As a result of the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), certain individuals who would lose group health plan coverage as a result of certain events (e.g., divorce, termination of employment) are entitled to purchase coverage in the employer’s group health plan at 102 percent of the cost of the coverage for a specified time period.
The American Rescue Plan Act (“ARPA”) gave involuntarily terminated employees and those who have a voluntary or involuntary reduction in hours the right to continue in their employer’s group health plan without having to pay a premium COBRA payment during the April 1, 2021 to September 30, 2021 period. Because some of these individuals may not have purchased COBRA coverage when they terminated employment or may have purchased such coverage and then let the coverage lapse, Congress also provided an extended election period for these individuals.
The IRS recently released Notice 2021-31 detailing many of the rules for claiming the credit. It is especially important that employers follow this guidance as the plan, employer, or insurance company does not want to be in a situation in which it allows an individual to avoid payment of a COBRA premium, but then is unable to claim the tax credit.
Assistance-Eligible Individuals
An assistance-eligible individual is an individual eligible for COBRA for the April 1, 2021 to September 30, 2021 period by reason of a reduction in hours or an involuntary termination of employment and who has elected COBRA. Premium assistance is not available once the individual is eligible for Medicare or coverage under any other group health plan. An individual who becomes available for such other coverage is required to notify the group health plan of eligibility for that coverage and is subject to a $250 penalty for each failure. Higher penalties apply if the lack of notification of the employer is determined to be fraudulent.
Because individuals who were terminated as long ago as November 2019 may still be within their COBRA period, these individuals should be receiving notice from their former employees if they are not covered under another group health plan or Medicare. The subsidy is available for spouses and dependents of individuals who would qualify as an assistance eligible employee or former employee because of a reduction in hours or the involuntary termination of employment.
An individual is involuntarily terminated if termination is due to the unilateral action of the employer where the individual is willing and able to continue performing services. However, a voluntary termination, retirement, or resignation may be considered an involuntary termination of employment if the employer would have terminated the individual absent the voluntary termination, the individual has knowledge that employment would be terminated, and the individual is willing and able to provided services. This is a facts and circumstances determination. An involuntary termination also includes termination for cause and a voluntary termination with good reason. Good reason does not include general concerns about the safety of the workplace. Death is not an involuntary termination of employment, so the surviving spouse and dependents are not assistance-eligible individuals.
Individuals may self-certify that they are an assistance-eligible individual, and the employer or other party maintaining the group health plan may rely on that certification, as long as that party does not have actual knowledge that the self-certification is incorrect.
Assistance-eligible individuals receiving notice will have an extended election period, up to 60 days after the notice is provided.
Coverage Provided
Coverage is available for the group health plan coverage in which the individual was participating before the reduction in hours or involuntary termination of employment, except for a health flexible spending account offered through a cafeteria plan. Group health plans include vision-only and dental-only plans as well as coverage provided under an individual coverage health reimbursement arrangement, an ICHRA. Coverage under a qualified small employer health reimbursement arrangement, a QSEHRA, is not a group health plan and thus is not the type of health program for which the premium assistance or credit are available.
Process for Providing the Coverage
While an assistance-eligible individual may elect coverage in a plan different than the plan in which the individual participated before being terminated or having reduced hours, the premium for that different health plan cannot exceed the premium for the coverage in which the individual participated before the termination of employment or reduction in hours.
Apparently, some group health plans are requiring that employees pay the premiums and then ask for reimbursement when it is determined that the individual qualifies as an assistance-eligible individual. This is not correct. An assistant-eligible individual is treated as if the premium was paid and is not required to pay the premium. As a result, it is imperative for plans to determine assistance-eligible employees as quickly and accurately as possible. Where an assistance-eligible individual has paid a premium, it should be reimbursed as soon as possible.
Recovery of Unpaid Premiums
When the current or former employee does not pay the COBRA premium, the employer, plan, or insurance company to which the premium would be paid is entitled to a refundable payroll tax credit to replace the premium payment not made by the individual with COBRA coverage as a result of this law change. Note that, generally, a third-party payroll provider (e.g., a PEO) may claim the credit if that is the party maintaining the coverage.
As with the employee retention credit and the emergency paid sick and FMLA credits, these payroll tax credits are monetized by reducing payroll tax deposits, filing for an advance credit on Form 7200 if desired, and by claiming the credit on the quarterly employment tax return. A credit is able to be claimed when COBRA coverage is elected, even for retroactive coverage, or when premiums previously paid by the COBRA beneficiary are reimbursed. Notice 2021-24 waives penalties for failure to deposit amounts if the employer was due to an anticipation of the premium assistance credit.
Your Guide Forward
Obviously, understanding these rules and providing notice and coverage where required is difficult given the many different circumstances of employees and former employees. Talk with your Cherry Bekaert professional if you have any questions about this new payroll tax credit and the required notices to be provided to certain employees. Cherry Bekaert’s employment tax team welcomes the opportunity to assist you with all of your employment tax needs.
