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IRS Issues Guidance on American Rescue Plan’s COBRA Subsidy

On May 18, 2021, the Internal Revenue Service (IRS) issued Notice 2021-31, which provides guidance for plan sponsors, multiemployer plans, and COBRA administrators in the form of 86 frequently asked questions (FAQs) on the American Rescue Plan Act (ARPA) subsidy for continuation health coverage COBRA. ARPA provides for a temporary 100 percent COBRA premium subsidy for individuals who elect COBRA continuation coverage due to a loss of coverage because of a reduction in hours (whether involuntary or voluntary) or an involuntary termination of employment. The COBRA premium subsidy is available from April 1 through September 30, 2021.

The IRS guidance addressed some of the following key items, in addition to many others:

Premium Assistance Coverage. The guidance confirms that premium assistance is available for COBRA continuation coverage of any group health plan, except a health FSA. This includes dental only and vision only insurance plans and health reimbursement arrangements (HRA).

How to Calculate and Claim the Premium Assistance Tax Credit. The Notice provides that the amount of the tax credit that may be claimed is the premium that the qualified beneficiary is responsible for paying and does not include any amount of subsidy that the employer would have otherwise provided to the individual. The tax credit can be claimed on designated lines of the federal payroll tax return (Form 941, Employer’s Quarterly Federal Tax Return). The premium payee may (1) reduce the deposits of federal employment taxes, including withheld taxes, that it would otherwise be required to deposit, up to the amount of the anticipated credit, and (2) request an advance of the amount of the anticipated credit that exceeds the federal employment tax deposit available for reduction by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Documentation for Tax Credit. The DOL created a model form  for individuals to attest to their eligibility as an assistance eligible individual (AEI), but there was no explicit guidance from the DOL as to whether this form is considered required. The IRS guidance, confirms that employers may require individuals to self-certify or complete an attestation that they are an AEI for the COBRA premium subsidy, as supporting documentation is needed to claim the premium assistance tax credit. The guidance states that employers who claim the premium assistance tax credit must retain in their records a “self-certification or attestation” as documented proof to support the tax credit, as such, employers should ensure that an attestation is completed by AEIs. Employers may use the DOL’s model form to satisfy the IRS’ documentation requirement or may create their own form which substantiates an individual is AEI qualified.

Reduction in Hours. The guidance confirms that any reduction in hours that results in a loss of coverage may make an individual an AEI, regardless of whether the reduction in hours is voluntary or involuntary including a reduction in hours due to a furlough or a lawful work stoppage if there is a reasonable expectation of a return to employment or resumption of hours.

Involuntary Termination. The guidance clarifies what is considered an involuntary termination which includes constructive discharge and termination for cause, but not gross misconduct. In addition, an employee-initiated termination of employment constitutes an involuntary termination if the employee’s decision to separate employment is “for good reason due to employer action that results in a material negative change in the employment relationship for the employee analogous to a constructive discharge.” The guidance also acknowledges that not every conceivable situation has been addressed in these FAQs and reiterates what is considered an involuntary termination will be fact specific and may need to be analyzed on a case-by-case basis.

Additional Information

Additional information on the subsidy for COBRA premiums including the special enrollment period and notice requirements is available on the HR Works website by clicking here (refer to “Subsidy for COBRA Premiums”).

Next Steps for Employers

COBRA subsidy election notices should have been provided to AEIs and their qualified beneficiaries by May 31, 2021. Employers who use the services of a COBRA Administrator should ensure that the third-party administrator maintains appropriate records for the employers to support the receipt of the tax credit. Employers should review the IRS guidance in its entirety and consult with their COBRA administrators and/or benefits counsel for additional guidance.

It is also recommended that employers consult with their tax professional for guidance related to Form 941 filings or proper completion of the Form 7200.

HR Works, headquartered in Upstate New York, is a human resource management outsourcing and consulting firm serving clients throughout the United States for over thirty years. HR Works provides scalable strategic human resource management and consulting services, including: affirmative action programs; benefits administration outsourcing; HRIS self-service technology; full-time, part-time and interim on-site HR managers; HR audits; legally reviewed employee handbooks and supervisor manuals; talent management and recruiting services; and training of managers and HR professionals.