On Tuesday, May 18, 2021, the Internal Revenue Service (IRS) issued Notice 2021-31, providing employers more detailed guidance on the Consolidated Omnibus Budget Reconciliation Act (COBRA) premium assistance and tax credit provisions of the American Rescue Plan Act of 2021 (ARP). The ARP generally provides temporary COBRA premium assistance for eligible individuals who lost group health plan coverage due to an employee’s involuntary termination of employment or reduction in hours (and who are not eligible for other group health coverage or Medicare). Eligible individuals are treated as having paid the full amount of any applicable COBRA premium for coverage during the period beginning April 1, 2021, and ending September 30, 2021. Persons to whom such COBRA premiums would otherwise have been paid are then entitled to refundable tax credits against their share of Medicare taxes. View our previous Sidley Update, The World According to ARP: Key Employee Benefits Changes Under the American Rescue Plan.
Notice 2021-31 provides much-needed context around many of the questions that have arisen with respect to the COBRA premium assistance available under the ARP. Notice 2021-31 sets forth 86 frequently asked questions with answers, the key provisions of which are summarized below.
Recordkeeping and Substantiation Requirements: Employers (or other payees) who claim the credit are required to keep documentation substantiating eligibility for the credit, including documentation demonstrating that individuals were eligible for the COBRA premium assistance (assistance-eligible individuals or AEIs). Therefore, employers should strongly consider requiring self-certifications or attestations regarding an individual’s eligibility for COBRA premium assistance. Employers may rely on an individual’s self-certification or attestation unless the employer has actual knowledge to the contrary.
Eligible Individuals: AEIs are qualified beneficiaries whose loss of coverage resulted from either (a) an employee’s involuntary termination of employment (other than by reason of gross misconduct) or (b) voluntary or involuntary reduction in hours. (This includes individuals who remain on COBRA for an extended period due to a disability determination or second qualifying event, as long as the original qualifying event was an involuntary termination of employment or reduction in hours.) AEIs must be covered under the group health plan on the day before such involuntary termination or reduction of hours.
Because the determination of whether termination is involuntary is based on facts and circumstances, the Notice helpfully includes a number of Q&As expanding on the general rule that an involuntary termination exists only where there has been an independent exercise of authority by an employer to terminate the employment where the employee is willing and able to continue performing services.
- A resignation for good reason could constitute an involuntary termination if the facts indicate that there was a material negative change in the employment relationship analogous to a constructive discharge. An employee’s resignation due to a material change in geographic location of the employment location, or due to an involuntary material reduction in hours, is considered an involuntary termination of employment.
- The failure to renew an employee’s contract generally is an involuntary termination if the employee was willing and able to continue the employment contract and execute a new contract with similar terms, unless the original contract was for specified services over a set term with the understanding that it would not be renewed.
- The mere absence from work due to illness or disability is not an involuntary termination if there is a reasonable expectation that the employee will return to work after the illness or disability has subsided. However, an employer action taken to terminate the employment relationship while the individual is absent is an involuntary termination for this purpose. Also, an absence from work that results in a coverage loss may qualify as a reduction in hours.
- An employee’s termination of employment due to general concerns about workplace safety, or personal concerns unrelated to the employer, is not an involuntary termination of employment unless the employee can demonstrate that the employer’s failure to take a required action and/or lack of a reasonable accommodation resulted in a material negative change in the employment relationship analogous to a constructive discharge.
- Employees who terminate employment because they cannot send their children to school or daycare due to COVID-19 typically are not treated as having been involuntary terminated. However, such an employee could qualify as an AEI on the grounds of a reduction in hours if the employee and employer intend for the employee to return to work.
- The death of an employee is not a reduction in hours or an involuntary termination of employment permitting the employee’s spouse or other dependents to qualify as AEIs.
- An employer’s termination of an employee for cause is an involuntary termination satisfying the AEI requirement unless the cause event qualifies as gross misconduct.
A reduction in hours includes a furlough or work stoppage due to strike or lockout as long as the employer and employee intend to maintain the employment relationship.
Eligible Health Plans Subject to COBRA Premium Assistance: Premium assistance is generally available for COBRA continuation coverage under any group health plan (including vision-only and dental-only plans, regardless of whether the employer subsidizes coverage for active employees). This includes retiree health coverage as long as retiree coverage is offered under the same group health plan offered to similarly situated active employees and health reimbursement arrangements but excludes health flexible spending accounts and qualified small employer health reimbursement accounts. COBRA premium assistance is not available, however, if the premiums for the coverage are greater than the premiums for the coverage in which the individual was enrolled prior to the involuntary termination or reduction in hours, unless that coverage is no longer available or the higher cost coverage is elected as part of open enrollment.
Extended Election Periods and Emergency Relief Notices: The ARP offers AEIs who did not have a COBRA continuation coverage election in place on April 1, 2021, a “second bite at the apple” to elect COBRA and receive the COBRA premium assistance. However, Notice 2021-31 makes clear that the extended timeframes applicable to group health plans and their participants and beneficiaries in response to the COVID-19 pandemic national emergency (which generally extend deadlines occurring after March 1, 2020 for one year (or if earlier, until 60 days after the announced end of the national emergency)) (the Emergency Relief) do not apply to the date by which the ARP extended election notice must be furnished nor the ARP extended election period to elect COBRA coverage with COBRA premium assistance. Accordingly, the notice of the ARP extended election period must be furnished by May 31, 2021, and an individual receiving the notice must elect COBRA continuation coverage no later than 60 days after receiving such notice in order to receive the COBRA premium assistance. Such election may apply only to periods starting April 1, 2021 or retroactive to the original loss-of-coverage date; however, premium assistance is available only for periods of coverage beginning on April 1, 2021. If an individual electing COBRA coverage with premium assistance for the period starting April 1, 2021, does not within the same 60-day period elect COBRA retroactive to the original loss-of-coverage date, such individual forfeits the right to elect retroactive COBRA coverage, notwithstanding any Emergency Relief provisions.
Calculation of COBRA Premium Assistance Credit and Impact of Normal-Course Employer Subsidy: The amount of the COBRA premium assistance credit depends on whether the employer subsidizes COBRA premium costs for similarly situated qualified beneficiaries who are not AEIs (e.g., pursuant to a severance plan). If the employer does not subsidize COBRA premium costs, the amount of the credit is the entire premium paid plus any administrative costs (up to 102%), but if the employer subsidizes all or any portion of such premium, then the amount of the credit is reduced by the amount of such subsidy.
Claiming the COBRA Premium Assistance Credit: An employer (or other payee) becomes entitled to the premium assistance credit as soon as it receives notice of an individual’s election of COBRA continuation coverage for any periods of coverage that began before that date, and then as of the first day of each month for subsequent coverage periods (assuming COBRA premiums are charged monthly). The employer (or other payee) generally claims the credit on its Form 941. In anticipation of receiving the credit, an employer may reduce the deposits of employment taxes, up to the amount of the anticipated credit, and request an advance of the remaining amount of the anticipated credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. Deposits may not be reduced, and advances may not be requested, for credits until the applicable period of coverage has begun.
An employer (or other payee) may still claim the credit with respect to an ineligible AEI who fails to inform the employer of disqualifying other coverage provided the employer does not know the individual is no longer eligible. If an employer (or other payee) reimburses an AEI for COBRA premiums previously paid by the AEI, the employer is entitled to the credit on the date the employer reimburses the AEI for the premium amounts for which the individual should have received COBRA premium assistance.
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