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COBRA Subsidy – Helpful IRS Guidance Issued

The Internal Revenue Service (IRS) has released Notice 2021-31 providing much needed interpretive guidance in a helpful question and answer (Q&A) format on the application of the temporary COBRA premium assistance (100% subsidy) provisions of the American Rescue Plan Act (ARP). The Q&As address many issues that have arisen with respect to the subsidy, including eligibility (and when a termination of employment is considered involuntary), eligible coverage, the subsidy period, how to calculate and claim the credit, the impact of employer subsidies on COBRA premiums, and other information related to understanding the subsidy and credit. The Notice offers numerous examples of the practical application of the rules and provides more detail that supplements the procedural and notice related FAQs previously issued by the Department of Labor (DOL). The Notice, the FAQs and recently released model notices are accessible on the DOL COBRA Premium Subsidy webpage.

This Update addresses the areas of most immediate interest for employer group plan sponsors (fully-insured and self-insured). Summarized below are key aspects of background on the process and the recent guidance (with certain of the Q&A sections referenced for your review).


  • ARP provides for a 100% federal COBRA “subsidy period” for up to 6 months (for periods of coverage between April 1 and September 30, 2021) for any “Assistance Eligible Individuals” or AEIs (employees and their families) who lost health coverage and became entitled to COBRA because of reduction in hours or an involuntary termination of employment.

  • During the subsidy window, an AEI is treated as though they paid the full amount of their COBRA premium for the specified coverage, and the amount that the employer pays in respect of this subsidy is refundable via a tax credit.

  • The subsidy is not taxable to the AEI and there is no income cap for the subsidy.

AEIs and Eligibility for the Subsidy

  • An AEI is as an individual who is a COBRA qualified beneficiary (QB) with respect to a period of COBRA coverage during the subsidy period, who is eligible for that COBRA coverage by reason of a COBRA qualifying event (QE) that is a reduction of hours or involuntary termination, and who elects COBRA. (Q&A 1-3)

  • Individuals who are not a COBRA QB cannot be an AEI, and AEIs who elect COBRA during the subsidy period are the only persons eligible for the subsidy.

  • The subsidy is not available to individuals who have continuation rights due to other QEs, such as divorce, death of the employee, or dependent aging out. (Q&A 8)

  • The subsidy is available for an AEI who experiences an eligible QE during the subsidy window, and to AEIs who have a second election opportunity because their eligible QE occurred prior to April 2021 and who either never elected COBRA at the time, or elected COBRA and dropped it. (Q&As 43-46)

  • Anyone that is not an employee, spouse, or dependent child eligible for federal COBRA is not eligible for the subsidy (e.g., domestic partners, even if they count as tax dependents and even if they are required to be covered under state law for insured plans, are not eligible to receive the subsidy). (Q&A 19)

Notices and Coverage Periods

  • ARP creates new notice requirements (different from the basic COBRA general notice rule). For example, new notices must be provided to all individuals who will lose coverage due to any COBRA QE during the subsidy period, and a separate notice must be provided by May 31, 2021 to anyone who may be eligible for the subsidy due to involuntary termination or reduction in hours occurring before April 1, 2021.

  • Eligibility for other group health plan coverage (including coverage under a spouse’s plan) makes an individual unable to claim the subsidy. AEIs must certify on election forms that they are not eligible for other employer coverage or Medicare and must notify the employer if they subsequently become eligible for such coverage. (Q&A 9)

  • An AEI is eligible for the subsidy until the earlier of: (i) the end of the individual’s maximum COBRA period, (ii) September 30, 2021, or (iii) the date that the individual is eligible to enroll in coverage under another group health plan (including coverage under a spouse’s group health plan) or Medicare. (Q&As 47-50)

  • The subsidy does not extend COBRA coverage—coverage will still expire 18 months after coverage was lost, even if that occurs in the middle of the subsidy period, although the subsidy can be extended for a second QE (up to a total of 36 months). So long as the original QE was a reduction in hours or involuntary termination of employment, the subsidy is available to individuals who have elected and remained on COBRA coverage for an extended period due to a disability determination, or second qualifying event, to the extent the additional periods of coverage fall between April 1, 2021 and September 30, 2021. (Q&A 17)

  • After the end of September 2021, COBRA continues automatically and the standard 30-day grace period to make timely payment will apply.

Certifications for Eligibility

  • Employers may require individuals to self-certify that they are AEIs and eligible for the subsidy; however, this is not mandatory, and if an employer does not request a self-certification, it must have other records to prove that the individuals were subsidy-eligible to obtain the tax credit. Employers can rely on these attestations unless they have actual knowledge that the attestations are incorrect. (Q&As 4-7)

  • The model Summary of COBRA Premiums Assistance Provisions (which must be included with election forms) includes certification language.

  • If an individual claims to be an AEI when the employer reasonably believes the person is not subsidy-eligible, the employer should request additional proof and document all correspondence with the individual (improperly obtained subsidy-related tax credits will likely need to be repaid).

  • Employers are not affirmatively required to provide the subsidy to COBRA QBs who the employer reasonably believed were AEIs and were enrolled in COBRA as of April 1, 2021 (employers are permitted, but not required, to wait until a COBRA QB self-certifies eligibility for the subsidy).

Involuntary Terminations and Reduction in Hours

  • The subsidy is available to anyone who had a reduction in hours; however, it is only available to individuals who had a termination of employment if that employment termination was involuntary.

  • The general rule is that a termination is involuntary if the employee is willing and able to continue to work but the employer on its own chooses not to continue the employment.

  • Whether a termination is voluntary or involuntary depends on the facts and circumstances, so the characterization by an employer is not by itself enough if the other facts and circumstances do not align with the guidance.

