IRS Guidance Provides Details on Temporary COBRA Premium Assistance

(Parker Tax Publishing May 2021)

The IRS issued a notice which explains in depth, in question-and-answer form, the application of the temporary premium assistance for Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) continuation coverage, as enacted in the American Rescue Plan Act of 2021, as well as the related refundable tax credit that may be claimed by an employer or insurer. The notice affirms that an employer may rely on an individual's attestation regarding a reduction in hours or involuntary termination of employment, and eligibility for other disqualifying coverage, for the purpose of substantiating eligibility for the credit, unless the employer has actual knowledge that the individual's attestation is incorrect. Notice 2021-31.

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" and their families who elect 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 Notice 2021-31, the IRS explains, in question-and-answer format, the details of how the continuation of health coverage under all of these provisions, referred to as "COBRA continuation coverage," applies. The temporary premium assistance available under the ARP is generally referred to as "COBRA premium assistance" or "premium assistance."

Practice Tip: Code Sec. 139I provides that the amount of any COBRA premium assistance is excludible from an individual's gross income.

Individuals Eligible for COBRA Continuation Coverage

An "Assistance Eligible Individual" is any individual who is (1) a qualified beneficiary as the result of (i) the reduction of hours of a covered employee's employment or (ii) the involuntary termination of a covered employee's employment (other than by reason of an employee's gross misconduct), (2) is eligible for COBRA continuation coverage for some or all of the period beginning on April 1, 2021, through September 30, 2021, and (3) elects the COBRA continuation coverage. This includes qualified beneficiaries who are the spouse or dependent child of the employee who had the reduction in hours or involuntary termination of employment resulting in a loss of coverage, as well as the employee, if that reduction in hours or involuntary termination of employment caused the qualified beneficiary to lose coverage and the other requirements are satisfied.

In order to be a qualified beneficiary who is eligible to become an Assistance Eligible Individual, an individual must (1) be covered under the group health plan on the day before the reduction in hours or involuntary termination of the covered employee's employment, and (2) lose eligibility for the coverage due to the reduction in hours or involuntary termination of the covered employee's employment. An individual who loses group health coverage in connection with the termination of a covered employee's employment by reason of the employee's gross misconduct is not a qualified beneficiary and, thus, cannot be an Assistance Eligible Individual.

An individual who becomes a qualified beneficiary as the result of a reduction in hours or involuntary termination of employment, and who otherwise meets the requirements to be an Assistance Eligible Individual, is treated as an Assistance Eligible Individual regardless of whether the individual was also treated as an Assistance Eligible Individual at an earlier date.

Example: On April 1, 2021, Katrina's employment is terminated, and she becomes a qualified beneficiary. Katrina elects COBRA continuation coverage and becomes an Assistance Eligible Individual with COBRA continuation coverage beginning on April 1. On July 1, 2021, Katrina becomes eligible for coverage under a group health plan sponsored by her husband's employer and ceases to be an Assistance Eligible Individual. Katrina ceases COBRA continuation coverage as of July 1, 2021, and enrolls in coverage in the group health plan sponsored by her husband's employer. On August 1, 2021, Katrina's husband has an involuntary termination of employment and as a result Katrina and her husband lose coverage. Katrina and her husband become qualified beneficiaries due to the loss of coverage and elect COBRA continuation coverage with the plan sponsored by her husband's employer. Katrina and her husband become Assistance Eligible Individuals with respect to COBRA continuation coverage as of August 1, 2021.

An extended election period is provided for certain individuals who did not have an election of COBRA continuation coverage in effect on April 1, 2021 (i.e., the ARP extended election period). The ARP extended election period is available for an individual who would be an Assistance Eligible Individual if the individual had a COBRA continuation coverage election in effect on April 1, 2021, or an individual who previously elected COBRA continuation coverage and discontinued that coverage before April 1, 2021. The ARP extended election period continues for 60 days after these individuals are provided notice of the extended election period. The resulting COBRA continuation coverage does not extend beyond the maximum period of COBRA continuation coverage that would have been required under the applicable COBRA continuation coverage provision if the individual had elected COBRA continuation coverage initially as required under that applicable COBRA provision, or had not discontinued the elected COBRA continuation coverage.

Premium assistance is not available if an individual is eligible for coverage under any other group health plan or for Medicare. If an individual receiving premium assistance becomes eligible for coverage under any other group health plan or for Medicare, the premium assistance period ends. An individual receiving premium assistance who becomes eligible for coverage under any other group health plan or Medicare is required to notify the group health plan providing COBRA continuation coverage of eligibility for that other coverage. If the individual fails to notify the group health plan, the individual may be subject to a penalty of $250 for each failure. If the individual fraudulently fails to notify the group health plan, the individual is subject to a penalty equal to the greater of $250 or 110 percent of the premium assistance improperly received after the end of eligibility for COBRA premium assistance.

Refundable Tax Credits Available for Employers, Insurers, or Multiemployer Plans

The ARP requires that health insurance issuers and group health plans treat Assistance Eligible Individuals as having paid the full amount of their COBRA premium for the specified coverage. The person to whom premiums for COBRA continuation coverage are payable (the employer, insurer, or multiemployer plan, as applicable) is entitled to a refundable tax credit against its share of Medicare taxes imposed by Code Sec. 3111(b) as of the first period of coverage beginning on or after April 1, 2021, and will not be available for periods of coverage beginning after September 30, 2021.

The plan must treat an Assistance Eligible Individual as having paid the full premium. If the plan does not treat the Assistance Eligible Individual as having paid the full premium, the plan will have failed to meet the applicable continuation coverage requirements. Thus, in the case of a plan subject to COBRA continuation coverage requirements under Code Sec. 4980B, the failure to treat the Assistance Eligible Individual as having made the full payment is a failure to satisfy the requirements of Code Sec. 4980B and may result in the imposition of the excise tax under Code Sec. 4980B(b).

Code Sec. 6432(c)(2)(C) provides that any penalty under Code Sec. 6656 for any failure to make a deposit of 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), is waived if the failure was due to anticipation of the premium assistance credit. Under Code Sec. 6432(e), the gross income of any person allowed the premium assistance credit is increased, for the tax year which includes the last day of any calendar quarter with respect to which the credit is allowed, by the amount of the credit. In addition, no credit is allowed with respect to any amount which is taken into account as qualified wages or qualified health care expenses with respect to certain coronavirus-related credits.

A third-party payer (such as a PEO, CPEO, or Code Sec. 3504 agent) can be treated as the person to whom premiums are payable (i.e., a premium payee) if the third-party payer: (1) maintains the group health plan; (2) 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 (the TPP Plan Administrator); and (3) would have received the COBRA premium payments directly from the Assistance Eligible Individuals were it not for the COBRA premium assistance.

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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