Page 1 of 1
In much-anticipated guidance, the Internal Revenue Service has offered its insight on the implementation of the COBRA temporary premium subsidy provisions of the American Rescue Plan Act of 2021 (ARPA) in Notice 2021-31.
Spanning more than 40 pages, the IRS-answered frequently asked questions (FAQs) finally resolve many issues relating to temporary premium assistance for COBRA continuation coverage left unanswered in the Department of Labor’s publication of model notices, election forms, and FAQs.
The practical implications of the guidance for employers are many. Significantly, employers must take action prior to May 31, 2021, to ensure compliance with some of the requirements under ARPA and related agency guidance.
Notice 2021-31 provides comprehensive guidance on the ARPA subsidy and tax credit implementation issues (although it acknowledges there are many issues that still need to be addressed). Some of the key topics addressed include:
For employers, there are some immediate takeaways:
As expected, the IRS expansively defines an “involuntary termination.” For purposes of the ARPA COBRA subsidy, involuntary terminations include employee-initiated terminations due to good reason as a result of employer action (or inaction) resulting in a material adverse change in the employment relationship.
The guidance provides helpful COVID-19-specific examples. Employees participating in severance window programs meeting specified regulatory requirements could qualify. Voluntary employee terminations due to an involuntary material reduction in hours also could qualify. Further, voluntary terminations due to daycare challenges or concerns over workplace safety may constitute an involuntary termination, but only in the narrow circumstances in which the employer’s actions or inactions materially affected the employment relationship in an adverse way, analogous to a constructive discharge.
Employer action to terminate the employment relationship due to a disability also will constitute an involuntary termination, but only if there is a reasonable expectation before the termination the employee will return to work after the end of the illness or disability. This requires a specific analysis of the surrounding facts and circumstances. The guidance notes that a disabled employee alternatively may be eligible for the subsidy based on a reduction in hours if the reduction in hours causes a loss of coverage.
A number of the circumstances that meet the involuntary termination definition in the guidance may not be coded in payroll or HRIS systems as involuntary terminations. As employers have an affirmative obligation to reach out to employees who could be AEIs, employers will need to look behind the codes to understand the circumstances of the terminations.
Further, to identify all potential AEIs, employers may need to sweep involuntary terminations or reductions in hours occurring prior to the October 1, 2019, date referenced in the Department of Labor’s FAQs. The IRS makes clear that COBRA-qualified beneficiaries who qualified for extensions of COBRA coverage due to disability (up to 29 months), a second qualifying event (up to 36 months), or an extension under state mini-COBRA potentially can qualify for the subsidy if their coverage could have covered some part of the ARPA COBRA subsidy period (April 1, 2021–September 30, 2021).
An involuntary termination is not the only event that can make an employee potentially eligible for the subsidy. Employees who lose coverage due to a reduction in hours (regardless of the reason for the reduction) can be eligible for premium assistance as well. This can include employees who have been furloughed, experienced a voluntary or involuntary reduction of hours, or took a temporary leave of absence to facilitate home schooling during the pandemic or care for a child.
The IRS explains that, if an employer subsidizes COBRA premiums for similarly situated covered employees and qualified beneficiaries who are not AEIs, the employer may not be able to claim the full ARPA tax credit. In this case, the amount of the credit the employer can receive is the premium that would have been charged to the AEI in the absence of the premium assistance and does not include any amount of subsidy the employer would otherwise have provided. For example, if a severance plan covering all regular full-time employees provides that the employer will pay 100 percent of the COBRA premium for three months following separation, this employer could not take a tax credit for the subsidy provided during this three-month period.
Notice 2021-31 does not elaborate on this issue beyond providing specific examples involving a company severance plan. Thus, ambiguity remains as to whether this guidance would prohibit an employer from claiming a tax credit where an employer has agreed to provide a COBRA subsidy in a negotiated separation or settlement agreement and not pursuant to an existing severance plan or policy. Further IRS guidance on this point may be forthcoming. In light of this guidance, employers should re-evaluate their COBRA premium subsidy strategies.
