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The COBRA Quandary: A Look Into How The Pandemic Took Plan Sponsors And Insurers For A Spin While Administering Continuation Coverage

It is no secret that COVID-19 has brought unprecedented hardship to the nation. In a race to provide relief to Americans during a time of crisis, the past year has involved numerous significant changes to employee benefits. In particular, a number of changes and guidelines impacting continuation of health coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) have made big waves not only for individuals but also for plan sponsors, carriers, and related service providers. Group health plan sponsors and related service providers have found themselves struggling to navigate not only the fluctuating COBRA enrollment and premium payment deadlines issued by the regulatory agencies, but also the COBRA subsidy and notice requirements under the American Rescue Plan Act (the “ARPA”). Between Congressional legislation and regulatory guidance from the Internal Revenue Service (“IRS”) and Department of Labor (“DOL”), the following is a timeline and summary of events that led to “the COBRA quandary.”

The COBRA Timeline

On March 13, 2020, President Trump declared the COVID-19 Pandemic to be a National Emergency effective as of March 1, 2020.

On April 28, 2020, the DOL, IRS, and Department of Health and Human Services (“HHS”) released Disaster Relief Notice 2020-01. This notice provided employers with relief from penalties and enforcement actions for missed deadlines due to COVID-19, including certain deadlines relating to COBRA continuation coverage and related premium payments. Generally, qualified beneficiaries have sixty (60) days to elect COBRA continuation coverage under a group health plan. Premiums generally must be paid within forty-five (45) days of an election, with a grace period of thirty (30) days or longer for each subsequent payment. Additionally, plans are generally required to notify individuals of their right to elect COBRA, and individuals have sixty (60) days to notify the plan of certain qualifying events or disabilities. Disaster Relief Notice 2020-01 provided temporary relief for these deadlines. The deadline relief was to remain in effect from March 1, 2020, through sixty (60) days after the end of the COVID-19 National Emergency. This period of time was defined as the “Outbreak Period.” The COBRA-related deadlines that were extended until the end of the Outbreak Period included: (1) the 60-day deadline to elect COBRA continuation coverage; (2) the 45-day (for the initial payment) and 30-day (for subsequent payments) deadlines to timely pay COBRA premiums; (3) the 60-day deadline to notify the plan of qualifying events or disabilities; and (4) the deadline for plans, sponsors, and administrators to provide a COBRA election notice. Under the guidance, group health plans were to disregard the Outbreak Period (in other words, “hit the pause button” on time during the Outbreak Period) for purposes of these deadlines.

If the Employee Retirement Income Security Act of 1974 (“ERISA”) statutory limitations expired before the end of the Outbreak Period, the deadlines would instead be subject to the ERISA deadline, which was one year from the effective date of the relief (in other words, February 28, 2021).

On January 20, 2021, Joe Biden took office and became the 46th president of the United States. Biden’s inauguration left many wondering what changes would come with the new administration.

On February 26, 2021, nearly one year after Disaster Relief Notice 2020-01 was released, the DOL was forced to decide between adhering to ERISA limitations or extending deadlines further than initially announced. Two days before the relief was set to expire under the one-year statutory limitation, the DOL released Disaster Relief Notice 2021-01, which provided that the one-year expiration would be implemented on an individual-by-individual basis. In other words, the provisions from the previous Disaster Relief Notice 2020-01 would remain in effect for a relief period starting on or after March 1, 2020, and ending on the earlier of: (1) one year from the expiration of the original deadline for the individual based on the individual’s qualifying event; or (2) the end of the Outbreak Period. Soon after release, plan sponsors large and small began to scramble to interpret and implement the guidance as applied on a participant-by-participant basis—an administrative nightmare.

On March 11, 2021, President Biden signed the ARPA into law, including provisions that heavily impacted employee welfare benefit plans. Under the ARPA, Assistance Eligible Individuals (“AEIs”) and their beneficiaries may be eligible to receive a temporary COBRA subsidy. To be designated an AEI, the individual generally must be in a COBRA continuation coverage period (regardless of whether COBRA was actually elected) sometime between April 1, 2021, and September 30, 2021. Additionally, the AEI must have been involuntarily terminated or experienced a reduction of hours causing them to lose coverage. During the subsidy window, an AEI is treated as though they paid 100% of their COBRA premium for the specified coverage. The amount of the subsidy covered by the premium payee (generally, the employer plan sponsor or the carrier), is refundable via a tax credit.

The ARPA implemented a new special COBRA election period for AEIs that were within their COBRA continuation coverage period as of April 1, 2021, but had not elected COBRA during their initial election period. Plan sponsors and carriers were hit with new notice requirements as well, including election notice and expiration notice requirements, and strict deadlines for distributing such notices. The passage of the ARPA left plan sponsors and carriers yearning for omitted details, such as what constitutes an involuntary termination, what information to include in the notices, the types of plans that are covered, and more.

