The American Rescue Plan Act (“the Act”) signed in March 2021 provides for a 100% COBRA premium subsidy for certain individuals who are eligible for and enroll in COBRA coverage between April 1, 2021 and September 30, 2021. Employers sponsoring health plans should take action quickly to ensure that the subsidy is properly administered and consider its effects on any planned layoffs or other severance events.
In order to be eligible for the subsidy, an individual must have lost health coverage (including dental or vision) due to a COBRA qualifying event that is an involuntary termination of employment or a reduction in hours – an employee who voluntarily quits does not qualify. The individual is then eligible for a full subsidy of their COBRA premiums from April 1, 2021 through the earliest of (a) September 30, 2021, (b) the end of his or her maximum COBRA coverage period, or (c) the date that he or she becomes eligible for other group health plan coverage (with certain exceptions) or for Medicare. The subsidy provisions impose an obligation on individuals to notify their health plan administrators of their eligibility for other coverage that would make them ineligible for the subsidy, subject to penalties for not doing so.
Notably, the subsidy applies not only to qualified beneficiaries who have a COBRA qualifying event after the enactment of the Act, but also to individuals who previously had a qualifying event and are still within their COBRA coverage period (18 months in most cases). As part of this, group health plans are required to offer a “second chance” election to qualifying individuals who previously experienced an eligible COBRA qualifying event but either declined COBRA, or who previously elected COBRA and let it lapse prior to April 1. Coverage under a new election will generally be effective April 1 and will extend until the end of the original COBRA window. The Act also permits (but does not require) group health plans to allow eligible individuals to make changes to their health plan elections, so long as the new option that the individuals elect is no more expensive than the coverage in which they were enrolled at the time of their COBRA qualifying event.
The Act requires that a notice be provided to individuals who are eligible for the subsidy, no later than May 31, 2021. The notice must include, among other things, forms needed to establish eligibility, information on the subsidy generally, conditions to receive it, any extended election period, and the individual’s obligation to notify the plan of any other coverage for which they are eligible. In addition, eligible individuals must also receive a separate notice 15-45 days before their subsidy ends (unless it is due to eligibility for other coverage). The Department of Labor has been directed to issue model notices.
The COBRA subsidy is not paid directly by the government. Instead, employers are generally responsible for paying the cost of COBRA contributions on the employee’s behalf, and then recouping that cost from the government by claiming a credit against their Medicare payroll taxes.
As a first step, health plan sponsors should work with their COBRA administrators to confirm that affected individuals will receive timely notice of the subsidies, and to understand what other steps may be needed to administer the subsidy.
In addition, health plan sponsors will need to consider how the new COBRA election window might overlap with existing election rights. In 2020, the government issued relief suspending certain time limits under ERISA, including the time period to elect COBRA coverage, up to one year (which we previously covered in a client alert). An individual who had a qualifying event prior to April 1 and is still within the extended election window may separately have the right to elect coverage retroactive to his or her original COBRA effective date. As a result, some participants may effectively have the right to choose whether to have their coverage apply retroactively or prospectively starting with the subsidy period. These rules are highly complex and fact-specific. Health plan sponsors should work with their COBRA administrators to ensure that the required notice is timely provided to health plan participants, and that the new election window is opened up to eligible individuals (where applicable) as required by ARPA.
Finally, employers anticipating layoffs and/or entering separation agreements with employees during the next 6 months will want to consider how the COBRA subsidies might affect any severance payments, particularly if the company has a policy or practice of offering COBRA reimbursements or lump sum payments for post-termination health care costs.