On April 7, 2021, the U.S. Department of Labor (DOL) issued eagerly anticipated guidance on administering COBRA subsidies under the American Rescue Plan Act of 2021 (ARPA). The guidance includes Frequently Asked Questions (FAQs) and various Model Notices and election forms implementing the COBRA Premium Assistance provisions under ARPA, while also announcing the launch of a page dedicated to COBRA Premium Subsidy guidance on its website.
Since ARPA was enacted, employers have been preparing to comply, albeit with many open questions. ARPA requires that full COBRA premiums be subsidized for “Assistance Eligible Individuals” for periods of coverage between April 1, 2021, through September 30, 2021. While this guidance answers important questions on the administration of the subsidies, it does not address many other details on the minds of employers. For example, this guidance does not cover important nuances such as what is an “involuntary termination” in order to qualify for subsidized coverage, how existing separation agreement commitments to subsidize COBRA should be viewed, or details on how the corresponding payroll tax credit will work.
The FAQs are largely directed to individuals and focus on how to obtain the subsidy and how subsidized coverage fits with other types of health coverage that may be available, including Marketplace, Medicaid, and individual plan coverage. We hope that employer directed guidance will follow to fill in the gaps.
Employers will be happy to know that the FAQs confirm a few points that will impact administration. First, eligibility for coverage under another group health plan, including that of a spouse’s employer, will disqualify the employee from the subsidy. Employees must certify on election forms that they are not eligible for such coverage and will notify the employer if they subsequently become eligible for coverage (individual coverage, such as through the Marketplace or Medicaid, will not disqualify an otherwise eligible individual from subsidized COBRA). Failure to do so will subject the individual to a tax penalty of $250, or if the failure is fraudulent, the greater of $250 or 110% of the premium subsidy. The availability of other coverage (which the employer may not know about) does not impact the employer’s initial obligation to identify potential Assistance Eligible Individuals and provide the required notices and election forms.
Soon after enactment, there were also questions circling about whether ARPA applied to small employer plans not subject to COBRA, but rather state “mini-COBRA” laws. The FAQs confirm that the subsidy also applies to any continuation coverage required under state mini-COBRA laws but also notes that ARPA does not change time periods for elections under State law. Further guidance would be welcome on obligations related to small insured plans. The FAQs also confirm that plans sponsored by State or local governments subject to similar continuation requirements under the Public Health Service Act are covered by the ARPA subsidies.
One area that has caused great confusion is how the right to retroactively elect COBRA coverage (to the date active coverage was lost) due to the DOL’s extended deadlines fits with this new election right. While there is more to come on this, the DOL helpfully confirmed that these are two separate rights and thankfully, the FAQs note that the extended deadlines do not apply to the 60-day notice or election periods related to the ARPA subsidies.
The most significant part of the guidance (that we knew was coming but are still happy to see sooner rather than later) are the Model Notices and election materials. The guidance package confirms that employers have until May 31, 2021, to provide the notices of the opportunity to elect subsidized coverage and individuals have 60 days following the date that notice is provided to elect subsidized coverage. Individuals can begin subsidized coverage on the date of their election, or April 1, 2021, as long as the involuntary termination or reduction in hours supporting the election right occurred before April 1, 2021. As previously noted, in no way do these timeframes extend the otherwise applicable 18-month COBRA period.
The Notices include an ARPA General Notice and COBRA Continuation Coverage Election Notice, to be provided to all individuals who will lose coverage due to any COBRA qualifying event between April 1 and September 30, 2021, and a separate Model COBRA Continuation Coverage Notice in Connection with Extended Election Periods, to be provided to anyone who may be eligible for the subsidy due to involuntary termination or reduction in hours occurring before April 1, 2021 (i.e., generally involuntary terminations or reductions in hours occurring on or after October 1, 2019).
