IRS Provides Additional Guidance on Temporary COBRA Premium Assistance

(Parker Tax Publishing August 2021)

The IRS issued a notice which provides additional guidance in question-and-answer format on the application of Section 9501 of the American Rescue Plan Act of 2021 relating to temporary premium assistance for Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) continuation coverage. The notice supplements the guidance issued in Notice 2021-31 and addresses additional issues. Notice 2021-46.

Background

Section 9501 of the American Rescue Plan (ARP) Act of 2021 provides for a temporary 100 percent reduction in the premium otherwise payable by an "Assistance Eligible Individual" who elects Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) continuation coverage through the Internal Revenue Code (Code), the Employee Retirement Income Security Act of 1974 (ERISA), or the Public Health Service Act (PHS Act) due to a loss of coverage as the result of a reduction in hours or an involuntary termination of employment. The temporary premium assistance is also available to individuals enrolled in continuation health coverage under state programs that provide for coverage comparable to COBRA continuation coverage (often referred to as "mini COBRA").

In general, Code Sec. 6432 provides that the persons to whom these COBRA premiums are payable for the continuation coverage are allowed a credit against the tax imposed by Code Sec. 3111(b), or so much of the taxes imposed under Code Sec. 3221(a) as are attributable to the rate in effect under Code Sec. 3111(b), for each calendar quarter, an amount equal to the premiums not paid by assistance eligible individuals for such coverage by reason of such Section 9501(a)(1) of the ARP with respect to such calendar quarter.

Initially, the IRS addressed issues with respect to COBRA premium assistance for COBRA continuation coverage under the ARP in Notice 2021-31, which was issued in May 2021. The IRS has supplemented that guidance with the issuance of Notice 2021-46.

Notice 2021-46

One issued addressed in Notice 2021-46 is whether COBRA premium assistance is available for a potential Assistance Eligible Individual whose original 18-month COBRA continuation coverage period has expired, but who is entitled to notify the plan or insurer, and has not yet done so, of the intent to elect COBRA continuation coverage for an extended period due to a disability determination, second qualifying event, or an extension under state mini COBRA, to the extent the extended period of coverage falls between April 1, 2021, and September 30, 2021. The IRS responded that yes, if the original qualifying event was a reduction in hours or an involuntary termination of employment, COBRA premium assistance is available to such an individual, even if the individual had not notified the plan or insurer of the intent to elect extended COBRA continuation coverage before the start of that period.

Example: Casey, who was provided a COBRA general notice, is involuntarily terminated and elects COBRA continuation coverage effective October 1, 2019. Casey's 18-month COBRA continuation period lapses March 31, 2021. On March 1, 2020, a disability determination letter is issued by the Social Security Administration providing that Casey was disabled as of November 1, 2019. The disability determination entitles Casey to the 29-month extended COBRA continuation coverage. Casey fails to notify the plan of the disability determination by April 30, 2020, which is 60 days after the date of the issuance of the disability determination letter and which is generally required under Code Sec. 4980B(f)(6)(C). However, under Emergency Relief Notices issued by the Departments of Labor and the Treasury, Casey has one year and 60 days from the issuance of the disability determination letter to notify the plan of the disability in order to extend COBRA continuation coverage. On April 10, 2021, Casey notifies the plan of the disability and elects ongoing coverage from April 1, 2021. Assuming Casey is not eligible for other disqualifying group health plan coverage or Medicare, she is an Assistance Eligible Individual and is entitled to the COBRA premium assistance.

Another issue addressed in Notice 2021-46 is whether an Assistance Eligible Individual who previously elected COBRA continuation coverage with premium assistance for dental-only or vision-only coverage becomes ineligible for COBRA premium assistance if he or she subsequently becomes eligible to enroll in other disqualifying group health plan coverage, or Medicare, that does not provide dental or vision benefits. The IRS answered yes, eligibility for COBRA premium assistance ends when the Assistance Eligible Individual becomes eligible for coverage under any other disqualifying group health plan or Medicare, even if the other coverage does not include all of the benefits provided by the previously elected COBRA continuation coverage. For example, eligibility for Medicare, which generally does not provide vision or dental coverage, ends eligibility for premium assistance related to all previously elected COBRA continuation coverage, including previously elected dental-only or vision-only COBRA continuation coverage.

Regarding the issue of whether a state continuation coverage program provides comparable coverage to COBRA continuation coverage for qualifying individuals if the state program covers only a subset of state residents (for example, only employees of a state or local government unit), the IRS responded that a state program does not fail to provide comparable coverage to federal COBRA continuation coverage solely because the program covers only a subset of state residents, as long as the program provides coverage otherwise comparable to federal COBRA. Thus, according to the IRS, a state law that provides continuation coverage only for employees of a state or local government unit may be comparable coverage that qualifies Assistance Eligible Individuals for COBRA premium assistance under the ARP.

The IRS also provided additional clarification in Notice 2021-46 on which entity is entitled to claim the COBRA premium assistance credit under Code Sec. 6432(a). The IRS explained that the common law employer maintaining the plan is the current common law employer for Assistance Eligible Individuals whose hours have been reduced or the former common law employer for those individuals who have been involuntarily terminated from employment, which, in both cases, serves as the basis for the individual's eligibility for COBRA continuation coverage (collectively referred to as the common law employer). According to the IRS, when the requirements in Code Sec. 6432(b)(2) are satisfied, the common law employer is generally the entity entitled to claim the credit. For state-mandated continuation coverage that is comparable to federal COBRA and is a group health plan subject to both federal COBRA and the state-mandated continuation coverage, the IRS stated that the common law employer is the premium payee entitled to claim the credit because the plan is subject to federal COBRA. Consequently, even if the state-mandated continuation coverage would require the Assistance Eligible Individual to pay the premiums directly to the insurer after the period of federal COBRA ends, the insurer is not entitled to claim the COBRA premium assistance credit.

Another issued addressed in Notice 2021-46 is whether, if a fully insured plan that is not subject to federal COBRA is offered by an employer through a Small Business Health Options Program (SHOP), the employer is the premium payee entitled to claim the premium assistance credit. The IRS answered yes, but only in certain circumstances. According to the IRS, if a fully insured plan that is not subject to federal COBRA is offered by an employer through a SHOP exchange, the common law employer is treated as the premium payee and is therefore eligible to claim the premium assistance credit with respect to coverage in the plan if all of the following conditions are satisfied: (1) the employer participates in a SHOP exchange that offers multiple insurance choices to employees enrolled in the same small group health plan; (2) the SHOP exchange provides the participating employer with a single premium invoice, aggregates all premium payments, and then allocates and pays the applicable premium amounts to the insurers; (3) the participating employer has a contractual obligation with the SHOP exchange to pay all applicable COBRA premiums to the SHOP exchange; and (4) the participating employer would have received the state mini COBRA premiums directly from the Assistance Eligible Individuals were it not for the COBRA premium assistance. The IRS said that if all four of these conditions are satisfied, then the insurer of a plan that is not subject to federal COBRA is not treated as the premium payee with respect to coverage in the plan and is, therefore, not eligible to claim the credit. However, in all other cases of a fully-insured plan subject solely to state mini COBRA, the insurer (and not the common law employer) is the premium payee entitled to the premium assistance credit.

For a discussion of the 2021 COBRA premium assistance, see Parker Tax ¶79,600.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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