Legal Alert

IRS Weighs in on ARPA COBRA Subsidy

By Ed Leeds
May 19, 2021

Summary

The IRS issued guidance on a wide range of questions pertaining to the subsidies that employers are required to offer to COBRA qualified beneficiaries under the American Rescue Plan Act.

The Upshot

The guidance follows up on prior U.S. Department of Labor guidance, is generally consistent with prior IRS guidance, and includes an extensive set of questions and answers on:

  • when the subsidy applies;
  • who is entitled to a second chance at making a COBRA election;
  • how the rules work with the extended COBRA election periods required on account of the COVID-19 national emergency declaration; and
  • what procedures need to be followed to claim the tax credit for subsidizing COBRA coverage.

The Bottom Line

Many employers are far along in their processes or plans to comply with the ARPA COBRA subsidies. For those who have been following prior guidance, the new notice is likely to present few obstacles—and may present some opportunities—to their compliance efforts.

In a lengthy notice, the IRS offered guidance on a wide range of questions pertaining to the subsidies that employers are required to offer to COBRA qualified beneficiaries under the American Rescue Plan Act.

Following up on guidance previously issued (with model forms) by the U.S. Department of Labor, the IRS notice includes an extensive set of questions and answers on when the subsidy applies, who is entitled to a second chance at making a COBRA election, how the rules work with the extended COBRA election periods required on account of the COVID-19 national emergency declaration, and what procedures need to be followed to claim the tax credit for subsidizing COBRA coverage. 

Although not completely duplicative, the new notice is generally consistent with prior guidance, including guidance that was issued in 2009 when COBRA subsidies were made available on account of the recession under the American Recovery and Reinvestment Act. The new notice provides guidance that addresses certain subjects broadly, but also focuses on very specific issues.

The following includes a sample of the notice’s significant guidance. NOTE: Some of the examples below have been created for this alert for illustration.

An involuntary termination is generally defined by reference to an employer’s unilateral action to end an employee’s employment. But in some circumstances, resignations may be considered involuntary, such as where employees know that they will be fired by the employer if they do not resign or where a material change in the circumstances of employment (such as a transfer to another geographic location) prompts an employee to leave.

  • The subsidy ends when an individual becomes eligible for other group health coverage or Medicare. An individual will not be considered eligible for other group health coverage if the individual has no current opportunity to enroll for that coverage. This may occur, for example, when an involuntarily terminated employee fails to enroll for coverage in a spouse’s plan during the annual enrollment period, has no extended special enrollment rights, and now must wait for the next enrollment period (or a qualifying change in status) to enroll.
  • The subsidy applies only to the premiums for COBRA qualified beneficiaries. If, for example, a single employee with no children were to be involuntarily terminated, elect COBRA at a premium of $800 per month, get married and add a spouse to the coverage, paying $1,500 per month, the new spouse would not be a COBRA qualified beneficiary because the spouse was not covered when the employee was terminated. Accordingly, the subsidy would apply only to $800. The employee would need to pay the remaining $700.
  • The right to a second opportunity to elect continuation coverage applies only to coverage under the federal COBRA law and not to coverage under state mini-COBRA laws. 
  • The right to a second COBRA election and an ARPA subsidy cannot be denied simply because an individual is delinquent in paying past COBRA premiums. 
  • An individual who, on April 1, 2021, retains a right to elect COBRA coverage retroactively may choose to make a retroactive election or to start coverage on or after April 1, 2021. If the employee makes a retroactive election, premiums will be due for coverage prior to April 1. If the individual elects COBRA on a prospective basis, the individual may not later elect retroactive coverage.
  • When the subsidy ends, COBRA coverage will continue automatically, but without the subsidy.
  • Plans may require elections under the ARPA to be made in accordance with the 60-day ARPA deadlines. The extension for making other COBRA elections under the COVID-19 emergency declaration does not apply to ARPA elections.
  • The premium tax credit applies only to subsidies provided under the ARPA. If an employer otherwise subsidizes coverage, for instance, under a severance agreement, an employer may claim a tax credit only for the ARPA subsidy, which will be the amount of the COBRA premium minus the severance subsidy. However, an employer that currently charges an employee less than the full COBRA premium may increase the amount that it charges, up to the full COBRA premium, and claim the full amount as a premium tax credit.
  • An employer should retain documentation to support the amount that it claims as a premium tax credit. This documentation may include an individual’s attestation that he or she qualifies for a COBRA subsidy. An employer may rely on that attestation.

Many employers are far along in their processes or plans to comply with the ARPA COBRA subsidies. For those who have been following prior guidance, the new notice is likely to present few obstacles (and may present some opportunities) to their compliance efforts. The notice addresses a wide range of issues and details not referenced above. The IRS has stated that it may (but there is no commitment that it will) provide guidance on other specific issues.


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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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