As we previously reported, President Biden signed the American Rescue Plan Act (“ARPA”) into law on March 11, 2021, which, among other things, mandates that employers provide 100 percent COBRA premium subsidies to eligible employees (“Assistance Eligible Individuals” or “AEIs”) and their qualified beneficiaries from April 1, 2021, through September 30, 2021 (“Subsidy Period”). An AEI is an employee who has experienced a “qualifying event,” which is either an “involuntary termination” or a “reduction of hours,” and who is, or could have been, eligible for COBRA coverage during the Subsidy Period. Generally, the qualifying event must occur during the Subsidy Period; however, former employees who experienced qualifying events before the Subsidy Period are also eligible under ARPA for an extended COBRA election period.

ARPA creates a series of complicated notice requirements, each with different timelines, which employers must navigate. We have previously advised on the Model Notices and guidance issued by the U.S. Department of Labor to facilitate compliance with these requirements.

On May 18, 2021—more than two months since ARPA’s enactment and less than two weeks before the May 31, 2021, notice deadline applicable to employers—the Internal Revenue Service (“IRS”) issued its long-awaited guidance, in the form of 86 Q&As, which includes helpful examples on how employers, third-party administrators, and insurers can comply with the COBRA subsidy requirements. The Q&As provide guidance on, among other things, who is eligible for the COBRA subsidy, what the terms “reduction in hours” and “involuntary termination” mean, and how to calculate the COBRA premium subsidy tax credit. Since the guidance is quite expansive, a summary of the most notable provisions follows. Further review and individual analysis, however, is highly recommended.

  1. Who Is Eligible for COBRA Premium Assistance?

The COBRA subsidy is available to any individual who (1) had a COBRA qualifying event because of a covered employee’s reduction in hours or involuntary termination of employment and (2) is eligible for COBRA during the Subsidy Period. This group includes AEIs who had enrolled in COBRA prior to April 1, 2021; had enrolled in COBRA prior to April 1, 2021, but discontinued coverage; or had not elected COBRA as of April 1, 2021, and whose maximum period of COBRA coverage has not yet expired. The COBRA subsidy is not available to AEIs who are eligible for other group health plan coverage or Medicare beginning on or after April 1, 2021, even if they do not enroll in either.

Importantly, the IRS has instructed that employers may require individuals to self-certify that they are eligible for the COBRA subsidy due to a reduction in hours or involuntary termination and whether they are eligible for other group health plan coverage or Medicare. Although not required, the IRS has stated that employers that claim the tax credit for such COBRA subsidies should retain such self-certifications or attestations in their records.

  • Notable Takeaway: Employers should consider requiring AEIs to self-certify and/or attest that they (1) are eligible for the COBRA subsidy due to a reduction in hours or an involuntary termination and (2) are not eligible for other group health plan coverage or Medicare for the Subsidy Period.
  • Notable Takeaway: Employers should retain records of these self-certifications and attestations, especially if they plan to claim the tax credit.
  1. What Is a “Reduction in Hours”?

The term “reduction in hours” remains ambiguous and open to interpretation. Under the Q&As, for example, an individual whose qualifying event is a “voluntary reduction in hours” would be eligible for the COBRA subsidy, e.g., an individual who voluntarily switches from full-time to part-time employment. The Q&As do not clarify what constitutes a voluntary reduction in hours and the extent to which the voluntary reduction provision may apply to individuals who refuse to return to work full-time.

The IRS identified a “furlough” as “a temporary loss of employment or complete reduction in hours with a reasonable expectation of return to employment or resumption of hours . . . such that the employer and employee intend to maintain the employment relationship” (emphasis added). The IRS also addressed a “reduction in hours” as it applies to organized labor, specifically stating that a reduction in hours includes labor-related work stoppages as a result of lawful strikes or employer lockouts.

  • Notable Takeaway: Employers should be cognizant of how changes to their workforce may have constituted a reduction in hours triggering eligibility for COBRA, eligibility for the COBRA subsidy, and the notice requirements under ARPA for AEIs. Employers should be particularly mindful of novel working arrangements during the COVID-19 pandemic, which may fall within the definition of “furlough.”
  1. What Is an Involuntary Termination of Employment?

