The New Mandatory COBRA Subsidy: What Employers Need to Know

Congress recently handed another significant benefit to Arizona employees, and others across the nation, in the form of a full COBRA subsidy for many individuals and their dependents who have lost employer-sponsored health coverage during the pandemic. In doing so, Congress also handed an administrative burden to employers that sponsor group health plans. These changes are set forth in the American Rescue Plan Act of 2021 (“ARPA”).

ARPA requires employers who are subject to federal COBRA (or state COBRA laws commonly known as “mini-COBRA”) to temporarily provide a full subsidy of COBRA continuation coverage premiums to certain employees and their dependents who would lose coverage due to involuntary termination or a reduction in hours. Employers pay the cost for these subsidies, which are reimbursed in the form of federal quarterly payroll tax credits. The subsidy applies to COBRA premiums for coverage from April 1 through September 30, 2021. It does not extend or otherwise affect the time that a person is eligible to stay on an employer’s plan through COBRA.

What Is COBRA and Mini-COBRA?

COBRA is federal legislation that allows individuals who lose group health coverage due to a variety of “qualifying events,” such as termination of employment, reduction in hours, death or divorce, to continue on a group health plan for a certain period (generally 18 months) following a loss of coverage. Federal COBRA applies to employers with 20 or more employees, but 40 states, including Arizona, have adopted their own “mini-COBRA” laws for smaller employers. Normally, whether it is federal COBRA or state mini-COBRA, the COBRA participant must pay the full cost of the premiums while they stay on the employer’s plan, including any part the employer paid previously. For this reason, COBRA can be very expensive and many individuals who lose coverage cannot afford COBRA. This makes the full COBRA subsidy a very valuable benefit at a time when a person has lost a job or had a reduction in hours.

Who Is Eligible for the COBRA Subsidy?

Generally, those eligible for the COBRA subsidy are individuals and their dependents who would lose coverage due to an involuntary termination of employment or a voluntary or involuntary reduction in hours. ARPA does not define what constitutes a voluntary or involuntary termination, so eligibility will depend on the individual facts and circumstances. The job loss or reduction in hours does not need to be COVID-related.

To get the subsidy, the individual’s maximum COBRA eligibility period must also not have expired as of April 1, 2021. This means the subsidy applies to individuals who become eligible for COBRA continuation coverage during the subsidy period from April 1, 2021, through September 30, 2021, but it also applies to individuals already enrolled through COBRA who have not reached their maximum COBRA period. In addition, an individual who declined or discontinued COBRA coverage prior to April 1 but whose COBRA maximum period otherwise would have continued beyond April 1, 2021, may also be eligible for the subsidy. For example, an individual who involuntarily terminated employment and lost coverage on May 1, 2020, would still be within the 18-month COBRA period and so would also be eligible, even if such individual did not initially elect COBRA or elected it and then discontinued it prior to April 1, 2021.

The subsidy does not apply in the event an employee voluntarily terminates employment or experiences any other COBRA qualifying event and does not cover an individual who is eligible for Medicare or other group health coverage. Those receiving the subsidy are required to notify the employer if they become eligible for other coverage so the employer can stop paying the subsidy. That might happen if the individual gets coverage through a new job or through a spouse’s health plan.  The subsidy also stops when the person’s maximum COBRA coverage period ends and, in any event, the subsidy does not go beyond September 30, 2021.

How Does an Eligible Person Elect Subsidized COBRA Coverage?

Individuals who become newly eligible for COBRA coverage must make the election during the normal 60-day COBRA election window following notice of eligibility from their employer.

Individuals who previously declined COBRA continuation coverage or who discontinued COBRA continuation coverage prior to April 1 have a new, special 60-day window to elect COBRA coverage that begins when they are notified by their employer of their eligibility for the subsidy.

What Notices Must Employers Provide?

The burdens ARPA imposes on employers mostly relate to notices employers must provide regarding this temporary COBRA subsidy. To ease that burden, the Department of Labor issued model notices.

Employers are not required to use the model notices, but doing so best ensures compliance. Employers are required to give three types of notices:

1. To Individuals Newly Eligible For COBRA: For all individuals who become eligible for COBRA on or after April 1, 2021, employers must provide a notice describing eligibility for the subsidy. This notice can be incorporated into the existing COBRA election notice or be provided as a separate supplemental notice. The DOL has provided a model notice for this purpose, including an election form and a summary of the subsidy provisions to be attached to the general notice.
2. To Individuals Who Are Currently Enrolled in COBRA or Who Previously Declined or Discontinued COBRA: For individuals who currently are or were previously eligible for COBRA coverage due to a reduction in hours or involuntary termination but who declined or discontinued COBRA prior to April 1, employers must provide notice of the 60-day special COBRA election period. These notices must be provided by May 31, 2021, and elections are effective retroactive to April 1. The DOL has also provided a model notice and summary for this purpose, including an election form.
3. To Individuals Receiving the COBRA Subsidy: Between 15 and 45 days prior to the expiration of an individual’s subsidy, employers must notify the individual when the subsidy will end. This does not apply when the subsidy period ends due to the individual’s eligibility for other group coverage or Medicare. A model notice for this purpose is included on the DOL website.

The DOL also provided an alternative model notice for insured plans subject to state mini-COBRA requirements from April 1 through September 30, 2021, including an election form. The model notice for insured plans subject to Arizona mini-COBRA requirements can be found here.

Action Items: What Do Employers Need To Do?

Employers can best ensure they comply with COBRA subsidy requirements under ARPA by taking the following actions.

1. Identify individuals who qualify for the subsidy. This step may be challenging as it will require looking back 18 months prior to April 1, 2021 (to October 2019).
2. Prepare and send required notices.
3. Coordinate with insurance or stop loss carriers to ensure coverage is continued for any eligible individuals electing subsidized COBRA coverage.
4. Submit claims for quarterly tax credits to receive reimbursement for any subsidies. More information regarding the logistics of this process should be forthcoming from the IRS.
5. Review any form severance agreements in use by the employer to ensure that references to COBRA payments are consistent with current law and in line with the employer’s intent.

Additional guidance from the IRS and potentially the DOL is expected, so employers should continue to monitor this topic and consult with legal counsel and other advisors to ensure they are compliant with these new requirements.

Kristi Hill works in the ERISA practice group at Fennemore where her practice focuses on the areas of ERISA and employee benefits, employment and labor law, and business and finance. She reviews and consults on a variety of qualified plan issues, including drafting, revising, and terminating 401(k) plans, profit-sharing plans, ESOPs and pension plans.

Ryan Curtis is chair of Fennemore’s ERISA (Employment Retirement Income Security Act of 1974) and employee benefits practice group where he guides clients through the critical intricacies of volatile matters such as IRS audits and U.S. Department of Labor investigations.

David Heap works in Fennemore’s ERISA practice group helping businesses and other clients with matters related to executive compensation and employee benefits law, including defined benefit, 401(k), 403(b), 457, ESOPs, SERPs, cafeteria, stock-related and medical plans. He is also a frequent speaker on employee benefit and executive compensation issues.