On April 7, 2021, the United States Department of Labor (“DOL”) issued guidance interpreting the premium assistance requirements for employers providing group health plan continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”). On May 18, 2021, Treasury and the IRS published Notice 2021-31 containing interpretive tax guidance for COBRA premium assistance, including the employment tax credit available for sponsoring employers. COBRA was further amended on March 11, 2021 by the American Rescue Plan Act of 2021 (“ARPA”) to assist employees who lost health insurance coverage amid the Covid-19 pandemic.
COBRA requirements are set forth in the Internal Revenue Code of 1986, as amended (“Code”), the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the Public Health Service Act of 1944, as amended (“PHSA”). The April 7 Frequently Asked Questions follow Disaster Relief Notice 2021-01, issued by DOL with concurrence from the Treasury on February 26, 2021, and prior joint department guidance, which extended certain periods and dates for group health plans to comply with Code section 4980B continuation coverage requirements as the result of the Covid pandemic.
Thus. the DOL, the IRS and the Department of Health and Human Services (“HHS”) share jurisdiction over group health plan administration and compliance with COBRA. Whereas DOL has interpretive authority over notice and disclosure requirements, the IRS is authorized to issue regulations defining the required continuation coverage. HHS is authorized to interpret COBRA as it applies to state and local government plan sponsors, in conformity with DOL and IRS rules.
ARPA section 9501(a) provides that assistance eligible individuals, who generally are former employees or employees with reduced hours enrolled in a group health plan offered by a plan sponsor, are exempt from paying monthly premiums for COBRA continuation coverage during the premium assistance period. The continued coverage premium amounts are not payable by employee to employer or insurer.
Instead, ARPA section 9501(b)(1) provides an employment tax credit (premium assistance credit or "PAC") for payments of premiums under extended COBRA coverage provided to terminated employees under a group health plan from April 1, 2021 through September 30, 2021 (the “premium assistance period”). Terminated employees who receive premium assistance exclude the amounts of premiums that are paid by employer from gross income. The income exclusion provisions are effective for taxable years of employees ending after March 11, 2021, the date of the enactment of ARPA.
On April 7, DOL published extensive guidance and model notices for employers providing premium credit assistance. Generally, not all employers sponsoring group health plans must offer COBRA coverage. COBRA exempts generally employers with fewer than twenty full-time employees, as well as certain religious organizations and their affiliates. However, ARPA rules apply to insured group health plans maintained by small employers and other exempt employers subject to State "mini-COBRA" laws discussed further below.
ARPA section 9501(b) provides that in the case of an employer not subject to COBRA continuation provisions in the Code, ERISA or PHSA, the person to whom the premiums are payable, and thus, the person eligible for the employment tax credit, is the insurer, rather than the employer. On May 18, 2021, Treasury and IRS issued Notice 2021-31 (the "Notice") providing extensive guidance for interpreting the ARPA premium assistance provisions. The Notice addresses applicability of ARPA premium assistance provisions to small employers and other exempt employers.
Although small employers are exempt from Federal COBRA, a majority of the States have enacted "mini-COBRA" statutes that require small employers to provide continuation coverage similar to COBRA under analogous circumstances, including involuntary termination, reduction in hours of similar qualifying events. The Notice clarifies applicability of ARPA premium assistance requirements to small employers subject to mini-COBRA. In particular, the Notice sheds light on whether small employers subject to mini-COBRA are exempt from paying premium assistance amounts.
COBRA premium assistance credit previously was made available in connection with the "Great Recession" of 2008 - 2009 under section 3001 of the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5 (2009) ("ARRA"), and provided subsidized COBRA coverage, generally to terminated employees. ARRA offered a 65 percent subsidy for COBRA premiums paid generally by involuntarily terminated employees, which phased out above an annual salary of $125,000 and was extended by subsequent legislation to apply for 15 months. By contrast, ARPA offers generally a 100 percent subsidy for involuntarily for maximum duration of six months, without an income cap.
Employers subject to mini-COBRA laws may have various arrangements with insurers for collection and payment of employee premiums. Furthermore, an employer voluntarily may pay all or a portion of the COBRA premium of an employee under various arrangements with insurer. Thus, for example, insurer and employer may agree that employer will make payments of premium to the insurer and subsequently be reimbursed by employee. Alternatively, an insurer may accept direct payments of premium from employee, and employer may reimburse employee for the payments or pay the employee the amount of premium in advance as severance.
There also are instances, in which the employer does not pay or reimburse any portion of employee COBRA premium. In those cases, an employer may have an obligation to collect and remit the premium payments to insurer, pursuant to certain mini-COBRA State statutes. On the other hand, absent a statutory requirement, an employee may make direct payments of COBRA premiums to insurer, without employer as intermediary.
If a small employer only must collect any premium payments from employee and remit the amounts to insurer, neither ARPA section 9501(a)(1)(A) nor Notice 2021-31 require the employer to make premium assistance payments. ARPA section 9501(a)(1)(A) states in passive voice that an assistance eligible individual (AEI) “shall be treated for purposes of any COBRA continuation provision as having paid the full amount of such premium.” Thus, if an employer is a mere intermediary and is not subject to COBRA rules under ERISA or the Code, there is no affirmative requirement under ARPA for the employer to make up any deficit in premium assistance amount. Instead, the insurer, which also is entitled to the premium assistance credit, must treat the AEI as having paid the full amount of the premium.
A small employer subject to a mini-COBRA statute may be contractually obligated to make COBRA premium payments to insurer. In this scenario, ARPA section 9501(a)(1)(A) does not exempt contractually the employer from paying the portion of the COBRA premium to the insurer. This rule applies despite the fact that the insurer, and not the small employer subject to mini-COBRA, would be entitled to the PAC under Code section 6432(a). The 2009 ARRA Notice clarified that, even if a small employer subject to mini-COBRA paid the remainder of the COBRA premium to the insurer, along with the subsidized amount collected from employee, the employer would not be eligible for a PAC for any portion of the COBRA premium.
On the other hand, ARPA section 9501(a)(1)(A) also does not penalize the employer for failure to make the employer portion of the premium payment to the insurer subject to an agreement. The reason is that, a small employer generally is exempt from COBRA. Instead, under ARPA section 9501(a)(1)(A), the insurer must treat the employee as having made the premium payment in full, and may claim the PAC for the amount of the premium or incur ERISA or Code section 4980B liability. But the insurer would have recourse at common law against employer for breach of contract due to failure of employer to pay its portion of the COBRA premium to the insurer.
Under Notice 2009-27 with respect to the ARRA premium assistance credit, if insurer and employer agreed that the insurer would collect the premiums directly from individuals, the insurer would have to treat the 35 percent payment as having been made in full even if employer failed to remit any payment. The insurer would be liable for excise tax under Code section 4980B for failure to provide benefits. However, by contrast to a small employer subject to mini-COBRA, an employer subject to COBRA also would incur excise tax liability along with the insurer under Code section 4980B for failure to pay the COBRA premium assistance amount. Small employers and other employers exempt from COBRA but subject to State mini-COBRA statutes should take note of the requirements under ARPA, ERISA and the Code and review their group health plan documents, including arrangements with group health plan providers, to ensure current compliance with the COBRA continuation coverage legislation.