The American Recovery Plan (ARP) Act was signed into law in March 2021, establishing some of the most significant changes to the employee benefits industry since the inception of the Affordable Care Act (ACA) – particularly in the COBRA space. The ARP temporarily provides 100% federally subsided, premium-free COBRA to “Assistance Eligible Individuals” (AEIs) across a six-month window from 4/1/2021 – 9/30/2021.
While helpful to many, the law raises questions and brings significant administrative challenges to employers, carriers, COBRA Third Party Administrators (TPAs), and AEIs. These areas of confusion are addressed by regulations, which follow establishment of any new law. As regulations begin to trickle in from the Department of Labor (DOL), we are learning more about this new law – as detailed in this column. Further regulations and clarity are expected to follow from the IRS, Department of Treasury, and DOL over the coming weeks.
What is COBRA?
COBRA is a federal law that allows a person who has lost eligibility for a group health plan to continue coverage under that same plan for a certain duration of time, usually 18-36 months, depending on the situation. Federal COBRA law applies to employers with 20 or more employees, as of January 1st annually, based on 50% or more of the typical working days of the preceding calendar year.
Some states have “mini COBRA” laws, which provide similar benefit-continuation options, and apply to smaller employers below the federal 20 employee threshold. California’s “mini COBRA” law is called Cal-COBRA. Other states, like Nevada, do not have “mini COBRA” options. COBRA is an employer responsibility. Federal COBRA is generally administered by the employer/plan-sponsor, and Cal-COBRA is generally administered by the carrier. ARP regulations specify that the law applies to both federal COBRA and state “mini COBRA” laws. Further regulations are expected, which will give detail to the law’s implications — especially on Cal-COBRA administration.
What are ARP’s major COBRA changes?
ARP provides temporary, premium-free COBRA continuation options to “Assistance Eligible Individuals (AEIs)” who have involuntarily lost eligibility for their group health plans because of an employee’s involuntary reduction of hours or involuntary job termination (except for “gross misconduct”). AEIs can be employees, former employees, spouses, former spouses, dependent children, or former dependent children. The caveat is that they must have lost eligibility for their group health plans, due to the employee’s involuntary termination or reduction of hours. AEIs are not required to pay their COBRA premiums from April 1, 2021, through September 30, 2021. If an AEI inadvertently pays a COBRA premium for coverage during the subsidy window, the AEI must be issued a refund within 60 days.
According to the new law, each AEI’s COBRA premium must firstly be paid by the plan-sponsoring employer, to then later be reimbursed by the IRS when the employer files its quarterly payroll taxes. The subsidy is only available for the six-month period, and cannot be applied retroactively. Additionally, employers can – but are not required to – permit AEIs to change their health plan elections to a lower-cost plan than the one previously enrolled in.
Who is eligible to take advantage of the subsidy?
AEIs are eligible for premium assistance (“the subsidy”) if they are eligible for and elect COBRA continuation coverage because of their own or a family member’s involuntary reduction in hours or involuntary termination from employment. The premium assistance is available for periods of coverage from April 1, 2021, through September 30, 221. Premium assistance applies to federal COBRA, as well as “comparable state continuation coverage (mini-COBRA) laws,” such as Cal-COBRA.
Assuming the person has lost coverage due to the employee’s involuntary job termination or reduction of hours, the person is an AEI who is eligible for the subsidy. This can include a person:
- * Who is/was offered COBRA continuation during the six-month subsidy period (04/01/2021 – 09/30/2021)
- * Who declined to take COBRA continuation when first eligible, as long the person would still have been in his or her maximum COBRA coverage period (had the coverage been initially elected). For federal COBRA, the period is 18-36 months depending on the situation. For Cal-COBRA, the period is generally 36 months; however, it is unclear if ARP applies on an 18-month or 36-month period for Cal-COBRA. Further clarifying regulations will follow. This creates an additional COBRA election period for AEIs in this circumstance.
