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IRS releases follow-up guidance on COBRA subsidy

Earlier this year, the federal Department of Labor enacted a 100-percent premium subsidy for eligible individuals enrolled in COBRA as part of the American Rescue Plan Act (ARPA).

This subsidy is available for assistance eligible individuals (AEI) between April 1 and Sept 30, 2021. An AEI is defined as anyone who “(1) is a qualified beneficiary as the result of the covered employee’s reduction of hours or involuntary termination of employment; (2) is eligible for COBRA coverage for some or all of the COBRA premium subsidy period … and (3) elects COBRA.”

For most AEIs, the 60-day period to sign up for this benefit has ended. COBRA administrators must plan to send a final notice to all recipients of the subsidy to remind them that it will end on Sept. 30. These notices are also required if someone’s COBRA eligibility has reached its maximum time limit, typically 18 months. Former employees could remain eligible for COBRA, but without the premium assistance.

It’s important than group health plans send the expiration notice to AEIs 15 to 45 days before their assistance expires.

Follow-up guidance

Here are some key points of clarification under the IRS follow-up guidance related to the subsidy:

  • If a health plan is subject to both state-mandated continuation coverage and federal COBRA coverage, the IRS states that the employer is the “premium payee.” That means that the employer is eligible to claim the tax credit for the subsidy, not the insurer. That is true even if under the state-mandated continuation coverage, the AEI must pay premiums directly to the insurer when the federal COBRA period ends. To claim the tax credit, employers are required to report the credit and the number of individuals receiving assistance on their federal employment tax returns. The proper form to use is typically Form 941, which is usually due by the last day of the month following the end of the quarter.
  • If an AEI’s original 18-month COBRA continuation coverage expires, but they are allowed to elect extended continuation coverage due to a second qualifying event, they still qualify for the subsidy for the extended period if it falls between April 1 and Sept. 30.
  • The guidance says that if an AEI elected COBRA continuation coverage for dental-only or vision-only coverage, they are no longer eligible for a subsidy at the point when they become eligible for any other disqualifying group health plan or Medicare. That is true even if the new coverage does not include dental or vision coverage.
  • According to the guidance, individual-state continuation coverage provides comparable coverage to COBRA continuation coverage, which means that AEIs may access the subsidy. That is the case even if a state program only covers a subset of state residents.

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