American Rescue Plan Act’s COBRA health care premium subsidy

[UPDATE: On April 7, 2021, the Department of Labor issued the model notices required by ARPA, as well as an FAQ to provide additional guidance on the changes to the COBRA subsidies.]

COBRA requires an employer-sponsored group health plan to give employees who otherwise would lose coverage due to termination (or another qualifying event) a chance to continue to buy coverage for themselves and any family members on the plan for a limited period after that event. The maximum coverage period generally is 18 months. The plan typically may charge up to 102 percent of the cost of coverage for similarly situated active participants (the COBRA premium).

ARPA provides a 100 percent premium subsidy for eligible individuals to purchase COBRA coverage if they are eligible for COBRA coverage between April 1 and September 30, 2021, due to involuntary termination or reduction in hours of employment, regardless of when that occurred. ARPA does not provide the subsidy directly to eligible individuals. Instead, if an eligible individual elects COBRA, ARPA prohibits the plan from charging the individual for the premiums and associated fees. The employer is reimbursed via a credit against its payroll taxes, or a refund to the extent the credit exceeds its tax liabilities. The subsidy is not available with respect to COBRA coverage under a health flexible spending account.

An eligible individual who does not have a COBRA election in effect by April 1, 2021, may elect COBRA coverage during an extended election period under ARPA. This also applies to individuals who elected COBRA but discontinued it before April 1, 2021. The individual has 60 days after receiving a notice of this right to make the election. If the individual elects COBRA coverage, the coverage begins with the first period of coverage after enactment of ARPA. A period of coverage is the period for which premiums are charged under the plan, so for most plans the coverage will begin April 1, 2021. The employer may, but is not required to, allow an eligible individual who already has elected COBRA coverage to change to a less expensive enrollment option under the plan. The individual has 90 days after receiving a notice of this right to elect different coverage. These changes will require group health plans to make temporary changes to their COBRA election procedures.

The subsidy is available beginning with the first period of coverage under the plan that starts after March 11, 2021. It is available through September 30, 2021, but ends if the individual is eligible for Medicare or another group health plan. (Eligibility is enough for this purpose; actual coverage is not required.) The eligible individual is required to notify the plan if and when this occurs. The subsidy also ends upon expiration of the maximum period of coverage under federal COBRA. The subsidy is not subject to tax.

The plan administrator must amend its existing COBRA notices to include information about the new subsidy and election rights, or provide this information in a separate, written notice. The notice must comply with existing requirements for COBRA election notices, and must note the availability of premium assistance under ARPA and the option to enroll in different coverage if the employer so permits. ARPA also requires disclosures concerning expiration of the premium assistance period and extended election periods. For eligible individuals who become entitled to COBRA coverage from April 1 to September 30, 2021, the plan administrator must include notice of the availability of premium assistance with its usual COBRA notice. For individuals already on COBRA who became entitled earlier, or who became entitled to COBRA coverage earlier, but declined or dropped coverage, the plan administrator must send notice of the availability of premium assistance and, if applicable, the extended COBRA election period by May 31, 2021. The Department of Labor is required to make a model notices available by April 10, 2021 (which probably means April 9, 2021, since April 10 is a Saturday).

The Internal Revenue Service and Department of Labor are working on guidance related to the new provision, including the eligibility rules and the mechanism for claiming the tax credit, including the possibility of credit advances before the end of a quarter, but so far have not issued any. Meanwhile, some guidance is available under a similar provision enacted in 2009. For questions about ARPA and COBRA requirements applicable to your workplace, contact an author of this blog post or the Hogan Lovells lawyer with whom you regularly work.

Heather McAdams, a Law Clerk in the New York office, contributed to this post.

Authored by  Kurt L.P. Lawson and Patricia Ambrose