- * Who elected COBRA coverage and later discontinued it, as long as the person would still have been in his or her maximum COBRA coverage period (had the coverage not been discontinued). Again, for federal COBRA, this period is 18-36 months depending on the situation. For Cal-COBRA, the period is generally 36 months; however, it is unclear if ARP applies on an 18-month or 36-month period for Cal-COBRA. Further clarifying regulations will follow. This creates an additional COBRA election period for AEIs in this circumstance.
AEIs eligible for an additional COBRA election period (the latter two bullet points above) must receive notice of the period informing them of this opportunity. This additional COBRA election notice must be sent by the employer (or the employer’s COBRA TPA) by May 31, 2021.
How long does an AEI have to enroll in COBRA to take advantage of the subsidy?
AEIs have 60 days after receiving the provided notice to elect COBRA continuation utilizing the subsidy. If an AEI does not elect COBRA within a 60-day period upon notification, the subsidy is forfeited.
When do COBRA coverage and the subsidy begin?
Individuals can begin their coverage prospectively from the date of their election, or, if an individual has a qualifying event (caused by involuntary job loss or reduction of hours) on or before April 1st, choose to start coverage as of April 1st, even if the individual receives an election notice and makes such election at a later date. In this circumstance, COBRA coverage is applied retroactively.
To which plans does ARP’s COBRA premium assistance apply?
ARP regulations clarify that the subsidy provisions apply to all group health plans sponsored by employers, subject to federal COBRA rules under ERISA and/or state mini-COBRA (Cal-COBRA). ARP’s subsidy also applies to state or local governments subject to provisions under the Public Health Service Act.
Subsidy Eligibility – “Assistance Eligible Individuals” (AEI)
An AEI is a person who is eligible for COBRA continuation coverage during the period from April 1, 2021, through September 30, 2021, due to a qualifying event that is a reduction in hours, or an involuntary termination of employment and who elects COBRA coverage.
A person is not eligible (or loses eligibility) for the subsidy if he or she is (or becomes) eligible for another group health plan (through a spouse, new employer, etc.), or if eligible for Medicare.
Having individual coverage through a state exchange (e.g., Covered California, Nevada Health Link) or Medicaid/Medi-Cal does not nullify an AEI from receiving COBRA subsidy assistance. However, if the individual currently maintains an individual plan on a state exchange, paid through a premium tax credit (PTC), and that person elects COBRA via the subsidy, he or she is no longer eligible for the PTC on the exchange during the subsidy period.
Individuals who accept the COBRA subsidy, but become eligible for another group health plan or become eligible for Medicare during the subsidy period, must inform their previous employer/health plan of such. Failure to do so results in a $250 penalty or 110% of the premium assistance. However, regulations clarify that a person will not be subject to the penalty if the failure to notify the employer/health plan is due to reasonable cause and not due to willful neglect.
How does previous COVID-19 National Emergency guidance from the DOL, Department of Treasury, and IRS apply?
Because of the COVID-19 pandemic in 2020, the standard 60-day COBRA election windows were extended to 12 months. Because of this, depending on a person’s situation, a person can retroactively elect COBRA as far back as 12 months – if a person had a qualifying event during the previous 12 months as a result of the COVID-19 pandemic. ARP regulations clarify that these extensions do not apply to any timelines created in ARP related to COBRA premium assistance/subsidy. ARP timelines are concrete, and are not impacted by previous COVID-19 National Emergency Guidance.
Employers must notify all eligible AEIs of these changes, subsidies, and enrollment rights.
Employers must notify any person who would be in his or her maximum COBRA period during any of the months in the six-month subsidy period. Because ARP allows people who previously declined or dropped COBRA coverage to re-enroll now, this can include persons involuntarily terminated (or who had a reduction in job hours) as far back as October 2019 (18 months prior to April 2021). As previously stated, this may reach back as far as 36 months prior to April 2021 for Cal-Cobra (March 2018) – though we are awaiting further regulations to clarify. In some instances, federal COBRA can extend to a 36-month period.
