May 12, 2021
Many struggling businesses have been forced to lay off workers in the past year, and layoffs can leave former employees with limited health insurance options. Workers may be able to keep health insurance coverage under their ex-employer’s plan, but it generally comes at a significant cost. However, the new American Rescue Plan Act (ARPA) provides some relief to workers. Under ARPA, employers are required to offer a 100% subsidy to eligible individuals for a specified time period. The subsidies are tax-free to ex-employees and employers can recoup costs through a payroll tax credit.
Under the longstanding Consolidated Omnibus Budget Reconciliation Act (COBRA), an employer with 20 or more employees
in the preceding year must offer continued health insurance to “covered employees.” Generally, COBRA coverage is available to the employee, the employee’s spouse, dependent children and even to an ex-spouse if group coverage would be lost due to certain qualifying events. These individuals are known as “qualified beneficiaries.” To be eligible for COBRA coverage, the employee must have been enrolled in the employer’s health plan when he or she worked there and the plan must still be active.
Employers are required to notify employees of their COBRA rights and to offer continued coverage, when warranted. But employers may shift costs to the departing employee and add a 2% administrative fee. Coverage is triggered by the following “qualifying events”:
- Termination of employment for any reason other than gross misconduct,
- Reduction in the number of employment hours,
- The employee becomes entitled to Medicare,
- Divorce or legal separation of the spouse from the covered employee,
- Death of the covered employee, or
- Loss of dependent child status under the health plan rules.
If the qualifying event is the covered employee’s termination or reduction in work hours, the worker is entitled to 18 months of COBRA coverage. However, if the qualifying event is termination or reduction of hours and the employee became entitled to Medicare less than 18 months before the qualifying event, COBRA coverage may last for 36 months after the time the employee is eligible for Medicare. For certain other qualifying events, coverage must be provided for a maximum 36-month period.
What the New Law Provides
ARPA provides a temporary 100% premium subsidy for qualified beneficiaries who are eligible for COBRA coverage between April 1, 2021, and September 30, 2021, due to an involuntary termination of employment or a reduction in hours. In other words, ex-employees don’t have to pay a penny for their health insurance coverage during this period. Although the subsidy period ends on September 30, qualified beneficiaries may continue COBRA coverage after that date if they elect to pay the premiums themselves.
The new law doesn’t extend the usual 18-month coverage period. But qualified beneficiaries now have another chance to elect coverage if they initially passed it up. However, in this case health insurance coverage may only be extended for the remaining time of the original COBRA continuation coverage period. Also, employers may choose to allow former employees to enroll in a different plan, so long as the plan’s premiums aren’t higher than those of the plan the employee had at the time of the qualifying event.
3 Key Notification Requirements
Your organization should identify individuals entitled to COBRA coverage who may benefit from these law changes and communicate the new rules with them. ARPA imposes three key notification requirements:
- Employers must notify ex-employees who become eligible for premium assistance before April 1, 2021, that they may be entitled to the COBRA subsidy. If you choose to allow ex-employees to enroll in different coverage, the general notice must also notify the recipient about this option. You need to provide this notification by May 31, 2021.
- Employers need to notify ex-employees who are getting a “second chance” to elect continued health insurance. These individuals, as well as those who become eligible for COBRA coverage during the subsidy period, will have 60 days to elect coverage after the notice is provided. This notification must be made by May 31, 2021.
- Employers are responsible for notifying eligible individuals when the COBRA premium assistance period is about to expire. You must notify ex-employees at least 15 days (but not more than 45 days) before the expiration date. If coverage is ending because an employee has become eligible for health coverage through Medicare or another group health plan, this notice isn’t required.
Tax Break for Employers
The burden for paying health insurance premiums shifts from ex-employees to employers during the new subsidy period. However, employers will be eligible for a refundable tax credit against payroll taxes. In the event the tax credit is refundable, an employer may be able to obtain advanced payment.
At the time of this writing, more details about the credit are still being worked out. Expect guidance from the IRS in the near future. In the meantime, contact us with your questions.