05/03/2021

It is important for employers to understand how the COBRA subsidy included in the American Rescue Plan Act (“ARPA”) will impact their business responsibilities. 

Employers must pay a 100 percent premium subsidy to individuals eligible for COBRA coverage due to either a reduction in hours or an involuntary termination of employment. Employers will be entitled to reimbursement, on a dollar-for-dollar basis, through a refundable payroll tax credit against employer-paid Medicare taxes. The tax credit will be applied on a quarterly basis, with any credits above Medicare taxes for such quarter to be treated as an overpayment that may be refundable. The subsidy applies for the period from April 1, 2021 to September 30, 2021.

Who is Eligible

The COBRA subsidy is available to assistance eligible individuals (“AEI”) who incurred a COBRA qualifying event due to: (1) an involuntary termination of employment or (2) a voluntary or involuntary reduction in hours and who elect COBRA coverage. An employee’s reduction in hours includes reduced hours due to: (1) a change in an employer’s hours of operations, (2) a change from full-time to part-time status or (3) taking a leave of absence, as long as, the individual remains an employee. The ARPA requires that subsidized COBRA coverage be offered even to those individuals who discontinued or never elected COBRA.

The COBRA subsidy is not available to individuals who are: (1) eligible for Medicare, (2) eligible for coverage under another employer's plan, (3) eligible for coverage through a spouse’s group health plan or (4) terminated for gross misconduct. 

Employers should be careful when determining whether to offer coverage to an employee who was terminated for “misconduct” because the term "gross misconduct" is subject to interpretation. Ordinary dishonesty probably does not meet the definition of “gross misconduct,” but it may depend upon what the employee was dishonest about. To deny the subsidy, an employer must decide that the termination of the individual's employment is for severe or intentional misconduct.

If an employee was fired for poor performance last year from Company A and then the employee went to work at Company B, but his employment was recently terminated for poor performance from Company B, then potentially both Companies A and B may be required to send COBRA notices and offer the COBRA subsidy. This result occurs if the AEI was covered by a health plan at each company. The AEI will be given a choice of COBRA coverage.

Employer Notice Requirements

The deadline for providing notice to AEIs is May 31, 2021. The U.S. Department of Labor posted model notices here. In the notice, employers are required to inform individuals about the $250 penalty they will face for electing subsidized COBRA if they are eligible for Medicare or another group health plan.  

AEIs and their qualified family members have 60 days after the notice is provided to elect COBRA.

Penalties for Non-Compliance

Employers may be subject to excise taxes for failing to satisfy COBRA continuation requirements. This tax could be as much as $100 per qualified beneficiary, but not more than $200 per family, for each day that the employer is in violation of the COBRA rules.

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