Plans will also have to provide individuals with a Notice of Expiration of Period of Premium Assistance 15-45 days before the expiration of the subsidy — essentially explaining that subsidies will soon expire, the ability to continue unsubsidized COBRA for any period remaining under the original 18-month coverage period and describing the coverage opportunities available through other avenues such as the Marketplace or Medicaid. Employers are highly encouraged to use the DOL’s model notices without customization except where required to insert plan or employer specific information.
With the release of the model notices, employers and COBRA administrators now largely have the tools to administer this new election right. The FAQs remind us that the DOL will ensure ARPA benefits are received by eligible individuals and employers will face an excise tax for failing to comply, which can be as much as $100 per qualified beneficiary (no more than $200 per family) for each day the employer is in violation for the COBRA rules. Accordingly, employers will want to begin or continue conversations with COBRA administrators to ensure notices are timely provided to the right group of individuals.
The Affordable Care Act (ACA) established Health Insurance Marketplaces (also called Exchanges) where individuals can shop and enroll in health coverage. Individuals who meet certain criteria are eligible for premium subsidies and cost-sharing reductions for coverage on the Marketplace.
For the first time, in 2016 some employers will receive a notice from a Marketplace indicating that one of their employees signed up for health coverage through the Marketplace and received advanced premium subsidies. Many employers are asking what these notices mean and what actions they should take if they receive one.
Premium subsidies and cost-sharing reductions are designed to expand healthcare coverage by making insurance, and its utilization, more affordable. Premium subsidies, more accurately referred to as a premium tax credit, are claimed on an individual’s income tax return at the end of the year. What is unique about this tax credit is that an individual can choose to have the expected premium tax credit advanced throughout the year, in which case the government makes payments directly to the health insurer on the individual’s behalf. Importantly, individuals who have access to health coverage through an employer that is affordable and meets minimum value are not eligible to receive the premium tax credit or advances of the premium tax credit for their coverage.
The ACA generally requires that applicable large employers – generally employers with 50 or more full-time employees, including full-time equivalents – offer health coverage that is affordable and of minimum value to their full-time employees (and their dependents) or face an Internal Revenue Service (IRS) tax. This is often referred to as the employer “pay or play” or employer mandate provision. Tax liability under this employer provision is triggered if one of the employer’s full-time employees receives a premium tax credit and the amount of the tax liability is determined by the number of full-time employees who received the premium tax credit.
During the Marketplace application process, individuals are asked a host of questions, including questions about access to health coverage through an employer. If the Marketplace determines that the individual does not have access through an employer to coverage that is affordable and meets the required minimum value, and assuming the individual meets other eligibility criteria, advance payments of the premium tax credit can begin.
In such an instance, the Marketplace is required to send the employer a Marketplace notice. This will be the first year the Federally Facilitated Marketplace (FFM) is sending out these notices. It is worth noting that there is not a commitment to send a notice to all employers, and the FFM has said it can send a notice only if the individual provides a complete employer address. Consequently, some employers expecting Marketplace notices may not receive them and notices may not be mailed to the preferred employer address.
The Marketplace notices will give employers advance warning that they may have potential tax liability under the employer mandate of the ACA. However, there are reasons that receiving a notice does not necessarily mean the IRS will be in hot pursuit, including:
The FFM recently posted a sample of its 2016 notice which can be found here.
Please note that the notice suggests that employers should call the IRS for more information if they have questions, however, IRS telephone assistors will be unable to provide information on the Marketplace process, including the appeals process, and will be unable to tell an employer whether they owe a tax under the employer mandate.
An employer who receives a Marketplace notice may want to appeal the decision that the individual was not offered employer coverage that was affordable and of minimum value. An employer has 90 days from the date of the notice to file an appeal, which is made directly to the Marketplace. Importantly, the IRS will independently determine whether an employer has a tax liability, and the employer will have the opportunity to dispute any proposed liability with the IRS. Similarly, an individual will have the opportunity to challenge an IRS denial of premium tax credit eligibility. Any contact by the IRS, however, will occur late in the game after the year’s tax liabilities have already been incurred. Therefore, although an appeal is not required, it may be advisable.