The IRS has defined an “involuntary termination” as “a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services.” The IRS has specifically articulated that a “constructive discharge” would constitute an “involuntary termination.” Moreover, if an employee is involuntarily terminated due to gross misconduct, the IRS stated that the individual would be ineligible for COBRA continuation coverage and therefore would not qualify as an Assistance Eligible Individual. The IRS generally carved out retirement from the term “involuntary termination.”

Interestingly, the IRS specified that an employer’s decision not to renew an employee’s contract is an involuntary termination, unless the parties understood at the time they entered into the expiring contract that the contract was for specified services and would not be renewed, in which case the employee would not be eligible for the COBRA subsidy. This position may present issues for employers that hire seasonal or temporary employees, where there is either an expectation that the seasonal employees might return the following season or the temporary employees would be brought on to perform specific tasks. In this context, the employer and the employee may not be clear about whether there is an expectation the contract would be renewed. That said, the IRS stated that whether a termination is involuntary depends on the particular facts and circumstances, and therefore the Q&As may be construed differently depending on the applicable employment agreements and facts surrounding an employee’s termination.

  • Notable Takeaway: Employers should be wary of employment contracts that provide set terms, including employment contracts for seasonal and temporary employees.
  1. What Type of Coverage Is Eligible for COBRA Premium Assistance?

The COBRA subsidy is available for COBRA continuation coverage provided for any group health plan, including dental-only and vision-only type plans, as well as retiree health coverage, as long as the retiree coverage is offered under the same group health plan as the coverage offered to active employees. The COBRA subsidy is also available for COBRA continuation coverage offered through health reimbursement arrangements (“HRAs”). The COBRA subsidy is not available for COBRA continuation coverage offered through: (1) health flexible spending accounts (“FSAs”) provided through cafeteria plans, (2) non-health benefits that are not subject to federal COBRA continuation coverage requirements, and (3) Qualified Small Employer Health Reimbursement Arrangement (“QSEHRA”).

  • Notable Takeaway: Generally speaking, the COBRA subsidy is available for most COBRA continuation coverage provided for any group health plan. Employers should be mindful of employees who are enrolled in dental-only and vision-only coverage to ensure that they receive the subsidy if they are AEIs.
  1. When Does the COBRA Premium Assistance Period Begin and End?

An AEI is eligible to receive the COBRA subsidy on the first applicable period of coverage beginning on or after April 1, 2021, and ending on the earlier of (1) the end of the AEI’s COBRA continuation coverage period; (2) September 30, 2021; or (3) the date that the individual is eligible to enroll in coverage under another group health plan (including a spouse’s group health plan) or Medicare. Employers (or their COBRA administrators) must send notices to AEIs whose subsidy is terminating (1) prior to September 30, 2021, because the normal COBRA continuation maximum period is ending, or (2) as of September 30, 2021 (the end of the Subsidy Period). Once the Subsidy Period expires on September 30, 2021, COBRA coverage for a qualified beneficiary who was an AEI will automatically continue and payment should be timely paid according to the terms of the plan and subject to COBRA continuation rules and Emergency Relief Notices.

  1. How Are Extensions Under the Emergency Relief Notices and the Extended Election Periods Coordinated?

Employers are required to provide an extended election period to qualified beneficiaries, including spouses and dependents, who do not have an election of COBRA continuation coverage in effect on April 1, 2021, but would have been an AEI if the election were in effect. In addition, if an employee had a reduction in hours or involuntary termination before April 1, 2021, and elected self-only COBRA continuation coverage, their spouse or dependent child who is a qualified beneficiary in connection with the reduction in hours or involuntary termination is an AEI and has an opportunity to elect coverage during the extended period. The extended election period only applies to plans subject to federal COBRA and does not apply to a group health plan subject to state mini-COBRA statutes unless the state mini-COBRA statutes provide for a similar extension. However, the extension provided under the Emergency Relief Notices do not apply to the timing under ARPA for providing the notice or the extended election period.

  1. What Should Employers Know About Payments to Insurers Under Federal COBRA and Comparable State Continuation Coverage?

If an insurer has agreed to collect COBRA premiums directly from qualified beneficiaries of a fully insured group health plan (that is not a multiemployer plan) subject to federal COBRA, then the insurer will be required to treat an AEI as having paid the premium in full. The employer will be responsible for paying the premium to the insurer for the months of COBRA subsidy applicable to the AEI.

