The American Rescue Plan Act fully subsidizes premiums for COBRA health coverage from April 2021 through September 2021 and requires special COBRA election periods and extensive new COBRA notices.
The bill provides a 100% subsidy for COBRA continuation coverage for “assistance eligible individuals” — that is, COBRA qualified beneficiaries. This group includes any employees along with their spouses and dependent children who lose (or lost) group health plan coverage due to the employee’s involuntary termination of employment or reduction of work hours and elect (or elected) COBRA coverage. Other COBRA qualifying events causing a loss of coverage, such as voluntary termination of employment, death of a covered employee, or dependent aging out, won’t qualify for a subsidy. Subsidy-eligible COBRA coverage can include hospital and major medical coverage as well as dental and vision plans, but not health flexible spending arrangements (FSAs).
The premium assistance will be available from April 1, 2021, through Sept. 30, 2021, regardless of whether COBRA coverage began earlier or ends later. The subsidy will end sooner than September for qualified beneficiaries whose maximum COBRA coverage period ends earlier (as measured from the date of the original COBRA qualifying event) or who become eligible for another group health plan (other than excepted benefits) or Medicare.
Subsidy-eligible individuals electing coverage pay no portion of the premium for health coverage. Employers and plans that comply with certain reporting requirements will receive refundable tax credits equal to the premiums that individuals otherwise would have owed. The Internal Revenue Service will provide the credit through a reduction of Medicare payroll taxes. Employers will obtain the subsidy through a payroll tax credit against employers’ quarterly taxes and will be responsible for paying health insurance carriers for the premiums. Both fully insured and self-insured group health plans subject to federal COBRA are eligible for the credit against their Medicare FICA payroll taxes and must provide the COBRA premium subsidy to assistance eligible individuals who have elected COBRA coverage. If the credit exceeds the amount of payroll taxes due, the credit would be refundable when employers submit Form 941 quarterly tax return. The credit can also be advanced.
How The Six-month Subsidy Works
Only assistance-eligible individuals (AEIs) qualify for a subsidy and excludes employees who voluntarily end employment. An assistant eligible individual (AEI) is someone who, in the time period between April 1 and September 30, 2021, is eligible for COBRA coverage due to an involuntary termination and elects such coverage. An AEI no longer is eligible for a subsidy upon the earliest of his or her becoming eligible for other group health plan coverage or Medicare or the expiration of his or her maximum COBRA period.
Tax credits will apply as follows:
- If a group health plan is subject to federal COBRA, then the employer receives the tax credits, whether it’s fully insured or self-insured, and pays the insurer or third-party administrator (TPA) to subsidize coverage for AEIs that elect COBRA coverage through September 2021.
- If a self-funded plan is not subject to federal COBRA, but the state requires continuation coverage, the employer receives the tax credit and pays the insurer/TPA to subsidize coverage.
- If a fully insured plan is not subject to federal COBRA, but the state requires continuation coverage, then the insurer receives the tax credits and is responsible for ensuring AEIs’ continuation coverage at no cost.
New COBRA Election and Notice Periods
A 60-day special election period is available to assistance-eligible individuals who haven’t exhausted their original 18-month COBRA period and either did not elect COBRA when first eligible or elected COBRA but dropped it before April 1, 2021. An assistance-eligible individual who did not initially elect COBRA or who elected but dropped COBRA coverage prior to April 1 may receive the subsidy on a prospective basis without electing and paying for COBRA retroactively for months prior to the subsidy becoming available. Within 60 days of April 1, 2021, employers’ COBRA notices will have to include information about the subsidy’s availability and the special 60-day enrollment period for qualified beneficiaries.
Increased ACA Marketplace Subsidies for 2021 and 2022
The legislation fully subsidizes ACA marketplace coverage for individuals earning up to 150% of the federal poverty level and anyone receiving unemployment insurance in 2021. The measure also expands subsidy eligibility to individuals earning more than 400% of the federal poverty level and caps their premium costs at 8.5% of household income. This subsidy expansion will last for taxable years beginning in 2021 or 2022. The bill makes no changes to the ACA’s employer shared-responsibility requirements. The Health Insurance Marketplace Calculator provides estimates of health insurance premiums and subsidies for people purchasing insurance on their own in health insurance exchanges (or “Marketplaces”).
We will continue to provide additional updates regarding this legislation. There is a lot of available information available to assist taxpayers experiencing COVID-19 related financial difficulties to be aware of these options and get assistance. Contact us today to review your options.
Maria is a Partner at Wilke & Associates, servicing closely-held businesses in manufacturing, real estate, transportation/logistics, technology industries, and high net worth individuals and executives in delivering effective tax strategies.