Regardless of whether an employer pursues an appeal, an employer, particularly one that offers affordable, minimum value health coverage, should communicate to its employees about its offering. Although an applicable large employer is required to furnish IRS Form 1095-C to full-time employees detailing the employer’s offer, a better option is providing employees with information before they enroll in Marketplace coverage.
In summary, the Marketplace notice serves as an advance warning that either the employer or the employee may have a tax liability. Given this exposure, employers should review Marketplace notices and their internal records and consider taking action.
Form 1095-A is a tax form that will be sent to consumers who have been enrolled in health insurance through the Marketplace in the past year. Just like employees receive a W-2 from their employer, consumer who had a plans on the Marketplace will also receive form 1095-A from the Marketplace, which they will need for taxes. Similar to how households receive multiple W-2s if individuals have multiple jobs, some households will get multiple Form 1095-As if they were covered under different plans or changed plans during the year. The 1095-A forms will be mailed direct to consumer’s last known home address provided to the Marketplace and will be postmarked by February 2, 2015.
Form 1095-A provides information to consumers that is needed to complete Form 8962, Premium Tax Credit (PTC). The Marketplace has also reporting this information to the IRS. Consumers will file Form 8962 with their tax returns if they want to claim the premium tax credit or if they received premium assistance through advance credit payments made to their insurance provider.
Starting in 2015, the Affordable Care Act (ACA) requires applicable large employers to offer affordable, minimum value health coverage to their full time employees (and dependents) or pay a penalty. The employer penalty rules are also known as the employer mandate or the “pay or play” rules.
Effective in 2014, affordability of health coverage is used to determine whether an individual is:
On July 24, 2014, the IRS released Revenue Procedure 2014-37 to index the ACA’s affordability percentages for 2015.
For plan years beginning in 2015, an applicable large employer’s health coverage will be considered affordable under the pay or play rules if the employee’s requires contribution to the plan does not exceed 9.56 percent of the employee’s household income for the year. The current affordability percentage for 2014 is 9.5 percent.
Applicable large employers can use one of the IRS’ affordability safe harbors to determine whether their health plans will satisfy the 9.56 percent requirement for 2015 plan years, if requirements for the applicable safe harbor are met.
This adjusted affordability percentage will also be used to determine whether an individual is eligible for a premium tax credit for 2015. Individuals who are eligible for employer-sponsored coverage that is affordable and provides minimum value are not eligible for a premium tax credit in the Exchange.
Also, Revenue Procedure 2014-37 adjusts the affordability percentage for the exemption from the individual mandate for individuals who lack access to affordable minimum essential coverage. For plan years beginning in 2015, coverage is unaffordable for purposes of the individual mandate if it exceeds 8.05 percent of household income.
The pay or play rules apply only to applicable large employers. An “applicable large employer” is an employer with, on average, at least 50 full-time employees (including full-time equivalents) during the preceding calendar year. Many applicable large employers will be subject to the pay or play rules starting in 2015. However, applicable large employers with fewer than 100 full-time employees may qualify for an additional year, until 2016, to comply with the employer mandate.
The affordability of health coverage is a key point in determining whether an applicable large employers will be subject to a penalty.
For 2014, the ACA provides that an employer’s health coverage is considered affordable if the employee’s required contribution to the plan does not exceed 9.5 percent of the employee’s household income for the taxable year. The ACA provides that, for plan year beginning after 2014, the IRS must adjust the affordability percentage to reflect the excess of the rate of premium growth over the rate of income growth for the preceding calendar year.
As noted above, the IRS has adjusted the affordability percentage for plan years beginning in 2015 to 9.56 percent. The affordability text applies only to the portion of the annual premiums for self-only coverage and does not include any additional cost for family coverage. Also, if an employer offers multiple health coverage options, the affordability test applies to the lowest-cost option that also satisfies the minimum value requirement.
Affordability Safe Harbors
Because an employer generally will not know an employee’s household income, the IRS created three affordability safe harbors that employers may use to determine affordability based on information that is available to them.
The affordability safe harbors are all optional. An employer may choose to use one or more of the affordability safe harbors for all its employees or for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category.
