When Congress enacted the American Rescue Plan Act (ARPA), few employers were aware of the law’s immediate and dramatic impact upon group health plan sponsors. Effective April 1, 2021, ARPA mandated an array of critical new notification requirements and COBRA election opportunities that potentially trigger a range of employer penalties if compliance failures occur. Simply stated, ARPA enables eligible employees (and dependents) who lost group health coverage, a temporary opportunity to obtain 100 percent “free” COBRA coverage between April 1, 2021 and September 30, 2021.
Many of us who worked in the employee benefits world back in 2009 will recall the original COBRA subsidy program under the American Recover and Reinvestment Act (ARRA). Although there are key program parallels, the new subsidy pays the full COBRA cost (not just 65 percent). In addition, unlike its predecessor program, ARPA not only covers involuntary termination (other than for gross misconduct), but also health coverage losses stemming from an hours reduction. It therefore seems likely that the COBRA “uptake” rate should be significantly higher today than it was for ARRA.
Activating COBRA Despite a Health Coverage Gap
ARPA defines those satisfying subsidy eligibility criteria as “Assistance Eligible Individuals” (AEIs). AEIs include former employees, along with family members: (i) who are currently enrolled, or eligible to elect COBRA, (ii) who enrolled in COBRA, but later dropped continuation coverage, or (iii) who previously declined electing COBRA.
Ever since President Ronald Reagan signed it into law back in 1985, COBRA has always been regarded as “continuation” coverage. Using COBRA always contemplated retroactively creating a bridge that restored health plan coverage back to the moment a loss of coverage occurred. However, that’s not the case with ARPA. The law gives individuals the opportunity to use COBRA despite a gap in coverage. Specifically, AEIs receive a path to “activate” health coverage on April 1, 2021 even with a prior gap. (Note that coinciding with ARPA, AEIs are also protected by “outbreak emergency” rights that permit restoration of earlier health coverage at the individual’s own expense. A discussion of outbreak period rules exceeds this article’s scope.)
ARPA directs that the employer (and in some cases insurance carrier) pay all AEI-related COBRA costs during the subsidy period and then later seek government reimbursement by securing a federal tax credit offset (or refundable tax credit) against Medicare payroll tax liability. This “up front” payment requirement could prove devastatingly burdensome for some cash-strapped organizations. Moreover, accurately documenting the basis for each subsidy payment, and validating ongoing AEI eligibility represents an especially crucial operational plan sponsor duty as the IRS will demand repayment (along with possible under withholding penalty and interest) for inappropriately paid tax credits.
Employer Notification Responsibilities
The Labor Department has already issued an FAQ and four new model notices. Employers that fail to correctly provide these updated notices could be subject to excise-tax penalties under long-standing COBRA notice requirements. IRS-assessed penalties may be as much as $100 per qualified beneficiary (capped at $200 per family), for each day that the employer is in violation of applicable COBRA rules. Other COBRA penalties could also potentially apply.
Although the newly released model notices address different subsidy situations, at its core, ARPA directs that employers find all AEIs who would be entitled to receive any portion of a COBRA-period that crosses into the April 1 – September 30 federal payment timeframe. Once identified, these AEIs must be informed of their rights and given an opportunity to secure COBRA, generally with a coverage activation date of April 1. For example, as November 2019 fell seventeen months ago, an AEI could still potentially receive a one-month COBRA subsidy payment for April 2021, and so that individual must therefore be informed of his or her ARPA subsidy opportunity.
Although the subsidy period runs for six months, not everyone will remain eligible the entire time. For instance, payment eligibility can be lost if COBRA exhausts inside the subsidy period, or if an individual becomes eligible for disqualifying coverage. In other words, an AEI who is eligible for other group health coverage, such as through a new employer’s plan, a spouse’s plan, or Medicare, is blocked from collecting a COBRA subsidy. Also note that under ARPA’s disqualifying coverage rule, actual enrollment is unimportant - mere eligibility is enough to disqualify the AEI from subsidy payment.
On April 7, along with the four model Notices and FAQ, the DOL also issued a form called “Request for Treatment as Assistance Eligible Individual.” This form includes language that directs the AEI to verify that he or she did not hold disqualifying eligibility. For purposes of disqualifying eligibility, group health coverage does not include plans that only provide excepted benefits, qualified small employer health reimbursement arrangements (“QSEHRAs”), or health flexible spending arrangements (“FSAs”). The FAQ also confirmed that neither individual (e.g. “marketplace”) insurance coverage, nor Medicaid preclude subsidy eligibility.
Individuals are responsible for notifying their plans if they become eligible for other group health coverage, or Medicare while receiving a subsidy. Failure to do so may result in a tax penalty for the individual. Penalties range from $250 up to 110% of the amount received after eligibility loss.
• Find AEIs: Employers should compile a list of employees who were involuntarily terminated or experienced a reduction of hours qualifying event on or after November 1, 2019.
• Assign Notification Duty: Employers who outsource COBRA administration should confirm their vendor sends appropriate notification to all AEIs who did not elect COBRA on or after November 1, 2019, or the date of the qualifying event (if later). If the vendor will not be issuing notices, the employer must do so before May 31, 2021.
• Flag Overpayments: Employers should identify any qualified beneficiary who paid his or her COBRA premium for April 2021 and reimburse that payment once the individual submits a signed “Request for Treatment as an Assistance Eligible Individual” form certifying that they do not hold eligibility for other group health coverage, or Medicare.
• Sharpen Communications: Employers should consult their COBRA vendors about how they will be notified of qualified beneficiaries (or eligible family members) electing COBRA and when such individuals “certify” they are AEIs. The employer should develop a vigorously effective line of communication to their COBRA vendor, as employers will be footing COBRA costs and must therefore depend upon a quick and reliable system to flag AEIs that lose COBRA subsidy eligibility.
• Manage COBRA-User Surge: Employers should also consider the impact a jump in covered lives (AEIs) could have on its group health plan. Insurance carriers and stop-loss carriers often reserve the right to re-rate plans when a sudden increase in covered lives occurs (usually 10% or more), especially if those covered lives reflect COBRA qualified beneficiaries.
The ARPA statute is tortuously complicated under any objective scale. And more alarmingly, employer burdens have already attached despite numerous remaining questions. Many key questions fall under the Treasury Department’s regulatory purview and so we anticipate the IRS will issue the next round of clarifying guidance. Stay tuned!