The American Rescue Plan Act of 2021

Example 2

Brigid’s employer laid her off on September 14, 2020. Brigid’s eligibility for group health coverage terminated at the end of the month, and her COBRA qualifying event date was October 1, 2020. Brigid did not elect COBRA continuation coverage prior to April 1, 2021. Under the COBRA subsidy extended election, Brigid can elect coverage as of April 1, 2021 through November 30, 2021 (the remainder of her original COBRA continuation coverage period). Brigid is eligible for the COBRA subsidy and will pay no premiums for the period from April 1, 2021 – September 30, 2021.

Marketplace Special Enrollment Right? In 2020, both the DOL and HHS released informal guidance indicating the loss of an employer-provided COBRA subsidy triggers a public health insurance marketplace special enrollment right.[6] We assume the DOL and HHS will treat the loss of this particular COBRA subsidy as a marketplace special enrollment right and may clarify this in later guidance.

An individual cannot claim the health care tax credit (HCTC) while receiving this COBRA subsidy. The HCTC is available to certain workers who lose employment due to foreign trade and pension plan participants of plans taken over by the Pension Benefit Guaranty Corporation.

Loss of Subsidy Eligibility

An individual loses subsidy eligibility on the earliest to occur of the following:

1. The individual gains eligibility for other group health coverage (excluding coverage consisting only of excepted benefits) or Medicare;
2. The individual exhausts their COBRA continuation coverage period; or
3.  September 30, 2021 (the end of the COBRA subsidy period).

Individuals must notify the plan administrator when they gain eligibility for other group health coverage and/or Medicare and are subject to potential penalties of the greater of $250 or 110% of the ineligible subsidy amount for failing to do so. The Agencies will address this in more detail in later guidance.

Subsidy Recovery 

COBRA subsidies are reimbursable to the plan sponsors/employers in the form of Medicare payroll tax credits for group health plans subject to federal COBRA (including both self-insured and fully insured coverage) and other self-insured group health plans not subject to federal COBRA. COBRA subsidies are reimbursable to the insurance carrier for fully insured coverage not subject to federal COBRA. 

Employers will claim the credits on their quarterly payroll tax filings and may request advance payments. The credit is refundable, and an employer will still benefit if the credit exceeds the actual Medicare tax owed. 

The IRS will address this process in later guidance, but it should be very similar to the process for claiming reimbursement for providing emergency paid sick leave and emergency family and medical leave. We expect employers will use IRS Form 7200 for advance payments requests. 

No Double Dipping:  Employers cannot claim reimbursement for the same expense through this COBRA subsidy program and emergency paid sick leave/emergency family medical leave or the employee retention credit under the CARES Act. 

Communications and Model Notices

The COBRA subsidy obviously creates new notice obligations. Plan administrators – or COBRA administrators acting on their behalf – and/or insurers must provide eligible individuals with the information described below. The Agencies will provide model notice material for this content in April.

COBRA Subsidy Extended Election Rights Notice

The plan administrator must notify individuals who are eligible for the COBRA Subsidy Extended Election of their rights by May 31, 2021. This notification must include:

• The availability of the COBRA subsidy;
• The name and contact information for the plan administrator and/or other parties involved in applying and qualifying for the subsidy;
• A description of the COBRA Subsidy Extended Election and how to apply, if eligible;
• A description of the Drop-Down Election, if offered, and how to apply;
• Any additional forms or applications necessary to qualify for the subsidy and how to obtain them (if not included); and
• The obligation of an individual receiving a subsidy to notify the plan administrator when the individual gains eligibility for other group health coverage or Medicare.

Plan administrators may provide this information in a revised COBRA election notice or as a separate addendum to it. Since the subsidy is temporary, plan administrators may prefer using an addendum. We suspect this will depend on the model notice material.

Note: Remember that an individual who did not elect COBRA or elected it and dropped it is eligible if any portion of his or her original COBRA continuation coverage period overlaps with the subsidy period beginning on April 1, 2021. This may include individuals who involuntarily lost coverage due to a termination or reduction in hours as far back as October 2019 depending upon their COBRA qualifying event date.

General Subsidy Availability Notice

This applies to eligible individuals who are already COBRA participants when the subsidy period begins and eligible individuals whose COBRA qualifying events occur during the subsidy period. The content requirements are the same as the COBRA Subsidy Extended Election Notice. Plan administrators may provide this information in a revised COBRA election notice or as a separate addendum to it. Since the subsidy is temporary, plan administrators may prefer using an addendum. We suspect this will depend on the model notice material.