The affordability safe harbors are:
Beginning in 2014, the ACA requires most individuals to obtain acceptable health insurance coverage for themselves and their family members or pay a penalty. This rule is often referred to as the “individual mandate”. Individual may be eligible for an exemption from the penalty in certain circumstances.
Under the ACA, individuals who lack access to affordable minimum essential coverage are exempt from the individual mandate. For purposes of this exemption, coverage is considered affordable for an employee in 2014 if the required contribution for the lowest-cost, self-only coverage does not exceed 8 percent of household income. For family members, coverage is considered affordable in 2014 if the required contribution for the lowest-cost family coverage does not exceed 8 percent of household income. This percentage will be adjusted annually after 2014.
For plan years beginning in 2015, the IRS has increased this percentage from 8 percent to 8.05 percent.
With the open enrollment period for the Exchange beginning October 1, 2013, many questions are beginning to surface regarding how premium subsidies will work as individuals start to evaluate all of their options available to them.
Q1: It sounds like individuals who choose to buy health insurance on the Exchange will have to pay the full monthly premium for the coverage they choose and subsidies will be paid through tax credit that are received annual as a tax refund. How can a low income person who is living paycheck to paycheck afford this?
A: When consumers apply for a plan on the Exchange (aka marketplace), you will be asked to provide income information to determine if you are eligible for a premium tax credit (aka subsidy). A subsidy will be available to people with incomes up to 400% of the federal poverty level ($45,960 for an individual in 2013 or $94,200 for a family of four).
If you qualify for the subsidy, consumers can opt to receive their tax credits in advance, and the exchange will send the money directly to the insurer every month. This subsidy will reduce the amount you owe up front on your medical premium. You can also choose, instead, to receive your credit when you file your taxes the following year.
It is important to estimate your income as accurately as possible and to contact the Exchange during the year if you find out that you are making more or less than expected. When completing your 2014 taxes, your estimate will be reconciles with what you actually earned. If you have received more than you were due, you could have to repay those amounts.
Q2: What happens if I do not pay my premium in a timely manner after I have purchased insurance on the Exchange? If I am terminated from the policy, will I be able to have it re-instated?
A:Consumers who are receiving premium tax credit for coverage on the Exchange will have a 90 day grace period to catch up on late premiums. Other consumers who do not receive a subsidy may get more or less time, depending on the Exchange rules. Once the grace period has passed, consumers will generally have to wait until the next annual open enrollment period in the fall to re-enroll in coverage. Please note though, if an individual goes uninsured for more than 3 months, they could be assess a penalty for not having insurance coverage of up to $95, or 1% of income in 2014, whichever is greater.
Please contact our office for assistance with evalutating your options and obtaining coverage through the Exchange.
Beginning January 1, 2014, all individuals and employees of small businesses will have access to purchase health coverage through the Health Insurance Marketplace (aka the Exchange or SHOP). Open enrollment for the Marketplace begins October 1, 2013.
Section 1512 of the Affordable Care Act requires all employers to provide the Exchange notice to all employees (regardless of full or part time status or plan enrollment status) no later than October 1, 2013. The notice must also be supplied to all new hires within 14 days of their hire date. Employers are not required to provide a separate notice to dependents or other individuals who are or may become eligible for coverage under the plan if they are not employees.
The purpose of the notice is to:
1) inform employees of the existence of the Marketplace (aka Exchange) and how they can contact the Marketplace for assistance
2) inform employees if their current plans meets minimum value standards for the purpose of determining if they will be eligible for a premium tax subsidy in the Marketplace
3) inform employees if they purchase coverage through the Marketplace they will lose the employer contribution to any health plans offered by the employer.
This notice can be provided to employees via paper or electronically. If you decide to post is on your company intranet, you must distribute a notice to all employees directing them where the notice can be located.
Even if you do not currently provide health coverage to employees, you are still required to distribute the Marketplace notice explaining this.
Please contact our office if you need a copy of the English or Spanish versions of the Exchange notice.