On April 7, 2021, the DOL released Frequently Asked Questions (“FAQs”) regarding the implementation of the ARPA. This release provided logistical guidance, including model notices for distribution to AEIs. Different model notices were provided, as the type of notice to be used depends on the date the AEIs coverage was lost or whether the notice is for federal or state continuation coverage. The FAQs also included information about the previously announced DOL COBRA extensions to elect or pay for COBRA by clarifying that the DOL COBRA extensions continue to be in effect, but the ARPA 60-day special enrollment period for the subsidy does not qualify for additional extensions. The DOL also clarified that the COBRA subsidy is available for AEIs that qualify for continuation coverage under state “mini-COBRA” laws. These provisions overwhelmed plan sponsors and issuers with pressure to distribute the correct model notices to the correct individuals and by the correct deadline.

Most recently, on May 18, 2021, the IRS issued Notice 2021-31, listing 86 Q&As on the ARPA COBRA premium assistance provisions. The notice provided answers to long-awaited questions by specifying what types of plans are covered, defining what constitutes an involuntary termination under the ARPA, and affirming how employers can receive their tax credit. Under the guidance, the ARPA COBRA subsidy applies to any group health plan, but non-health benefits such as group-term life insurance are not covered. The IRS confirmed that dental-only and vision-only plans are covered by the ARPA COBRA premium subsidy.

The IRS also clarified what constitutes an “involuntary termination,” which is mostly a facts and circumstances analysis. Generally, an involuntary termination occurs when employers act with unilateral authority to sever employment of an individual who was willing and able to continue working. However, involuntary termination due to gross misconduct of an employee does not qualify the individual as an AEI. The IRS provided a number of examples and additional insight into involuntary terminations.

The IRS guidance also provided logistical clarifications regarding the premium tax credits. Premium payees are to use their federal payroll tax returns (Form 941) in order to claim the credit. Any ARPA tax credits received by a premium payee must be included in the premium payee’s gross income for the taxable year. However, the amount the AEI receives from the subsidy is not included in the AEI’s gross income. Additionally, the amount of a COBRA premium that would have otherwise been paid by the employer is not included in the amount the employer can claim in tax credit (i.e. severance agreements).

Interaction Between Disaster Relief Notice Extensions and the ARPA COBRA Subsidy

Following the release of guidance from the DOL and the IRS, many were stumped as to how to implement both the deadline extensions under the Disaster Relief Notices and the COBRA subsidy and related enrollment extensions and notice requirements under the ARPA. The Disaster Relief Notices introduced retroactive COBRA continuation coverage and extended deadlines for payments. The IRS provided clarity on how the two sets of COBRA relief would work in tandem.

If an AEI: (1) receives a COBRA notice on or before April 1, 2021, and qualifies for deadline extensions under the Disaster Relief Notices; and (2) receives an extended election period notice under the ARPA, then the individual may elect COBRA continuation coverage within sixty (60) days of receiving the extended election period notice. Additionally, the AEI must also elect or decline COBRA retroactive to the loss of coverage within sixty (60) days if such coverage is desired (and pay COBRA premiums for periods of coverage prior to April 1, 2021). If the AEI declines to elect retroactive COBRA coverage back to the date of the loss of coverage, such AEI is not allowed to elect retroactive COBRA coverage at a later time, regardless of any otherwise applicable deadline extension under the Disaster Relief Notices.

For purposes of premium payments, the deadline extensions under the Disaster Relief Notices remain available for premium payments for retroactive periods of coverage for AEIs, and any late or unpaid premiums for retroactive COBRA continuation coverage will not deem an individual ineligible for the COBRA subsidy. Premium payment extensions continue to apply under the applicable deadlines. If an individual fails to make premium payments by the applicable extended deadline, the plan sponsor may treat the individual as having not elected COBRA coverage until the first period of coverage beginning on or after April 1, 2021.

The IRS also clarified that deadline extensions applicable to electing COBRA coverage do not apply to the special COBRA election period for purposes of the ARPA. Additionally, any deadline extensions applicable to the provision of COBRA election notices do not apply to the notices required under the ARPA. Finally, for purposes of premium payments if individuals elected this coverage and did not pay or owe COBRA premium payments for the retroactive coverage, the individual would still be eligible for the COBRA premium subsidy.

When Does It End?

Despite all the situational differences amongst premium payees, one common question seems to be culminating: when is this COBRA quandary going to end? With respect to the COBRA premium subsidy, the DOL has indicated the answer is September 30, 2021. With respect to the deadline extensions, the answer is generally sixty (60) days after the yet-to-be announced end of the National Emergency period. Until then, it is crucial that plan sponsors, carriers, and plan service providers stay up to date on all COBRA-related guidance, and reach out to legal counsel and other plan providers for information on obtaining the premium tax credit and implementation of the COBRA relief and notice requirements. This article serves only as a summary of the key pieces of guidance provided by the regulatory agencies over the past year and is not intended to cover all the guidance relating to the deadline extensions and the ARPA COBRA subsidy. Please contact an employee benefits attorney for further guidance.