The American Rescue Plan Act of 2021 (ARPA), signed by President Biden on March 11th made significant changes to COBRA coverage for certain employees, former employees and their families. Notably, as of April 1st, the Act creates a six-month window where “assistance-eligible individuals” are entitled to a 100% subsidy of health insurance premiums under COBRA. In other words, employers must pay the full cost of the premiums. The ARPA period runs from April 1, 2021 to September 30, 2021. Although employers must subsidize COBRA benefits during this period, the ARPA provides tax credits to employees to offset the cost.

COBRA is a federal law which obligates employers (including state and local government employers) with group health plans to offer covered employees and covered dependents the right to continue coverage under the group health plan in certain circumstances where the coverage otherwise would cease. Group health plans that fall within COBRA include medical, prescription drug, dental and vision plans, but does not include health care flexible spending accounts. There is a small employer exemption to COBRA that applies if all employers maintaining the group health plan normally employed fewer than 20 employees on a typical business day in the preceding calendar year.

“Assistance-eligible individuals” are employees or former employees (and their eligible dependents) who have lost coverage under an employer’s group health plan due to a reduction in hours or an involuntary termination for reasons other than gross misconduct. ARPA does not extend the maximum applicable COBRA continuation period, but the ARPA does allow assistance-eligible individuals to take a second bite of the apple if they are not currently participating in the group plan through COBRA. The ARPA subsidy is open not only to assistance-eligible individuals with existing COBRA coverage, but also to those who did not initially elect COBRA coverage, declined COBRA coverage, or discontinued COBRA coverage if they are within the initial maximum applicable COBRA continuation period (usually 18 months) from the involuntary termination or reduction in hours. Employees who were terminated or had their hours reduced as far back as 2019 would thus potentially be eligible for the subsidized coverage. Although this benefit is tied to President Biden’s COVID-relief bill, it is notable that the reductions in hours or involuntary terminations need not be related to the COVID-19 pandemic.

ARPA also creates new notice requirements for plan administrators. Any assistance-eligible individual must receive notice no later than May 31, 2021, that they are eligible for the subsidized coverage, as well as notice of the period for electing the coverage. Employers must identify all former employees who suffered involuntary terminations (and all employees or former employees who experienced a reduction in hours) who are still in their initial COBRA coverage period and provide them and their eligible dependents with adequate notice by May 31st (or work with their plan administrators to ensure such notice is timely given). Employees and their dependents who become assistance-eligible individuals on or after April 1 must also receive notice of their eligibility for subsidized coverage under ARPA. The Department of Labor has released model notices which can be found at https://www.dol.gov/agencies/ebsa/laws-and-regulations/laws/cobra/premium-subsidy

Importantly, employers who cover the cost of premiums are eligible for a tax credit against Medicare taxes equal to 100% of the cost of the premiums. Further, the credit is refundable, so employers can recover the entire value of the credit even if it exceeds their Medicare tax obligations.

If you have any questions about the changes to COBRA which became effective April 1, 2021, please feel free to contact Kemp Smith’s Labor and Employment Department at 915-533-4424.