End of Subsidy Notice

Plan administrators must provide a notice to COBRA participants receiving subsidies including the following information:

• The individual’s subsidy expiration date;
• The right to continue COBRA without a subsidy if the maximum COBRA continuation coverage period has not been exhausted; and
• Other coverage options that may be available. 

It appears this is a separate notice requirement that cannot be met through the election notices. The notice requirement does not apply when the loss of subsidy is due to the individual gaining eligibility for other group health coverage or Medicare.

This notice has a delivery window beginning 45 days before the subsidy expires and ending 15 days before the subsidy expires. In other words, since the subsidy expires on September 30, 2021, the plan administrator must provide this notice sometime during August 16, 2021 – September 15, 2021.

State Continuation Coverage: Since the subsidy also applies to comparable state continuation coverage, the notice requirements apply to state continuation coverage. The Agencies’ model notices will be written specifically for COBRA, but we assume insurers and/or COBRA administrators will adapt them for state continuation coverage purposes as needed. 

COBRA Subsidy versus COVID-19 Outbreak Period Relief

There was no COBRA subsidy when the DOL and Treasury issued their revised Outbreak Period relief guidance affecting both COBRA election and payment (please see our previous Alert), and Congress did not account for the revised Outbreak Period relief with the COBRA subsidy.

This raises some interesting questions the Agencies need to address in guidance.

1. Retroactive subsidies – Based on the revised Outbreak Period relief and the potential duration of the Outbreak Period, it may be possible for eligible individuals to elect COBRA retroactively long after the subsidy period is over. Will these individuals still qualify for the subsidy for their period of retroactive COBRA coverage from April 1, 2021 – September 30, 2021?
2. Retroactive extended elections – Assuming the answer to #1 is yes and the affected individual’s COBRA qualifying event date was before April 1, 2021, can the individual take advantage of the extended election right and elect COBRA beginning April 1, 2021 instead of retroactive to the original COBRA qualifying event date?
3. Electronic disclosures – Does the Outbreak Period relief permitting the broad use of electronic disclosures without prior consent apply to the COBRA notice obligations under the COBRA subsidy? What about the relaxation of delivery deadlines for good faith efforts by plan administrators?

The Outbreak Period relief does not apply to state continuation coverage, so these questions are limited to federal COBRA. 

Smaller Pool: Remember that the Outbreak Period relief applies to all COBRA qualifying beneficiaries. By contrast, the COBRA subsidy is limited to COBRA qualifying beneficiaries who lose eligibility due to an involuntary termination of employment or reduction in hours.

Temporary Increase to Dependent Care Flexible Spending Account Limit

The ARPA temporarily increases the tax-free dependent care flexible spending account (DCFSA) reimbursable limit to $10,500 ($5,250 for married couples filing separate tax returns) [7] for, “any taxable year beginning after December 31, 2020, and before January 1, 2022.”

This relief is optional, and DCFSAs do not have to adopt it.

Taxable Year versus DCFSA Plan Year

The effective year is a little deceptive. The term “taxable year” means the participant’s tax reporting year and not the DCFSA’s plan year. An individual’s tax reporting year is the calendar year, so the increased DCFSA reimbursement limit applies only to the 2021 calendar year.

This is problematic for a non-calendar year DCFSA, because the reimbursement limit resets to $5,000 for the 2022 calendar year. A non-calendar year DCFSA needs to ensure participants do not exceed the 2022 reimbursement limit (but see A Workaround for Non-Calendar Year DCFSAs below).

Unlimited Carryovers and Extended Grace Periods

The increased contributions allowed for 2021 under this relief are subject to the unlimited carryover and extended grace period relief permitted under the Consolidated Appropriations Act, 2021 and IRS Notice 2021-15.

A Workaround for Some Non-Calendar Year DCFSAs

An employer with a non-calendar DCFSA plan year ending mid-to-late 2021 should be able to amend that plan year to allow for the increased limit and restrict reimbursements in excess of $5,000 to expenses incurred during the 2021 portion of the plan year.[8] The DCFSA could also implement an unlimited carryover or extended grace period for unused funds at the end of the 2020-2021 plan year. Since funds available during the 2021-2022 plan year due to an unlimited carryover or extended grace period do not count against the 2022 limit, this workaround should avoid potential reimbursement limit issues for both the 2020 and 2022 calendar years.