Employers have several notices to distribute, with tight timeframes.
- * A general notice must be provided to all eligible persons who have a qualifying event that is caused by a reduction of hours or involuntary termination of employment from April 1, 2021, through September 30, 2021. This notice can be provided separately or with the COBRA election notice.
- * A notice of the extended COBRA election period to any AEI who had a qualifying event before April 1, 2021. This notice must be sent to AEIs who are still in their 18-month COBRA window in April, 2021 — and potentially to those who are still in a 36-month federal COBRA or Cal-COBRA window (depending on the situation), which will likely be clarified in additional forthcoming regulations. This does not include those individuals whose maximum COBRA continuation period, if COBRA had been elected or not discontinued, would have ended before April 1, 2021. (Generally, those with applicable qualifying events before October 1, 2019, for federal COBRA, and perhaps before March 1, 2018, for Cal-COBRA.) This is due by May 31, 2021.
- * A notice explaining the expiration of periods of premium assistance, explaining that premium assistance will expire soon, the date of expiration, and that the individual may be eligible for coverage without premium assistance through COBRA or coverage under a different group health plan. Coverage can also be available through a state exchange or Medicaid/Medi-Cal. This notice must be provided 15-45 days before the individual’s premium assistance expires.
- Optional: If the employer permits individuals to change COBRA coverage options to a less-rich plan, individuals must be provided with a notice to do so. Individuals have 90 days to elect to change their coverage after notice is provided. This is included as addendums to the model notices linked above.
As of this article’s publishing date (04/13/2021), there is a special notice for mini-COBRA (Cal-COBRA), since its administration is different from federal COBRA’s administration. Cal-COBRA is generally administered by carriers. It is unclear how these notices are to be distributed for Cal-COBRA. We are awaiting further regulation and detail from carriers.
Model notices are available for use, and employers must include detailed information such as: the forms necessary for establishing premium assistance; contact information for the plan administrator (employer); a description of the election period; a description that AEI must notify the plan administrator if offered alternate group coverage or eligible for Medicare; a description of the right to receive premium assistance and conditions for entitlement; and, if offered by the employer, a description of the option to enroll in a different coverage option available under the plan.
The subsidy is only available April 1, 2021, through September 30, 2021.
An AEI will not be refunded payment for COBRA premiums before or after the subsidy period. The regulations remind Americans that individual coverage on a state Exchange cannot generally be terminated retroactively, and only can be done prospectively.
The regulations and model notices direct whistleblowers to contact the Department of Labor.
The Department of Labor has released a form for persons to request treatment as AEIs by current/former employers/plan sponsors – if applicable.
Throughout the required employer notices, there are several mentions of contact points for whistleblowers to contact the Employee Benefits Security Administration (EBSA), which also oversees enforcement of ERISA law, if they feel they are AEIs, but are not being treated as such.
Noncompliance penalties are steep.
The regulations clarify that employers will be subject to tax penalties of $100/employee per day for violations of notices under ARP. The penalty rises to $200/employee/day for employees with one or more dependents. However, the enforcing Departments understand that new ARP changes are challenging; they are considering good-faith efforts to comply with ARP before assessing potential penalties.
In COBRA, however, civil penalties (lawsuits filed by employees against employers) often carry the greatest liability and biggest exposure in the compliance space for employers.
How will carriers handle this for Cal-COBRA?
As of this article’s publishing, there are still many outstanding questions about the administration of ARP law. Regulations specify that mini-COBRA applies under ARP, but it is unclear how it will be administered. Cal-COBRA is generally administered by the carrier, and direct-billed to the COBRA participant. Federal COBRA is administered by the employer, and premiums are usually included on the employer’s monthly premium statement. ARP law says employers must forward payment for AEIs’ COBRA premiums so the IRS can subsidize them, but how that will work in Cal-COBRA is still unclear. Further regulations are expected to be released over the coming weeks, and additional information from carrier partners will follow.