New Federal Legislation Has Changed the COBRA Rules
Michael G. Trachtman |
Employer responsibilities under COBRA will drastically change on April 1, and the risks of noncompliance can be substantial. As compared to other recent developments, this has flown under the radar. Below is a summary of what you need to know – it will be important for employers to get out in front of these new requirements, which can be complex and hyper-technical. We have attorneys who have studied the new rules closely and can assist you as needed.
Traditionally, COBRA requires employers to offer terminated employees (and certain family members) the right to pay the premiums required to keep their group health coverage in effect post termination. The bad news: the recently passed American Rescue Plan Act (often referred to as “ARPA”) requires employers to pay the COBRA premiums for terminated employees (and family members) who become eligible for COBRA benefits between April 1, 2021 and September 30, 2021. The OK news: the federal government will ultimately subsidize your payment of the COBRA premium through a tax credit so long as you comply with the significant financial and administrative burdens ARPA imposes.
There are, as always, devils in the details. By way of highlights, note the following:
- The new ARPA rules apply to employees and family members who experience a “qualifying event” which disentitles them to coverage under a group plan, such as termination or a reduction in hours, between April 1, 2021 and September 30, 2021. There are some additional complexities but, basically, individuals are covered if …
- They are already enrolled in COBRA coverage on April 1, 2021.
- They could have been enrolled in COBRA coverage on April 1, 2021 but were not because they failed to elect coverage or elected coverage but subsequently dropped it.
- They first become eligible for COBRA coverage during the April 1, 2021 and September 30, 2021 subsidy period.
- Only individuals who suffered an involuntary termination of employment or a reduction in hours of work are eligible – this can get complicated.
- To obtain reimbursement for the COBRA payments, employers will be able to claim a tax credit against their quarterly payroll tax returns. We expect Treasury to offer guidance and regulations in the coming weeks and months.
- Certain information must be provided to individuals who may be eligible for these benefits. You will need to update your notice content and protocols.
So, what do you do now?
Begin identifying individuals who are eligible for the new open enrollment period, explained below. If you administer COBRA in-house you will need to do this on your own. If you have a third-party COBRA administrator reach out now to discuss its strategy for identifying these individuals. From a practical standpoint this will include individuals dating back to November of 2019. The DOL may not issue model notices until after the subsidy period begins on April 1, 2021, so employers need to be prepared to field questions from former employees about the subsidies.
As always, let us know if we can help. And stay well.
Below are more detailed answers our attorneys have prepared to some of the FAQs that many of our clients are asking. We will continue to stay on top of the developments.
How do the subsidy and payment of COBRA premiums work?
Individuals who are eligible for the COBRA subsidy will not receive a subsidy payment directly. Instead, employers are required to waive COBRA premiums during the relevant subsidy period (that is, the employer must treat the COBRA premium as paid in full), taking the burden of such payment off the individual. The subsidy is not taxable income to the individual who receives the subsidy.
Employers that sponsor self-insured health plans and plans that are subject to federal COBRA will be able to offset the lost COBRA premiums by claiming a credit against their quarterly payroll taxes (similar to the way employers recovered the costs of paid leave under the FFCRA). Employers that have at least 20 employees are subject to federal COBRA. The subsidy will cover medical, dental, and vision plans.
If the amount of the tax credit due to an employer exceeds the amount of payroll taxes due for the quarter an employer can apply for a refundable tax credit. In most cases, however, employers will owe more payroll taxes than the amount of tax credit they can claim for COBRA premiums. Both private and public employers are eligible for the tax credit.
What are the notice requirements for the subsidy?
Individuals who become eligible for COBRA during the subsidy period must be given additional information about the subsidy with the standard COBRA notice. Individuals who became eligible for the subsidy before the subsidy period and are eligible for the subsidy must receive a supplemental notice of the new open enrollment period and subsidy. There will also be a required subsidy expiration notice that must be sent to individuals between 45 to 15 days before their subsidy expires. ARPA requires the Department of Labor to issue model notices within 45 days of passage (so by mid-April), but the notice obligation may be satisfied by modifying the existing notice or providing a supplemental insert. ARPA requires that employers distribute the notice no later than May 31, 2021.
When is a termination of employment involuntary?
First, if an individual’s entitlement to COBRA coverage is due to a reduction in hours of employment (for example, due to a leave of absence or shortage of available work), the question of whether it is voluntary or involuntary does not apply. The exclusion from the subsidy only applies to voluntary terminations of employment.
One of the key questions in interpreting ARPA is going to be whether a termination of employment is involuntary. You may recall that congress previously enacted a COBRA subsidy in 2009 as part of the 2009 stimulus package. The IRS released interpretive guidance at the time to help define “involuntary” termination. While there is no assurance that the IRS would reach the same conclusions under ARPA, the 2009 guidance is instructive and may be relevant today.
Under the 2009 guidance an involuntary termination involved:
- Severance of employment
- Due to the independent exercise of the employer’s unilateral authority to terminate the employment other than due to the employee’s implicit or explicit request
- The employee was willing and able to continue performing services.
In the end the determination will be based on all the facts and circumstances, but the following describes how some common scenarios came out in the 2009 guidance.
- An involuntary termination occurred where an employee elected termination in exchange for a severance package and where the employer indicated that after the offer period for the severance package some specified number of employees would be terminated.
- An involuntary termination occurred where the employee initiated a termination due to an employer action that caused a material negative change in the employment relationship for the employee (e.g., a significant change in the geographic location of where services were performed).
Alert provided by:
Michael G. Trachtman
Wisler Pearlstine, LLP
(610) 825-8400 x1740
*This Alert is provided for general informational purposes only and does not constitute legal advice.