IRS Issues FAQ Guidance on ARPA COBRA Subsidy
On May 18, 2021, the Internal Revenue Service (IRS) issued Notice 2021-31, providing important guidance to employers and plan administrators regarding implementation of the COBRA subsidy rules under the American Rescue Plan Act (ARPA).
The 40-page notice contains 86 questions and answers that address many issues that have arisen with respect to the COBRA subsidy, including what constitutes an "involuntary" termination of employment, employer documentation requirements and how to calculate the credit. The FAQs are organized by topic, starting with who is eligible for COBRA premium assistance, and ending with how employers claim the federal tax credit to pay for the subsidy.
Given the expansive ground that is covered in Notice 2021-31, this E-Alert summarizes the key points of clarification relevant to employers. It is recommended that employers review the full notice and consult with their service and compliance partners regarding their unique circumstances, including the potential need to make changes before the upcoming May 31st notice deadline.
Eligibility for COBRA Premium Assistance: Q&A-1 to Q&A-20
Assistance Eligible Individuals (AEIs):
No qualifying events other than a reduction in hours or an involuntary termination of employment (such as divorce or a covered dependent child aging out) will be considered qualifying events for the subsidy.
Individuals who become eligible for other group health coverage (such as under a spouse’s plan) or Medicare on or after April 1st are no longer entitled to the COBRA subsidy, even if they choose not to elect. Previous eligibility or enrollment in other group health coverage that ceases before April 1st does not impact AEI status. AEIs remain eligible for the COBRA subsidy during waiting periods for other coverage.
The subsidy is available for extended periods of COBRA coverage falling within April 1 and Sept. 30, 2021, due to disability, a second qualifying event or extension under state mini-COBRA if the individual’s original qualifying event was a reduction in hours or involuntary termination.
Substantiation & Recordkeeping:
Employers may require individuals to provide self-certification or attestation regarding their eligibility status for the COBRA subsidy (including whether they are eligible for other disqualifying coverage), and they may rely on this for substantiating eligibility for the credit, unless they have actual knowledge to the contrary.
Employers who claim a premium assistance credit are required to maintain documentation substantiating eligibility, and this may be through either self-certification or attestation (as noted above), or by other relevant evidence, such as records concerning a reduction in hours or involuntary termination of employment.
Reduction in Hours: Q&A-21 to Q&A-23
The notice clarifies that any reduction in hours that results in a loss of coverage can make someone an assistance eligible individual, regardless of whether the reduction in hours is voluntary or involuntary.
Involuntary Termination of Employment: Q&A-24 through Q&A-34
Whether a termination is involuntary is determined under the facts and circumstances. Involuntary termination includes a severance from employment by the employer’s unilateral exercise of authority, as well as certain employee-initiated resignations for “good reason” if there is a material change in the employment relationship analogous to a constructive discharge (e.g. geographic relocations; reduction in hours).
Involuntary terminations include terminations for cause, but not gross misconduct.
An involuntary termination generally would not include retirement, death, or a resignation due to general concerns about workplace safety or a child being unable to attend school or daycare due to COVID-19 closures.
Calculation of COBRA Premium Assistance Credit: Q&A-63 to Q&A-70
The amount of the credit is the premium that would have been charged to an AEI in the absence of the premium assistance and does not include any amount of subsidy that the employer would have otherwise provided.
For example, if as part of a severance package an employer subsidizes coverage for involuntarily terminated employees for a period of three months, then the premium assistance credit can be claimed only for the reduced premium that would have been paid by the terminated employee for those three months.
Claiming the COBRA Premium Assistance Credit: Q&A-71 to Q&A-86
A premium payee (the employer for self-insured plans and plans subject to Federal COBRA) claims the credit by reporting the credit and the number of individuals receiving COBRA premium assistance on the designated lines of its federal employment tax return(s), usually Form 941.
In anticipation of receiving the credit, a premium payee may (1) reduce the deposits of federal employment taxes, including withheld taxes, that it would otherwise be required to deposit, up to the amount of the anticipated credit, and (2) request an advance of the amount of the anticipated credit that exceeds the federal employment tax deposits available for reduction by filing Form 7200.
Employers who sponsor fully insured plans subject solely to state mini-COBRA are not entitled to a tax credit as the insurer is considered the premium payee in these cases.
The IRS has begun updating the various forms required to claim the tax credit; however, these forms and their instructions are not complete and are not yet available for use.