April 01, 2021

American Rescue Plan Act (ARPA) – Impacts on COBRA and What It Means for Administrators and Employers

             The enactment of ARPA has sparked three (3) temporary but significant changes/provisions to group health plans and COBRA coverage. We have thoroughly analyzed these changes and have summarized, in relevant part, the changes below:

I.          Under ARPA, Assistance Eligible Individuals (AEIs) may receive a 100% subsidy for COBRA premiums paid during any period of COBRA coverage during the period beginning on April 1, 2021 (the first day of the first month beginning after enactment) and ending on September 30, 2021.

            An AEI is someone who, in the above-mentioned time period is eligible for COBRA coverage due to an involuntary termination (other than for gross misconduct) or reduction in hours and elects such coverage. An AEI is no longer eligible for a subsidy upon the earliest of his/her becoming eligible for other group health plan coverage, Medicare, or the expiration of his/her maximum COBRA period.

II.        The ARPA also provides a second chance for qualified beneficiaries who previously either (1) did not elect COBRA or (2) subsequently dropped their coverage.

            Typically, if an individual did not previously elect COBRA or elected coverage and then dropped it, they would not be considered an AEI, unless he/she took advantage of the ARPA’s extended election period. If an individual elects COBRA coverage, he/she will then be eligible for the subsidy and the coverage will be retroactive to April 1, 2021, at no cost.

            Note, an individual electing COBRA through the extended election period may maintain the coverage only until the expiration of the COBRA coverage period he/she would have had if he/she elected COBRA when first eligible. This means, an individual who was first eligible for COBRA on January 1, 2021 and did not elect COBRA until April 1, 2021, will be eligible for COBRA only through June 30, 2022. Therefore, just because an individual elects COBRA coverage during the extended election period does not mean they benefit from a new period of eighteen (18) months’ worth of COBRA.

III.      Administrators and/or Employers have the opportunity to provide qualified beneficiaries the chance to change their elected option for a cheaper option.

            Participants may only trade down to an equally or less-expensive option. The equally or less-expensive option must be available to similarly situated active employees. The equally or less-expensive option cannot be a health flexible spending account, a qualified small-employer health reimbursement arrangement or an excepted benefit.

            Administrators and/or Employers must understand that this additional provision is optional, not mandatory.       

IV.       What does this mean for Administrators and/or Employers?

            As the law regarding COBRA coverage eligibility has changed, Administrators and/or Employers are now tasked with the additional burden of notifying the qualified beneficiaries and their rights and duties as they pertain to the assistance availability, extension period, and expiration of subsidy. Administrators and/or Employers must be vigilant in complying with deadlines set forth below:  

Group Health Plans must provide the following notices to Qualified Beneficiaries:

  1. Notice of assistance availability: Informs AEIs of the availability of the subsidy and the option to enroll in COBRA during the period beginning on April 1, 2021, and ending on September 30, 2021. This notice requirement may be met by amending existing notices or including a separate document along with them. Specific content requirements apply;
  2. Notice of extended election period: Must be provided to individuals eligible for an extended election period within sixty (60) days after April 1, 2021;
  3. Notice of expiration of subsidy: Must be provided between forty-five (45) and fifteen (15) days before the date on which an individual’s subsidy will expire, unless the subsidy is expiring because the individual has gained eligibility for coverage under another group health plan or Medicare.

            The Department of Labor (DOL) provides Administrators and/or Employers with “Model Notices” on its website as a resource to verify compliance with COBRA specific content requirements and permitted use. The DOL is scheduled to issue updated model notices within thirty (30) days of the ARPA enactment. The Model Notices can be used to inform eligible individuals of the availability of assistance and the availability of the extended enrollment period. Approximately fifteen (15) days after the expiration of the thirty (30) day period, the DOL will issue model notices regarding the expiration of the subsidy.

Tax Credits - Offsets 

            In an effort to help offset the costs of providing a 100% subsidy, the ARPA makes available tax credits that may be taken against (private or public) employer Medicare taxes. The credits are based on the COBRA premiums that would have been payable by the qualified beneficiary for the relevant time period of free COBRA coverage. Except as may otherwise be provided by the Secretary of the Treasury, the tax credits are provided to the following persons:

  • If the plan is a multi-employer plan, the multi-employer plan itself;
  • If the plan is fully or partially self-insured, to the employer that sponsors the plan;
  • If the plan is not described above, to the insurance company.

            If the tax credits exceed the amount of payroll taxes due for a particular period, the employer can apply for a refundable tax credit.

            While the subsidy is set to go into effect in just a few weeks, questions remain unanswered regarding obligations of an insurer to give an employer any portion of the tax credit, negotiations between insurers and employers for premium offsets, and application of the new provisions in relation to an employer’s coverage under a stop-loss policy.

Potential Impact on Severance:

            Employers that typically offer payment of COBRA premiums as part of a severance agreement may need to review their agreements in light of ARPA’s mandatory COBRA subsidy.  A severance agreement offering only a now-mandatory (if only temporary) payment of premiums may be legally insufficient as consideration for the waiver of an employee’s other rights. As such, in light of ARPA, any such agreement entered into for the period of time that the subsidy is payable should be carefully reviewed with counsel.

           Further guidance is expected to clarify some of the outstanding questions regarding the above-mentioned issues. Until then, we will continue to monitor for updated guidance and provide timely and appropriate updates as necessary.  If you have questions, please contact a member of our Employment Practices Group at 1-888-488-2638.