What employers need to know about the new COBRA subsidy

Brian Kopp and Lena Gionnette      
BridgeTower Media Newswires

One of Congress’s goals in the American Rescue Plan Act of 2021 (ARPA) was to provide continued health care coverage to employees who lose their health coverage as a consequence of the pandemic. The federal government achieved this goal by agreeing to pick up the cost of employees’ COBRA coverage for up to six months, beginning April 1, 2021. Administering and communicating the new COBRA subsidy will pose challenges to employers.

Here are the key features of the subsidy:

Who is eligible: COBRA-qualified beneficiaries who lose health care coverage due to an employee’s involuntary termination (for reasons other than the employee’s gross misconduct) or reduction of hours. Employees who lose their health care coverage because they voluntarily terminate their employment are not eligible for the subsidy.

Amount of the subsidy: 100% of the COBRA cost, including any administrative fees.

Duration of the subsidy: April 1, 2021, through September 30, 2021 (although the subsidy ends earlier if COBRA rights end or if individual becomes eligible for Medicare or other group health plan coverage).

Methodology of reimbursement: Employers recoup the cost of COBRA coverage through refundable credits against their share of Medicare taxes. Employers may be able to request advance credits to fund the subsidy.

Tax consequences to employees: The benefit is tax-free to employees.

The subsidy automatically commenced on April 1 for eligible individuals who are receiving COBRA coverage on that date. If a qualified beneficiary pays for COBRA coverage during the subsidy period, they must be reimbursed for such payment within 60 days after making the payment.

Employers, at their option, can elect to give qualified beneficiaries the opportunity to change their current coverage and choose different coverage as long as the cost of the new coverage does not exceed the cost of their current coverage. There is no requirement that employers provide this option to eligible individuals currently receiving COBRA coverage.

In contrast, employers must give former qualified beneficiaries — those who previously waived or dropped their COBRA rights but would be eligible for the subsidy if they had elected and maintained such coverage (i.e., those qualified beneficiaries who, as of April 1, 2021, would still have time left in their original COBRA coverage period) — the opportunity to take advantage of the subsidy. This will be an administrative challenge because it means employers will have to (i) identify such qualified beneficiaries, (ii) notify them of the availability of the subsidy and (iii) provide a window for them to elect COBRA coverage. Unlike the current COBRA rules, which generally require coverage to commence retroactively to the date coverage was lost, this special election allows qualified beneficiaries to commence their coverage on April 1. The period for making this special election begins on April 1 and ends 60 days after the date the qualified beneficiary is provided the notification.

Employers must provide special notices describing the subsidy to both groups of COBRA-qualified beneficiaries (i.e., eligible individuals currently enrolled in COBRA and former qualified beneficiaries who are within their maximum continuation coverage period) by May 31, 2021. Employers must also update their current COBRA forms to explain the special subsidy rights and include other specified information in order to properly notify those who become eligible for the COBRA subsidy on or after April 1 and before September 30.

The Department of Labor (DOL) clarified in recently issued FAQs that the COVID-19-related extended deadline relief for COBRA elections and notices does not apply to the COBRA subsidy’s 60-day notice and election periods. In other words, qualified beneficiaries have only 60 days after the new notices are provided to elect subsidized COBRA. These individuals have a longer period to elect unsubsidized COBRA coverage. Subsidy-eligible individuals can begin their coverage prospectively from the date of their election or choose to start their coverage as of April 1 if their qualifying event occurred on or before then.

The ARPA creates an additional notification requirement. Specifically, qualified beneficiaries who qualify for the subsidy must be provided a “Notice of Expiration of Period of Premium Assistance” that explains the date when their subsidy will end and certain other specified information. Generally, this new notice must be provided no more than 45 days before and no less than 15 days before the date the subsidy will end.
The notice does not have to be provided to qualified beneficiaries whose subsidies end because their COBRA period ends. 

In order to assist employers in complying with all of the subsidy’s notice requirements, the DOL published model notices and election forms on its website. Employers should note that the documents can’t be used “off the shelf,” they must be customized with employer and plan-specific information prior to use.

The COBRA subsidy ends before the expiration of the six-month period if the individual’s maximum COBRA coverage period ends earlier or the individual becomes eligible for other group health plan coverage or Medicare (even if not enrolled in such coverage). Individuals receiving the COBRA subsidy must notify the plan administrator when they become eligible for other group health plan or Medicare coverage, and might be subject to penalties if they fail to do so.

Employers should anticipate that they may receive a form entitled “Request for Treatment as an Assistance Eligible Individual.” The DOL published this form for use by individuals who believe they are eligible for the subsidy, but don’t receive a notice. Therefore, an employer who receives this completed form should assess whether the individual is eligible for the COBRA subsidy. If so, the employer should stop collecting COBRA premiums from the individual for the subsidy period (or until the end of the individual’s COBRA continuation period, if earlier) and refund any premiums already paid for any period from April 1, 2021.

In its recent FAQs, the DOL also clarified the following: 

Reduction in hours: A reduction in hours includes reduced hours due to a change in an employer’s hours of operations, a change from full-time to part-time status, a temporary leave of absence or an individual’s participation in a lawful labor strike.

Eligibility for excepted benefits: Eligibility for excepted benefits (e.g., certain limited scope dental or vision benefits, accident insurance, etc.), a qualified small employer health reimbursement arrangement or a health flexible savings account (FSA) does not affect subsidy eligibility.

State mini-COBRA: ARPA has not changed the terms of and election periods for electing health coverage continuation under state mini-COBRA-like laws. It merely entitles individuals to the premium subsidy. Therefore, depending on the state, those individuals who qualified for mini-COBRA before April 1 but failed to elect it might not be able to elect coverage now.

Special Marketplace enrollment: The DOL confirmed that individuals whose COBRA subsidy expires may qualify for a special enrollment period on the Health Insurance Marketplace.

Penalties for noncompliance: Employers and multiemployer plans may be subject to excise taxes and penalties for failing to satisfy the COBRA subsidy requirements, including the notice requirements.

In sum, employers will have to develop a game plan for complying with the new COBRA subsidy. Challenges include identifying all of the eligible individuals entitled to the subsidy, updating COBRA forms and providing timely notifications. Employer communication strategies should also take into account the extended election periods individuals have for electing COBRA coverage under prior DOL and Treasury guidance.


Nixon Peabody Corporate Partner Brian Kopp developed this article with Associate Lena Gionnette. Both Kopp and Gionnette are members of the firm’s Employee Benefits & Executive Compensation team.