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Updated May 14, 2021

The American Rescue Plan Act, passed in March 2021, created a subsidy to cover 100% of COBRA premiums for a 6-month period from April 1, 2021-September 30, 2021.

COBRA continuation health coverage allows covered employees, along with covered spouses and dependents, to stay on their employer’s health plan up to 18 months after ending employment. Most private employers with 20 or more employees the previous calendar year are subject to federal COBRA and required to offer continuation coverage. Typically, the employee pays the full cost of the premiums plus a 2% administration fee.

If you are an employer with a group health plan and are subject to federal or state COBRA rules, you need to prepare immediately for the new COBRA requirements.

During the subsidy period, employers will pay the premium for an eligible employee who is currently enrolled in COBRA or who chooses to enroll during the special election period created under the new law. Employers will then be reimbursed fully for these premium payments through tax credits applied against their Medicare payroll taxes.

Our guide takes you through the COBRA subsidy process step-by-step and explains what employers should be doing right now.

1. Identify Assistance Eligible Individuals (AEIs)

Employers should work closely with their health insurance carrier to identify the individuals associated with their group plan who would be considered “Assistance Eligible Individuals,” or AEIs. All AEIs must be offered the subsidy.

Assistance Eligible Individuals would be:

  • Employees who lost health coverage under an employer plan because they were involuntarily terminated or had their hours reduced. Even employees who were terminated for reasons unrelated to COVID-19 are still eligible for the subsidy, unless the termination was for gross misconduct (i.e. sexual harassment, threats of workplace violence).
  • Qualified beneficiaries, i.e. employees’ spouses and dependents who were enrolled in the plan and also lost coverage.
  • Anyone who is in their 18-month COBRA-eligibility period at any time between April 1-September 30, 2021. This means employees who were terminated as early as November 2019 must be offered the subsidy.
  • It does not matter if the employee was previously offered COBRA and declined it. The law gives these terminated employees the opportunity to enroll in COBRA continuation coverage now and receive premium subsidies.

Employees who left voluntarily are not eligible for COBRA premium assistance. In addition, if an employee becomes eligible for coverage under Medicare or through another group plan, then he or she is no longer eligible for premium subsidies.

2. Send Notices to AEIs by May 31, 2021

After identifying AEIs and their qualified beneficiaries, an employer must send them a notice that provides information about premium assistance, how to qualify for it, and the extended election period. The Department of Labor has provided model notices that employers can use.

These notices must be sent by Memorial Day, May 31, 2021.

If the employee was terminated before April 1, 2021, the employer must send:

If the employee is terminated between April 1-September 30, 2021, the employer must send:

If your carrier or a third-party vendor administers COBRA for you, the carrier or vendor may send these notices for you. However, keep in mind that liability ultimately rests with the employer, so make sure you are involved with the process to ensure compliance.

3. Complete Paperwork & Notify Carrier

These notices contain the paperwork that employees need to complete to claim their subsidies. Employees have 60 days to complete and return their forms. AEIs who are currently enrolled in COBRA must complete the Request for Treatment as an Assistance Eligible Individual form, included in the Summary of COBRA Premium Assistance Provision notice. AEIs who are not on COBRA but want to elect it now need to complete this form too, plus the COBRA Continuation Coverage Election Form. An employee may elect retroactive coverage but is responsible for paying all premiums for the period before April 1, 2021.

The employee returns the Request for Treatment as an Assistance Eligible Individual form to the employer. The employer must complete the employer portion of the paperwork and approve or deny the request. At that point, the employer should notify the carrier, if the employee is newly enrolling in COBRA

4. Pay Premiums for AEIs Enrolled in COBRA

In most cases, the employer is responsible for paying the premiums upfront for any AEI that enrolls in COBRA. If you are a self-insured employer subject to state COBRA continuation but not federal, then the insurer will pay the premiums. This primarily includes private employers with less than 20 employees the previous year.

Please work closely with your carrier to understand the process for your group plan and who is responsible for paying COBRA premiums.

If an employee becomes eligible for coverage under another plan, such as Medicare or another employer’s group plan, then that employee is no longer eligible for premium assistance. Employees who do not immediately notify their plan sponsor about their change in eligibility will be fined. This is explained to employees in the general notice.

5. Apply for Tax Credits

The amount paid in COBRA premiums by the employer will be reimbursed through tax credits applied against Medicare payroll taxes. The IRS announced that employers will report this tax credit through Form 941 (Employer’s Quarterly Federal Tax Return), which will be amended to include it. Employers may claim an advance payment of this refundable tax credit by completing Form 7200 (Advance Payment of Employer Credits Due to COVID-19). Form 7200 is currently being revised to add this new credit, and the IRS says employers should not file for the second quarter of 2021 until the new version is released.

The IRS is actively auditing coronavirus-related employer tax credits, including COBRA subsidy tax credits, employee retention credits, and paid sick and family leave credits.

Employer should work closely with their CPA to understand what tax credits they are eligible for, how these tax credits interact with one another, what documentation is needed, and how these tax credits affect Paycheck Protection Loans forgiveness.

6. Send Final Notice to AEIs Receiving Subsidy

Finally, employers are required to send a second notice to AEIs who are receiving the subsidy, letting them know that the subsidy period is about to end. This must be sent out 15-45 days before the subsidy will expire.

Employers should get to work right away with their health insurance carriers and COBRA administrators to ensure compliance with the law.

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