American Rescue Plan Impacts COBRA And Dependent Care FSAs

by Caroline Nelsen
(402) 341-3070

President Biden has signed the American Rescue Plan Act of 2021 (the “Act”) into law, and the Act includes notable provisions that will impact employee welfare benefit plans. Not only does the Act implement a COBRA subsidy for certain qualified beneficiaries, but it also increases the Dependent Care Flexible Spending Account limit. This client alert summarizes the key benefit provisions within the Act.

COBRA Subsidy and Notice Requirements

  • Assistance Eligible Individuals. Under the Act, the government will subsidize 100% of COBRA insurance premiums for certain “assistance eligible individuals” from April 1, 2021 through September 30, 2021. In order to be an “assistance eligible individual,” the individual must be an employee, spouse or dependent that qualifies for and elects COBRA coverage due to the employee’s involuntary termination of employment or reduction in hours.
  • Employer Tax Credits. Employers will receive refundable tax credits equal to the premium costs assuming all reporting requirements are met.
  • Eligible Types of Coverage. Assistance eligible individuals can receive the COBRA subsidy for major medical, hospital, dental, or vision coverage, but not for Health FSA coverage. Additionally, the Act allows employers to permit assistance eligible individuals to switch to less-expensive coverage options, with some restrictions.
  • Special Enrollment Period. A new COBRA election period will apply to assistance eligible individuals. If an assistance eligible individual is still within the original 18-month COBRA period as of April 1, 2021, and the individual either has not elected COBRA or elected COBRA and dropped coverage prior to April 1, 2021, that individual will have a new 60-day period to elect COBRA and qualify for the subsidy. However, coverage elected will only extend through the individual’s original COBRA continuation period (or earlier, as described below). The special 60-day election period will run from the date the individual receives the newly required COBRA election notice. Assistance eligible individuals that did not initially elect COBRA or dropped coverage prior to April 1, 2021 may elect COBRA and utilize the subsidy on a prospective basis (and will not have to elect COBRA retroactively and pay for the retroactive premiums prior to the subsidy’s availability).
  • Notice Requirements. Employers must distribute a new COBRA notice within 60 days of April 1, 2021 that informs individuals about the subsidy and the special enrollment period. Employers will also be expected to provide a written notice prior to expiration of the subsidy (with certain exceptions), explaining the date of such expiration and that the individual may be eligible for coverage without premium assistance through COBRA or other coverage options.
  • Termination of COBRA Subsidy. The subsidy will end for assistance eligible individuals on the earlier of: (1) the individual’s maximum period of COBRA coverage; (2) the expiration of the subsidy relief provision under the Act; or (3) the date upon which an individual becomes eligible for coverage under another group health plan or Medicare (notice of which must be provided by the individual to the employer, or else a penalty will apply).

Dependent Care FSAs

  • Increased Limit. The Act allows employers to increase the Dependent Care FSA limit for 2021 from $5,000 to $10,500 (or from $2,500 to $5,250 for married filing single). If an employer implements this new increase, a plan amendment is likely required and can be adopted retroactively as long as the plan amendment is adopted before the end of the plan year. Please note that the Act also increased the value of the dependent care tax credit for 2021, but such provision is outside the scope of this client alert.


For next steps on how to implement these rules, plan amendments, or any questions, please reach out to Caroline Nelsen at 402-633-9575 or

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