questions.

Who Gets the Special Election Opportunity and What Is It?

An “Assistance Eligible Individual” under ARP is a qualified beneficiary who, during the period from April 1, 2021 to September 30, 2021, is eligible for COBRA coverage due to a reduction in hours or involuntary termination of employment, and who elects such coverage. An individual who did not have COBRA coverage on April 1st, but who would be an AEI had they previously elected or stayed on COBRA, is entitled to a special COBRA enrollment opportunity (the titular “second bite”) in order to receive the 100% COBRA subsidy.*

The ARP special election period is distinct from the normal COBRA election rules, which generally provide for a retroactive election of COBRA coverage to the date the qualified beneficiary lost group health coverage.  Under the ARP special election period, AEIs are permitted to prospectively elect COBRA, starting on April 1st (i.e., coinciding with the subsidy period).  However, the special election period does not extend an individual’s maximum period of COBRA coverage. Thus, an AEI who became eligible for COBRA coverage on January 1, 2020 and elects COBRA during the special election period is eligible for COBRA only until June 30, 2021 (18 months from the qualifying event), unless the period is extended under the normal COBRA rules (i.e., due to disability or a second qualifying event). In addition, the DOL made clear that the 60-day election period is not subject to the COVID-19 extended tolling period as set forth in EBSA Disaster Relief Notice 2021-01 and described in detail here. However, as a result of the extended tolling period, an individual may still have an opportunity to elect COBRA coverage retroactive to the date of the loss of coverage (with payment of the required premiums), instead of electing COBRA only on a prospective basis under ARP’s special election opportunity.

Notice of the Special Election Opportunity

The plan administrator must send a special election notice to these individuals by May 31, 2021. The special COBRA election period begins on April 1, 2021 and ends 60 days after the notice is provided to the individual. (Although some of the DOL notices and FAQs note that the 60-day period runs from the date of receipt, we understand that the DOL did not intend to revise the regular COBRA rules, which key the election deadline off of the date notice is “provided”).  The packet sent to these individuals should include the Model Notice in Connection with Extended Election Period tailored to reflect the specific facts and circumstances, along with the Summary of COBRA Premium Assistance Provisions under the American Rescue Plan Act of 2021, which explains the COBRA subsidy and includes an election form and a form for the individual to notify the plan if they become ineligible for the subsidy due to eligibility for other coverage (see below).

*Open Question: While it seems that the intention of ARP was to open up a special election opportunity for individuals to take advantage of the government’s COBRA premium subsidy, it appears that the statutory language can be read more broadly to allow even individuals not eligible for the subsidy to take advantage of this second election opportunity. This ambiguity is not resolved in the DOL FAQs, so we await any additional clarification from the regulators.

How to Elect Subsidized COBRA

To elect the COBRA premium subsidy, the AEI must complete a “Request for Treatment as an Assistance Eligible Individual,” in which they certify that they are not eligible for other group health plan coverage or Medicare.  Once receiving the COBRA premium subsidy, the AEI must also notify the plan administrator if they become eligible for other group health plan coverage or Medicare during the subsidy period.  A failure to so notify the Plan may result in the individual being assessed a penalty of $250 or 110% of the premium assistance that was provided after they were no longer eligible.

Subsidy Expiration Notice

In addition to the notifying individuals of the right to elect subsidized COBRA, plan administrators must notify AEIs of the expiration of their subsidy period.  The DOL’s Model Notice of Expiration of Period of Premium Assistance must be provided no later than 15 days and no more than 45 days before the date of the subsidy’s expiration.  This notice must be provided if the subsidy period is expiring due to the end of the individual’s maximum period of COBRA coverage, or the end of the ARP subsidy period on September 30, 2021.  Notice is not required if the subsidy period is ending due to the individual becoming eligible for other group health coverage or Medicare. Practically, it may be difficult (if not impossible) to provide this notice within the above timeframe, particularly if an AEI already is near the end of their maximum period of COBRA coverage (i.e., an AEI whose maximum COBRA period ends on April 30, 2021). Plan administrators should make a good faith effort to comply with the deadline or provide notices as soon as practicable. Consideration may be given to including the expiration notice in the initial election package, depending on when the package will be sent and when the COBRA premium subsidy will expire.

To Be Continued

Even with the issuance of the DOL FAQs and model notices, there are many unanswered questions regarding the ARP COBRA premium subsidy and the related election and notice requirements. We hope these questions will be addressed by future agency guidance.  Stay tuned for important updates on this developing law.