A workaround is trickier for non-calendar year DCFSAs with plan years beginning in early 2021. These DCFSAs will need to administer pro-rated reimbursement limits for expenses incurred during the 2022 portion of the 2021-2022 plan year.

Qualifying Life Event and Special Enrollment

Adopting the increased limit mid-year should trigger a qualifying life event for both existing DCFSA participants to increase elections as well as eligible employees who previously waived DCFSA coverage.

Amendment Timing

An employer must amend the DCFSA by the end of the plan year implementing the increase and must administer the plan consistently from the intended effective date through the amendment adoption date.

Nondiscrimination Issues: In our experience, most DCFSAs annually fail their Internal Revenue Code nondiscrimination requirements. This may be more likely for 2021, since the ARPA also improves the competing dependent care tax credit. Adopting the increased DCFSA limit for 2021 will probably result in larger corrections for highly compensated DCFSA participants by many employers. Employers may wish to consider restricting the increased limit to rank-and-file employees.

Voluntary Extension to Paid Sick and Family Leave

Employers have the option to extend either emergency paid sick leave (EPSL), emergency family and medical leave (EFML), or both from April 1, 2021 through September 30, 2021. This is not required. The rules that were in effect during the April 1, 2020 – December 31, 2020 EPSL/EFMLEA mandate period substantially remain in effect during this extension except where noted below. An employer may claim tax credits for paid leave taken by eligible employees during the extension.

If an employer adopts extended EPSL, EFMLEA, or both, it may be prudent to continue offering and administering the extended leave(s) on the same general terms as during the April 1, 2020 – December 31, 2020 period to avoid potential discrimination claims and/or employee relations issues.

An employer may take advantage of this extension even if it did not take advantage of the extension from January 1, 2021 – March 31, 2021.

EPSL Changes

The available EPSL leave for employees resets to 10 days (80 hours) as of April 1, 2021.

EFML Changes

The maximum total benefit increases from $10,000 to $12,000 as of April 1, 2021, but the available EFML does not reset. This effectively adds 10 more days to the maximum available EFML, so an employee who earlier exhausted their EFML would still be eligible for up to 10 more days of paid leave.

Revised Qualifying Purposes for EPSL and EFML

As of April 1, 2021, there are revisions to the qualifying purposes (see below), and employees may take EFML for any qualifying purpose from April 1, 2021 – September 30, 2021.

Non-Federal Governmental Employers

For the April 1, 2021 – September 30, 2021 extension period, state and local governmental employers may claim reimbursement for EPSL and EFML leave. The ARPA removes the previous restriction preventing this. This does not apply to EPSL and/or EFML taken before April 1, 2021.

Federal employers that are Internal Revenue Code §501(c)(1) organizations may also claim reimbursement.

A Word about Increased Marketplace Subsidies

The ARPA enhances public health insurance marketplace subsidies for 2021 and 2022, and one of the enhancements is worth a brief mention to employers. Normally, an individual with a household income equal to or greater than 400% of the federal poverty limit is not eligible for marketplace subsidies. This means these employees cannot trigger employer shared responsibility penalties against their employers under the Affordable Care Act. For 2021, 400% of the federal poverty limit for a single individual is $51,520 and $106,000 for a family of four.

The ARPA expands subsidy eligibility by removing the 400% limitation for 2021 and 2022. Employers pursuing strategies based on higher paid employees being ineligible for subsidies may wish to review them. Practically speaking, this is unlikely to have any effect before April or May of 2021.

[1] The subsidy also applies to comparable state continuation coverage. See Covered Group Health Plans.

[2] This includes the full premium for fully insured coverage (employee plus employer’s contribution).

[3] By contrast, the “Outbreak Period” relief mentioned in this Alert does not apply to state continuation coverage.

[4] This limitation also applies to comparable state continuation coverage. A plan can deny COBRA to an individual terminated due to gross misconduct, but this is a very high standard. 

[5] This should also include domestic partners. Domestic partners are not federal COBRA qualifying beneficiaries by themselves and cannot independently elect COBRA. However, COBRA permits the former employee to continue coverage for covered dependents under the group health plan, which includes a covered domestic partner (and his/her covered children). If the employee makes a COBRA election that includes his/her domestic partner, the subsidy should apply.

[6] Interestingly, this informal guidance technically conflicts with the applicable regulations.

[7] The $10,500 (or $5,250) reimbursement limit can come from any combination of employee pre-tax contributions and employer tax-free contributions/direct reimbursements.

[8] Unlike health care flexible spending accounts, DCFSAs are not subject to the uniform coverage rule.