An employer that sponsors a fully insured plan that is subject to only state mini-COBRA continuation rules, and not subject to federal COBRA, is ineligible for the premium tax credit. Instead, the insurer will receive the tax credit for providing coverage under the group health plan, even if the employer pays the premium directly to the insurer.

  • Notable Takeaway: Employers should confirm with their insurers that the insurers will treat the AEIs as having paid the COBRA premiums in full to ensure ongoing compliance. Failure to treat an AEI as having made a payment in full may result in insurance carriers being liable for excise taxes of $100 per day per qualified beneficiary (but not more than $200 per family) for each day of noncompliance.
  1. How Is the COBRA Premium Assistance Credit Calculated and Claimed?

If an employer does not subsidize COBRA premium costs for similarly situated employees and qualified beneficiaries, then the premium tax credit that an employer can claim for each calendar quarter is the amount equal to any premiums not paid by the AEI due to ARPA, which can be up to 102 percent of the cost during the Subsidy Period. However, if the employer subsidizes any portion of COBRA premium costs for similarly situated employees and qualified beneficiaries who are not AEIs, then the tax credit for the quarter is any amount that would have been charged to an AEI if there were no subsidy (if applicable). For example, if a severance plan provides that the employer will pay 100 percent of the COBRA premium amount for four months, then the employer will be unable to take a tax credit for the subsidy provided during that four-month period.

The following are “premium payees” under the rules and eligible to claim the premium tax credit:

  1. The multiemployer plan, in the case of a group health plan that is a multiemployer plan;
  2. The employer, in a case of a group health plan subject to federal COBRA or under which some or all of the coverage is self-funded; or
  3. The insurer providing coverage, in the case of a group health plan not described above (e.g., a fully insured plan subject to mini-COBRA continuation requirements).

A third-party payer (e.g., a PEO, CPEO, or §3504 agent) may also be a premium payee and entitled to the premium tax credit if certain conditions are met.

A premium payee claims the credit by reporting the credit (both refundable and nonrefundable portions of the credit) and the number of individuals receiving the COBRA subsidy on its federal employment tax return (usually the Form 941). The premium payee may reduce the amount of its federal employment taxes that it would otherwise be required to deposit, up to the amount of the anticipated credit, and request an advance of the amount of the anticipated credit that exceeds the federal employment tax obligations by filing Form 7200. IRS Notice 2021-41 contains more information about the reduction in deposits for the credit and other employment tax credits.

Premium payees that do not have employment tax liability should claim the tax credit on the Form 941 for any quarter the premium payee becomes entitled to the credit and report any advance payments received in anticipation of the credit on the same Form 941. The premium payee should enter zero on all remaining non-applicable lines so that the overpayment amount on the Form 941 is the amount of the credit reduced by any advance payment received.

  • Notable Takeaway: Employers should review severance plans and separation agreements to determine eligibility for the premium tax credit. The Q&As contain specific nuances regarding severance plans, separation agreements, and the ability to claim the premium tax credit. Employers should work with counsel to determine the options that may be available in determining whether to claim the premium tax credit.
  • Notable Takeaway: Employers should work with their tax practitioners in filing the appropriate forms to claim a subsidy for AEIs, if eligible.

What Employers Should Do Now

  • Review new IRS guidance to properly identify all Assistance Eligible Individuals and to ensure compliance.
  • Audit your workforce to identify those individuals eligible for COBRA whose employment has terminated (voluntarily or involuntarily) and who may have experienced any type of reduction in hours or similar event.
  • Coordinate with COBRA administrators to timely distribute all required notices.
  • Coordinate with COBRA administrators and counsel to draft self-certifications and/or attestations for AEIs to ensure that they are entitled to the COBRA subsidy.
  • Retain records of COBRA subsidies and the self-certifications and/or attestations obtained from AEIs.
  • Consult with tax advisors and consultants to file appropriate forms and properly claim tax credits.


For more information about this Advisory, please contact:

Gretchen Harders
New York
Cassandra Labbees
New York
Christopher Lech
New York
Sharon L. Lippett
New York
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