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IRS Answers Open Questions On ARPA COBRA Premium Subsidy

Employers have been patiently waiting for guidance on COBRA premium subsidy reimbursements under the American Rescue Plan Act (the “ARPA”) as the deadline for distributing ARPA COBRA election notices draws near. Many of these pressing questions were answered in the recently released IRS Notice 2021-31 (the “Notice”). This client alert summarizes some of the significant takeaways from the Notice, some of which closely track guidance issued years ago relating to the COBRA premium subsidy under the American Recovery and Reinvestment Act of 2009.

“Involuntary Termination” Defined: As described in a previous McGrath North client alert, American Rescue Plan Impacts COBRA And Dependent Care FSAs, one of the requirements for qualifying as an “assistance eligible individual” (or “AEI”) under the ARPA is that the individual must be involuntarily terminated from employment or experience a reduction in hours resulting in a loss of coverage. According to the Notice, determining whether a termination is involuntary is based on the facts and circumstances of the situation. The general definition of an involuntary termination is the severance of employment due to the independent exercise of the unilateral authority of the employer to terminate the employee, who is willing and able to continue with the employment contract. However, employees can initiate their own termination and still be considered “involuntarily terminated” if the termination was in response to an involuntary material reduction in hours. Window programs where employees facing termination are offered severance incentives to quit within a certain window of time are also considered involuntary terminations. An involuntary termination for cause is considered an involuntary termination, but if an employee was terminated due to gross misconduct of the employee, the termination is not considered involuntary. Employers should proceed with caution as they analyze what type of action amounts to “gross misconduct” under COBRA. For a more robust understanding of what constitutes an involuntary termination, please refer to the Notice.

Employee Attestation and Required Documentation: The IRS clarified that employers may require and rely on an individual’s attestation regarding a reduction in hours or involuntary termination of employment. Additionally, employers may use an employee’s attestation in an effort to substantiate the employer’s eligibility for the COBRA tax credit (unless the employer has actual knowledge that the attestation is false). There is no requirement for employers to request attestations, but maintaining documentation that verifies eligibility for the tax credit is required. The IRS and DOL can require receipt of the Opt-In Forms included with the ARPA COBRA election notices, meaning that employers should ensure they receive valid and completed Opt-In Forms from each AEI if they want to receive a tax credit. Premium payees must maintain records substantiating eligibility for the credit. This includes documentation demonstrating that individuals were eligible for premium assistance.

Retiree Health Coverage: If an individual is eligible for other group health plan coverage or Medicare, the individual is not eligible for the COBRA premium subsidy. Individuals that are offered retiree health coverage may or may not be eligible for the COBRA premium subsidy depending on whether the offering is part of the same group health plan coverage as the COBRA continuation coverage. The Notice clarifies that an individual offered retiree health coverage will only be eligible for the COBRA premium subsidy if the health coverage falls under the same group health plan as the COBRA continuation coverage. If an individual is offered coverage under a stand-alone retiree-only health plan, that offer of coverage will make the individual ineligible for the COBRA premium subsidy.

Health Reimbursement Arrangements, Dental-Only Plans, and Vision-Only Plans: The Notice confirms that the COBRA premium subsidy applies to COBRA continuation coverage under Health Reimbursement Arrangements (or “HRAs”), dental-only plans, and vision-only plans.

Premium Payees Eligible for Tax Credit: In order to be eligible for the premium assistance tax credit under the ARPA, an entity must be the “premium payee” for the continuation coverage. For group health plans that are multiemployer plans, the payee is the multiemployer plan. For group health plans that are not multiemployer plans but are subject to federal COBRA, or at least partially self-funded, the payee is the employer maintaining the plan. If neither of these descriptions pertain to the group health plan, then the insurer providing the coverage is the payee (for example, an insurer providing coverage under a fully-insured plan subject to state continuation coverage).

Tax Credit Does Not Include Amounts Employer Would Have Paid: Under the new guidance, the IRS clarifies that the amount of the tax credit that may be claimed does not include any amount of a COBRA premium that would have been otherwise paid by the employer. For example, if an employer promised to pay a certain portion of COBRA for an individual in a severance agreement, the employer cannot claim that portion of the coverage as a tax credit.

Claiming Credit: Premium payees are to claim the tax credit and report the number of individuals receiving COBRA assistance on their federal payroll tax returns (Form 941). Any ARPA tax credits received by a premium payee must be included in the premium payee’s gross income for the taxable year.

It is incredibly important for employers to stay up to date on the implications of these requirements. This client alert only summarizes some of the key questions and answers provided by the IRS, and is not intended to cover all of the new information provided relating to the ARPA COBRA subsidies. Please contact an employee benefits attorney for next steps.