American Rescue Plan: How to Navigate New Continuation Coverage Standards for COBRA

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (“ARPA” or the “Act”), the latest COVID-19 relief bill, into law. Under ARPA, employers will generally be obligated to advance the cost of continuation coverage required under the Consolidated Omnibus Budget Reconciliation Act (“COBRA continuation coverage”) for eligible individuals from April 1, 2021 to September 30, 2021, with the right to recover the amounts advanced through tax credits.

Generally, COBRA continuation coverage permits former employees and other qualified beneficiaries to continue receiving coverage under an employer’s group health plan following a qualifying event that results in a loss of such coverage. Ordinarily, continuation coverage may be paid for by the individual, but may also be paid (in whole or in part) by the employer. ARPA provides COBRA continuation coverage, temporarily and at no cost, to assistance eligible individuals and imposes new notice and payment obligations on many employers.

Eligibility

To be eligible for subsidized coverage, ARPA provides that a qualified beneficiary must be an “assistance eligible individual” or eligible to the same extent as an assistance eligible individual. Assistance eligible individuals are former employees who were involuntarily terminated for reasons other than gross misconduct, or who experienced a reduction in hours. Spouses and dependent children of such individuals are also assistance eligible individuals. Individuals who did not elect COBRA coverage during their initial election period, or whose COBRA coverage has lapsed (for example, due to non-payment of premiums), are eligible to the same extent as assistance eligible individuals so long as the otherwise applicable maximum COBRA coverage period has not expired. Accordingly, employers must permit a second COBRA coverage election window for such individuals. To avoid confusion, both groups are referred to herein as “assistance eligible individuals.”

Individuals who voluntarily resigned are not eligible for the ARPA subsidy, nor are individuals who are eligible for group coverage from another source (a spouse’s or new employer’s plan, for example). The subsidy is also available to assistance eligible individuals whose employers are not subject to federal COBRA requirements, but instead are subject to comparable state laws (commonly referred to as state “mini-COBRA” laws).

The subsidy is available to assistance eligible individuals for the portion of their period of COBRA eligibility that falls between April 1, 2021 and September 30, 2021. Notably, ARPA does not extend the otherwise applicable COBRA eligibility period. The subsidy is available for all assistance eligible individuals who currently have COBRA coverage because of a qualifying event that occurred prior to April 1, 2021, as well as assistance eligible individuals who become newly eligible for COBRA between April 1, 2021 and September 30, 2021. In subsequent FAQs, the DOL clarified that an assistance eligible individual has the choice of electing COBRA continuation coverage beginning April 1, 2021 or after, or from the date of an earlier qualifying event if the individual is eligible to make that election, including under the extended time frames provided under ARPA.

As an additional, optional measure, employers may allow eligible individuals to elect to enroll in a different coverage option than they are currently enrolled in, or were eligible to enroll in, as long as: (1) the premium cost of such coverage does not exceed the premium cost of their coverage at the time of termination, (2) the coverage is also offered to similarly situated active employees, and (3) the coverage does not only provide excepted benefits, is not a qualified small employer health reimbursement arrangement, and is not a flexible spending arrangement. If an employer chooses to adopt this provision, employees may change the coverage in which they are enrolled up to 90 days after receiving the associated notice.

Tax Credits

An assistance eligible individual will not be responsible for paying his or her COBRA premium during the premium subsidy period. Instead the employer or insurance company will be responsible for advancing the COBRA premiums and then will recoup that amount through tax credits. These tax credits will be available to the “person” to whom the premium is due. Depending on whether a plan is self-insured or fully insured, that “person” may be either the employer or the insurer. For all plans subject to the federal COBRA continuation requirements, as well as self-funded plans not subject to the federal COBRA continuation requirements, that “person” is the employer. For fully insured plans not subject to the federal COBRA continuation coverage, that “person” is the insurer.

Should the tax credit exceed the relevant tax liability, the excess is refundable to the employer. Additionally, the whole credit (including the refundable portion) may be advanced to the employer. Notably, no credit will be allowed with respect to amounts that were taken into account as qualified wages under the CARES Act or qualified health plan expenses under the Families First Coronavirus Response Act. Finally, if the eligible individual has paid COBRA premiums while they were entitled to the subsidy, then the employer or insurer (as applicable) will need to reimburse the individual within 60 days of the date the individual made the premium payment.

Notices

ARPA requires that an employer provide notices regarding the availability of the subsidy, the new election opportunity, and the subsidy expiration. A notice concerning availability of the subsidy and, if an employer elects, the opportunity to change coverage, must be provided by May 31, 2021 for individuals who were eligible to elect COBRA coverage prior to April 1, 2021. For individuals newly eligible for COBRA coverage on or after April 1, 2021, the notice may be sent together with the regular COBRA notice by either inserting language into the current notice or including a separate notice with the package. A notice that details the expiration of the subsidy must be provided by the employer between 45 days and 15 days prior to the expiration of the assistance eligible individual’s subsidy. An assistance eligible individual also has notice obligations under ARPA. It is an individual’s responsibility to notify the employer if he or she becomes ineligible for the subsidy due to becoming eligible for another group health plan, a flexible spending arrangement, a qualified small employer health reimbursement arrangement, or Medicare. If the assistance eligible individual becomes ineligible due to becoming eligible for another arrangement, then the employer is not required to send a notice of expiration to that individual. The Department of Labor has issued model notices for use by employers to assist in complying with these requirements.

Next Steps

Given that the ink is still drying on ARPA and some items are left unclear by the text of the Act, it is expected that further agency guidance will be forthcoming. In order to prepare for implementation of these requirements, employers should ensure that their records are able to identify assistance eligible individuals and confirm whether their group health plan providers will be facilitating ARPA compliance and distribution of applicable notices. If an employer uses a COBRA administrator, it should coordinate with the administrator on satisfaction of these new obligations. COBRA compliance is ultimately the responsibility of the Plan sponsor, even if third party service providers have been engaged.

As noted above, employers are required by May 31, 2021 to provide notices to individuals who: (i) are currently enrolled in COBRA; (ii) were eligible to elect COBRA coverage on or after October 1, 2019 but did not elect it; and (iii) were eligible to elect COBRA coverage on or after October 1, 2019, elected it and then discontinued it. They are also required to provide notices of ARPA subsidy rights to those who have become or in the future become eligible for the subsidy.

Employers should also be attentive to current COBRA arrangements. For example, partial but not complete subsidies of COBRA coverage are frequently included as elements of separation agreements with involuntarily terminated employees. Such agreements often provide for the former employee’s COBRA continuation contributions to be withheld from severance pay. Employers should cease withholding such portions and should reimburse employees for any such withholdings for the period from and after April 1, 2021, until the former employee’s eligibility for the subsidy ends.

These new COBRA requirements are complex. If you have any questions, please reach out to a member of your Goodwin team.