On May 18, 2021, the IRS released highly anticipated implementation guidance on the COBRA premium subsidy under the American Rescue Plan Act of 2021 (ARPA). Notice 2021-31 provides additional information for employers on how to ... ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­

IRS Releases COBRA Subsidy Guidance under the American Rescue Plan Act

Employee Benefits & Executive Compensation

On May 18, 2021, the IRS released highly anticipated implementation guidance on the COBRA premium subsidy under the American Rescue Plan Act of 2021 (ARPA). Notice 2021-31 provides additional information for employers on how to apply for the premium subsidy and how to claim the tax credit. Below are some highlights of the guidance.


The ARPA provided a 100% COBRA premium subsidy for “Assistance Eligible Individuals” (AEIs) for periods of COBRA coverage from April 1, 2021 through September 30, 2021. AEIs are individuals who experienced a COBRA qualifying event as a result of an involuntary termination of employment or a reduction in hours. ARPA also provided for an “extended election period” for individuals who would otherwise be AEIs as of April 1, 2021 but did not make a COBRA election or discontinued COBRA coverage prior to April 1, 2021. The extended election period for those individuals begins on April 1, 2021 and ends 60 days after the required notice is provided to the individual. Any applicable subsidy terminates as of the earliest of: i) the date the AEI becomes eligible for other group health plan coverage, ii) the date an AEI’s COBRA continuation coverage would otherwise expire or iii) September 30, 2021. On April 7, 2021 the Department of Labor (DOL) issued FAQs, model notices, and model forms for the implementation of the ARPA subsidies. However, there were still a number of questions that employers hoped would be addressed by IRS guidance.

Employer Diligence Requirements

Documentation Requirements
The IRS provided some welcome relief to employers struggling with how to accurately determine whether an individual is an AEI and the implications of potentially claiming a tax credit for an individual who was not properly classified as an AEI. Employers can require the individuals applying for the subsidy to self-certify as to their status as an AEI and that they are not eligible for other group health plan coverage or Medicare. Further, an employer can rely on this attestation when applying for the tax credit so long as the employer does not have “actual knowledge” that the attestation is incorrect. Employers are required to maintain this documentation to substantiate their eligibility for the tax credit.

Requirements for Amount of Credit
The IRS also clarified that employers can only claim a tax credit as to the amount of COBRA premium that the AEI would have otherwise been required to pay. Therefore, employers that maintain severance programs, or otherwise subsidize COBRA premiums for terminated employees, can only claim a tax credit as to the portion of the COBRA premium that the AEI would be required to pay.

Eligibility for Other Coverage

The IRS also provided some additional clarity around what constitutes eligibility for other group health plan coverage. An individual is only eligible for other coverage if he or she can actually enroll in other coverage, meaning an individual is not considered eligible for other coverage if he or she is in a waiting period for the other plan or there is no open enrollment window. It is worth noting that the loss of group health plan coverage is a HIPAA special enrollment event allowing for enrollment in another group health plan. The deadline for HIPAA special enrollment events is currently extended due to the DOL and IRS guidance. Therefore, it is very unlikely at this current time that an individual would not be eligible to enroll in other group health plan coverage (e.g. a spouse’s plan) outside of an open enrollment window.

A retiree is eligible for other group health plan coverage if his or her former employer offers retiree health coverage through a different plan than the plan that covers active employees. However, if retiree coverage is offered through the same plan as active coverage, that coverage is not other group health plan coverage and the retiree would be eligible for the ARPA subsidy.

Qualifying Events

The Notice provided some additional clarification as to what constitutes a reduction in hours or involuntary termination of employment. All reductions in hours that result in a loss of coverage are ARPA qualifying events. Even voluntary reductions in hours are ARPA qualifying events and can include reductions, temporary cessations of hours due to furloughs, lawful strikes and lockouts and leaves of absence that result in a loss of coverage. Additionally, employee-initiated terminations can be considered “involuntary” for purposes of ARPA if the employee was “constructively discharged” or if the employee knew he or she would be otherwise terminated. The determination of whether a termination was voluntary or involuntary is a fact-specific inquiry, but the IRS does provide some useful examples and scenarios in the Notice. For example, retirement is generally not considered an involuntary termination of employment absent other facts and circumstances.

In the Notice, the IRS clarified that if an individual’s initial 18-month COBRA period for an involuntary termination of employment or reduction of hours was extended due to a disability determination, second qualifying event or an extension mandated under state law that he or she would eligible for the ARPA subsidy during the extended COBRA period provided the individual had elected COBRA coverage and remained on such coverage during the extended COBRA period. In practice this means that individuals who are not covered as of April 1, 2021 and who had a triggering event more than 18 months prior to April 1, 2021 are not eligible for the extended election period. However, if an individual is on extended COBRA coverage as of April 1, 2021, he or she is an AEI through the extended period of COBRA coverage.

Eligible Coverage

As expected, the Notice clarifies that all types of COBRA coverage (except for FSAs) are eligible for subsidization. This includes medical, dental, vision and HRAs. If the employer no longer offers the same coverage that was available at the time the AEI had their COBRA qualifying event, the employer should offer coverage most similar to the prior coverage or cheaper plan options for the application of the subsidy.

Extended Election Period and Emergency Relief

Given the DOL and IRS’s extension of several benefit plan deadlines, it was unclear how those extensions may interact with the ARPA subsidies. The IRS Notice confirmed that these “Outbreak Period” extensions do not apply to notices or elections under the ARPA. Furthermore, an employer can require that an individual making an election for subsidized COBRA coverage chose to elect any retroactive COBRA coverage at that time. If he or she declines the retroactive coverage when electing the subsidy, he or she will not be eligible to elect it later, even if the outbreak period still applies.

Employer Calculation and Receipt of Tax Credit

A significant portion of the Notice addresses how employers calculate and receive the tax subsidy. The credit is generally available each quarter in an amount equal to the amount of the COBRA premiums not paid by AEIs. Therefore, for employers that subsidize COBRA coverage, through a type of severance program or otherwise, any amounts that a qualified individual would not be responsible for paying are not eligible for reimbursement. Employers with severance arrangements that subsidize COBRA coverage may want to review their programs in light of this guidance.

The tax credit is payable to the “premium payee” under ARPA. The Notice clarifies that the premium payee can be the employer that maintains the plan subject to COBRA (generally for self-insured plans), or the insurer providing the coverage (generally for fully-insured plans). The Notice further explains that premium payees can claim the credit by reporting it on the designated lines of its federal employment tax returns (usually the Form 941 Employer Quarterly Federal Tax Return). The premium payee is able to receive the credit by: 1) reducing its deposits of federal employment taxes it is otherwise required to deposit, up to the amount of the anticipated credit; and 2) requesting an advance of any anticipated credit that is anticipated to exceed the total amount of federal employment tax deposits by filing a Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Administering ARPA COBRA Subsidies

Plan Sponsors (or their COBRA Administrators) should have already distributed the ARPA COBRA notice and begun administering the ARPA COBRA subsidy. However, this guidance provides some additional useful information to assist plan sponsors and their vendors. Calfee will continue to monitor for any additional guidance, as there are still some lingering questions.

For more updates and alerts, visit the News section of Calfee.com.


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