All Good Subsidies Must Come to an End: ARP’s Expiration Notice Requirements

As mentioned in our earlier posts, the American Rescue Plan Act of 2021 (“ARP”) provides a 100% COBRA premium subsidy for continuation coverage between April 1 and September 30, 2021 for certain assistance eligible individuals (“AEIs”).  As employers and plan administrators prepare to educate AEIs about this subsidy, they cannot overlook another necessary notice:  a notice to some AEIs that their subsidy is about to expire.  Under a literal reading of the rules, this expiration notice might already be late!  Plan administrators must act quickly to ensure compliance, especially with respect to those AEIs nearing the end of their COBRA continuation coverage in the upcoming weeks.

When does the COBRA premium subsidy end?  The subsidy ends on the earlier of:

  • September 30, 2021,
  • The date on which the AEI reaches the end of their maximum COBRA continuation coverage period, or
  • The date on which the AEI becomes eligible for Medicare or another group health plan (not including excepted benefits, a qualified small employer health reimbursement arrangement (QSEHRA), or a health FSA). AEIs must notify the plan sponsor if they become eligible for such coverage and failure to do so may result in a tax penalty.

Who needs to be provided with the COBRA subsidy expiration notice?  The subsidy expiration notice only has to be provided to AEIs who will lose the subsidy due to the first two events: either the end of (a) the COBRA subsidy period (September 30, 2021) or (b) their COBRA continuation coverage period.

When is the expiration notice due?  Plan administrators must notify AEIs at least 15 days (but no more than 45 days) before they will lose the subsidy.

Note:  This deadline creates an immediate problem with respect to AEIs nearing the end of their maximum COBRA coverage period.  For example, some AEIs will lose their COBRA coverage—and thus their right to a subsidy—at the end of April.  Administrators must have provided these AEIs with a subsidy notice by April 15, before most plan administrators have even told AEIs about the subsidy in the first place.  Given the possible challenges in timing the subsidy expiration notice, plan administrators should consult with counsel and consider their options for good faith compliance.

What must the expiration notice include?  Perhaps most obviously, the notice must explain in “clear and understandable language” that the AEI’s subsidy will expire soon and indicate the expiration date in a prominent way.  But, as illustrated by the DOL’s model expiration notice, the notice must also detail other coverage options for which a special enrollment period may be available, including Medicare or group coverage through the Health Insurance Marketplace.  Using the model notice as a guide, plan administrators should include information on the factors the AEI should consider in choosing among coverage options, how and when to enroll, and the difficulty (or in many cases, impossibility) of switching coverage options later.  Further, administrators must note how much, if any, time remains in the AEI’s COBRA coverage period and specify the full, unsubsidized premium amount owed should the AEI choose to keep their COBRA coverage in effect.

Finally, plan administrators of insured plans should consider other applicable COBRA notice requirements.  Specifically, COBRA rules have always required that insured plans provide notice to qualified beneficiaries of their option to enroll in a conversion health plan in the 180 days before their COBRA coverage period ends.  In preparing subsidy expiration notices for such beneficiaries, plan administrators should consider including notice of any conversion options, particularly if they have not otherwise done so.

Next Steps

Time is of the essence.  Plan administrators should work quickly to ensure compliance with the new subsidy expiration notice rules—while keeping track of other COBRA notice requirements—for AEIs who will lose the subsidy nearly as soon as they get it.

U.S. Department of Labor Steps into the Cybersecurity Discussion

Formally wading into the cybersecurity discussion for the first time, on April 14, 2021, the U.S. Department of Labor (DOL) posted on its website a suite of new guidance, including Tips for Hiring a Service Provider with Strong Cybersecurity Practices, Cybersecurity Program Best Practices, and Online Security Tips for Participants and Beneficiaries.

By way of background, cybersecurity has over the last decade become an area of critical importance to sponsors and administrators of employee benefit plans as well as plan participants.  Put simply, this is because plans (which the DOL estimates hold $9.3 trillion in assets) are a prime target of cyberthieves, given that they typically hold significant amounts of sensitive participant data, often permit electronic access to funds (think 401(k) distributions) and rely on outside service providers, who provide additional access points for breach.  This risk was only exacerbated by the COVID-19 shutdowns, where benefits personnel and their service providers quickly had to transition to working remotely and begin relying on electronic access more than ever before.