  • Many cases are obvious, but the Q&As give helpful guidance on marginal cases (e.g., involuntary termination may include some retirements, constructive discharge and termination for cause, but not gross misconduct). (Q&As 24-34)

  • The guidance permits employers to collect a former employee’s attestation to validate termination circumstances.

  • A COBRA QE triggered by a reduction in hours is subsidy-eligible regardless of whether the reduction in hours was voluntary or involuntary (the involuntary requirement applies only to loss of coverage caused by termination of employment.) (Q&As 21-23)

  • COBRA subsidies are available where the reduction in hours triggering event for the loss of coverage was a furlough, lawful strikes and employer-initiated lockouts.

Coverage Eligible for the Subsidy

  • Subsidies are available for all healthcare coverage (including HRAs, dental, vision) lost due to a requisite QE, other than coverage under a health FSA. (Q&As 35-40)

  • If an employer no longer offers the health plan that previously covered the AEI at their initial QE, the employer should offer the coverage most similar to the previous coverage, or optionally can offer cheaper plan options, and still claim a tax credit. (Q&As 41-42)

Severance Benefits

  • In general, employers cannot claim the tax credit if they are subsidizing COBRA themselves (such as in a severance agreement), although separate taxable severance benefits do not affect the credit. (Q&A 66)

  • If an employer provides subsidized COBRA coverage by paying for all or part of the premium for an individual absent the subsidy, the employer may only claim a tax credit for the amount the AEI would have actually been required to pay for the premium (the amount in excess of the employer-provided subsidy). (Q&A 66)

  • Employers may reduce a severance-related subsidy and increase the COBRA premium charged to an employee, thus allowing the employee to then receive the subsidy in lieu of the employer subsidy if this is done on a prospective basis. (Q&A 65) But employers should be aware that changing course could jeopardize the validity of an existing waiver if the employer has already obtained severance-related waivers, and the employer-subsidized COBRA provided consideration in support of the individual’s waiver of certain claims.

  • An employer can provide a taxable severance benefit to an AEI for the amount the employer would have subsidized under the severance agreement. (Q&A 66)

Calculating and Claiming the Subsidy Credit

  • Subsidies are fronted by the employer/plan sponsor (for fully-insured and self-insured coverage) who then may claim a federal tax credit on the quarterly Form 941 employment tax return to reimburse itself. (Q&As 70-86)

  • Employers who claim the tax credit must maintain records to substantiate that an individual was eligible for the subsidy (documentation may be needed in case of an IRS audit or inquiry into the employer’s eligibility for the tax credits). (Q&A 84)

  • The credit for a quarter is the amount equal to the total amount of premiums not paid by the AEI based on the premium charged for COBRA under the same plan option for the same tier of coverage to individuals not eligible for the subsidy (including the 2% administrative fee). (Q&A 63)

  • The credit is gross income to the employer. The employer’s gross income is increased by the amount of the credit for the taxable year which includes the last day of any quarter with respect to which the credit is allowed. (Q&A 79)

  • If an employer receives a premium payment from a subsidy-eligible individual for coverage during the subsidy period, the employer cannot claim the credit until the employer reimburses the individual. (Q&A 85)

  • Plans that voluntarily extend continuation coverage, even though they aren’t subject to federal COBRA or state mini-COBRA laws, such as a self-insured church plan, are not eligible for the subsidy. (Q&As 15, 19, 68). Domestic partners therefore do not qualify for the subsidy because they do not qualify as a spouse, and therefore are not a qualified beneficiary.

Other Considerations

  • Employers should coordinate with their COBRA vendors to assist with administration, but employers ultimately remain responsible for compliance.

  • The subsidy will make it likely that some AEIs will elect COBRA for the subsidy period, potentially leading to higher claims. There may be an impact on insurance/stop-loss renewals, and out of an abundance of caution a plan sponsor might look to have an insurer sign off/agree that the plan’s insurance coverage will apply to claims incurred by COBRA QBs who obtain subsidized COBRA coverage or otherwise take advantage of extended enrollment/payment rights under the various mandates.

  • Individual Marketplace health coverage does not make someone ineligible for the subsidy; however, if that person chooses to take COBRA with the subsidy, they would lose any premium tax credit that they are using to pay for the individual Marketplace coverage. (Q&A 13)

  • The timeframe in which to activate the subsidy cannot be extended under the Outbreak Period rule (which generally gives individuals extra time to elect and pay for unsubsidized COBRA). If an individual is in an Outbreak Period for COBRA coverage and is also subsidy-eligible, they must choose to either obtain coverage from the original loss of coverage date forward or elect coverage from their subsidy eligibility forward. If they only elect coverage starting with their subsidy eligibility, they lose the ability to elect earlier COBRA coverage. (Q&A 9, 56-58)

  • Congress adopted a similar COBRA subsidy in 2009-2010 that was originally scheduled to last for 9 months, but was later extended to 15 months. Be prepared for the possibility of the ARP subsidy to be similarly extended.

More Guidance Needed Employers have been struggling to understand the ARP COBRA subsidy rules and its application to several open questions. The Notice Q&A format is very useful at addressing many scenarios as they arise. But while the Notice, FAQs and model notices do answer many important questions on the administration of the subsidies, they do not address all open issues. Therefore, we are hopeful that the agencies will issue additional employer directed guidance shortly to address the remaining open subsidy issues.

Conner Strong & Buckelew will continue to monitor further developments on these rules and we will provide ongoing alerts and updates as new information becomes available. Please contact your Conner Strong & Buckelew account representative toll-free at 1-877-861-3220 with any questions. For a complete list of Legislative Updates issued by Conner Strong & Buckelew, visit our online Resource Center.

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