The IRS recently released Notice 2021-46, which provides additional guidance regarding the temporary COBRA premium subsidy and the related tax credit under the American Rescue Plan Act of 2021 (“ARPA”). This new notice supplements previous guidance issued by the IRS in Notice 2021-31 and answers specific remaining questions, including much-needed guidance on how multiemployer plans, employers with self-funded plans, and insurers can claim the COBRA premium subsidy tax credit. However, this guidance also included some unexpected surprises. This alert summarizes the most relevant guidance for employer plan sponsors.
Subsidy Eligibility During Extended COBRA Coverage Periods
As employers know, COBRA is available for a variety of events and some events will stack on other events. Prior COBRA guidance clarified that if an individual’s original COBRA qualifying event was a reduction in hours or involuntary termination of employment, but the individual then experienced a second qualifying event that would extend the period of COBRA coverage (e.g., a disability determination, etc.), then such individual could qualify for the COBRA premium subsidy so long as his or her COBRA coverage (regardless of the reason—initial period or extension period) extended into the period between April 1, 2021, and September 30, 2021. The new guidance further clarifies that the individual may still qualify for the COBRA premium subsidy even if that individual did not notify the plan or insurer of the intent to elect extended COBRA coverage before April 1, 2021.
It remains unclear whether plan sponsors or insurers are required to send COBRA subsidy notices to this population (i.e., those who had a reduction in hours or involuntary termination and whose COBRA lapsed before April 1, but who could theoretically still be eligible for extended COBRA coverage). However, the notice does provide an example illustrating how the COBRA subsidy election interacts with the extended deadline relief provided for in the Joint Relief and EBSA Disaster Notice 2021-1.
Extension events in COBRA are not necessarily common. In response to this guidance, employers should review their COBRA administration as of April 1, 2021, to determine if there is an individual on the plan rolls who may be in this classification. If so, it would be appropriate to consult with the COBRA administrator or legal counsel to determine how to address the situation.
Ending COBRA Subsidy Eligibility for Dental and Vision Coverage
In general, an individual who is otherwise eligible for the COBRA premium subsidy loses eligibility for the subsidy if he or she becomes eligible for other group health plan coverage (subject to certain exceptions) or Medicare.
The new notice clarifies that if an individual is eligible for any other disqualifying group health plan coverage or Medicare, he or she will not be eligible for the COBRA premium subsidy. That is true even if the disqualifying coverage does not include all the benefits provided by any previously elected COBRA coverage. For example, Medicare may not offer dental or vision coverage, but eligibility for Medicare will end COBRA premium subsidy eligibility for all COBRA coverage, including dental-only or vision-only COBRA coverage.
Entity That May Claim the Tax Credit
The new notice includes several questions and answers clarifying which entity may claim the tax credit related to the COBRA premium subsidy. The most notable clarifications include the following:
- Common Law Employer Generally the Premium Payee. Previous guidance stated that the premium payee is the entity entitled to receive the COBRA premium subsidy tax credit, and the common law employer maintaining the plan was such an entity. This new notice clarifies that for purposes of determining the common law employer maintaining the plan (and thus the entity generally entitled to claim the tax credit), the “common law employer” is the current common law employer for the individual whose hours have been reduced or the former common law employer for the individual who was involuntarily terminated from employment.
- The Premium Payee in a Controlled Group. The new notice explains that if a plan (other than a multiemployer plan) subject to federal COBRA covers employees of two or more members of a controlled group, each common law employer that is a member of the controlled group is the premium payee entitled to claim the COBRA premium subsidy tax credit with respect to its employees or former employees. Although all the members of a controlled group are treated as a single employer for employee benefit purposes, each member is a separate common law employer for employment tax purposes. Therefore, the common law employer is the premium payee (subject to certain exceptions regarding third-party payers and business reorganizations).
- Insurer is Not the Premium Payee. The new notice provides that if a plan is subject to both federal COBRA and state-mandated continuation coverage, the common law employer is the premium payee entitled to claim the tax credit and not the insurer. Consequently, even if the state-mandated continuation coverage would require the individual to pay COBRA premiums directly to the insurer after the period of federal COBRA coverage ends, the insurer is still not entitled to claim the COBRA premium subsidy tax credit.
- Third-Party Payer May Be the Premium Payee. Prior guidance stated that a third-party payer is treated as the premium payee entitled to receive the COBRA premium subsidy tax credit if the third-party payer: (i) maintains the group health plan, (ii) is considered the sponsor of the group health plan and is subject to the applicable DOL COBRA guidance, including providing the COBRA election notices to qualified beneficiaries, and (iii) would have received COBRA premium payments directly from the individual were it not for the COBRA premium subsidy. The new notice further clarifies that a third-party payer is an entity that pays wages subject to federal employment taxes and reports those wages and taxes on an aggregate employment tax return that it files on behalf of its client.
Some of this guidance was unexpected as many plans and insurers have been relying on guidance previously provided in 2009 in connection with the COBRA premium subsidy under the American Recovery and Reinvestment Act, which permitted the insurer in certain instances to be treated as the premium payee. However, the IRS position here is consistent with the statutory language of ARPA and means a situation could arise where an employer is entitled to the tax credit even though the employer is not paying the premium cost for the COBRA coverage. It remains unclear how an employer in this type of situation will have the information necessary to apply for the tax credit if the insurer is administering the COBRA premium subsidy without the employer’s involvement.
The premium payee should claim the credit on IRS Form 941 for the quarter in which the premium payee becomes entitled to the credit. For many, the COBRA premium subsidy tax credit was to be filed on Form 941 that was due July 31 (for April, May, and June).
If you have any questions about this alert, please contact your Michael Best attorney.