In the face of these cybersecurity challenges, many plan sponsors and administrators have considered ways to mitigate risk, both internally (e.g., through education of their benefits personnel and participants) and externally (principally through management of their service provider relationships).

In recent years, it has been suggested (including by the Government Accountability Office in a February 2021 report) that the DOL should provide its perspective on fiduciary responsibilities with respect to cybersecurity.  Until now, the DOL has been largely silent on these matters, but has now stepped into the discussion with the following three pieces of guidance aimed at three different audiences.

Cybersecurity Program Best Practices: This document contains a list of 12 best practices for use by recordkeepers and other plan service providers responsible for information technology and data.  This guidance provides fairly extensive detail for each of the 12 items, which range from a description of what the DOL expects to see in a formal, documented cybersecurity program to stressing the importance of annual internal risk assessments along with external audits of security controls.  The document also details the actions that should be taken in the event a cybersecurity breach or incident occurs.  While this document is principally aimed at controls for service providers, it would still be relevant for plans that maintain information technology systems in-house.  Even for plans that do not maintain in-house systems, the DOL indicated that these best practices are for use by plan fiduciaries in their vendor hiring decisions.  Notably, the DOL has a blanket statement in this document that “plan fiduciaries have an obligation to ensure proper mitigation of cybersecurity risks.”

Tips for Hiring a Service Provider with Strong Cybersecurity Practices: The DOL then turned its focus directly to plan fiduciaries, issuing a document that provides some succinct suggestions for steps that plan sponsors and administrators might take with respect to diligence of, and contracting with, plan service providers. For example, the DOL guidance suggests the following steps:

  • Ask about the provider’s cybersecurity program and compare it to industry standards. As noted above, the DOL’s twelve Cybersecurity Program Best Practices can serve as useful guidance on the DOL’s view of what constitutes a sound cybersecurity program.
  • Seek providers that engage a third-party auditor to annually review and validate its cybersecurity program. The DOL further suggests that plan fiduciaries include a provision in the contract with the provider requiring that an annual third-party cybersecurity compliance audit be conducted.
  • Evaluate the provider’s track record in the industry by reviewing publicly available information about past security incidents and legal proceedings involving the provider.
  • Ask about past security breaches and how the provider responded.
  • Ask about the provider’s insurance policies that would cover losses caused by cybersecurity and identity theft breaches and consider requiring the provider to maintain professional liability and errors and omissions liability insurance, cyber liability and privacy breach insurance, and/or fidelity bond/blanket crime coverage.
  • Negotiate clear provisions in the contract regarding the provider’s obligation to keep private information private and meet a strong standard of care to protect confidential information.
  • The provider contract should require the provider’s ongoing compliance with internal cybersecurity and information security standards as well as compliance with records retention and destruction, privacy and information security laws.
  • Include in the provider contract how much time the provider has to provide notice to the fiduciary of a security breach and require that the provider investigate and reasonably address the cause of the breach. The DOL also states that plan fiduciaries should carefully review contract provisions that would limit the provider’s responsibility for cybersecurity breaches.

Online Security Tips for Participants and Beneficiaries:  Apparently recognizing that participants and beneficiaries represent a primary vulnerability from a cybersecurity perspective, the DOL provided these security tips for participants to consider in order to reduce the risk of fraud or cybertheft with respect to their benefits.  This list contains many predictable, but important, topics such as strong password use, phishing awareness, updating personal contact information and monitoring accounts.  While the DOL did not specifically suggest this, plan sponsors and administrators may wish to consider disseminating this guidance (or their own version of the guidance) to participants to improve their cybersecurity awareness and help avoid future crises.

The View from Proskauer

Given the threat that cybercrime poses to plans in the post-COVID world, it is an excellent time for plan sponsors and administrators to analyze their own vulnerabilities and establish an action plan to mitigate the risk of loss associated with data security breaches.  Vendor diligence and contracting is a critical – albeit not the sole – component of such an action plan.  The DOL’s guidance provides a helpful look into the DOL’s perspective on this issue and should be considered as a useful data point in the broader analysis.

*     *     *

Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns. Visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take and resources to help manage ongoing operations.

LexBlog

This website uses third party cookies, over which we have no control. To deactivate the use of third party advertising cookies, you should alter the settings in your browser.

OK