The American Rescue Plan Act of 2021 (ARPA) provides for COBRA continuation coverage for the Second and Third Quarters of 2021 for certain “Assistance Eligible Individuals” – certain covered individuals and their COBRA “qualified beneficiaries” (i.e., only individuals who were beneficiaries under the plan as of the day before the COBRA qualifying event) – without charge for the COBRA premiums they would normally have been required to pay (“COBRA premium assistance”). Where an employer would have received the regular COBRA continuation coverage premium amounts from an Assistance Eligible Individual, the employer will be entitled to a fully refundable federal payroll tax credit for those amounts.
The IRS recently released guidance regarding this premium assistance and the Premium Assistance Credit in its Notice 2021-31. Below is a summary of the most significant aspects.
COBRA Premium Assistance in general
Under ARPA, an Assistance Eligible Individual who becomes eligible for federal COBRA due to the loss of group health plan coverage as the result of a reduction of hours or an involuntary termination of employment only is not required to pay COBRA premiums (100% of coverage cost plus up to an additional 2% administrative fee) for COBRA continuation coverage for the Second and Third Quarters of 2021. (This does not apply to an individual who became COBRA-eligible on account of voluntary termination of employment.) This entitlement ends upon the earlier of the Assistance Eligible Individual’s becoming eligible for coverage under any other group health plan (including dental-only, vision-only, and HRA coverage, but excluding coverage under an FSA or QSERA) or Medicare, or expiration of the regular COBRA continuation coverage period (typically, 18 months). If an Assistance Eligible Individual already paid the COBRA continuation coverage premium for the eligible period, the recipient of the premium (typically, the employer) will be required to reimburse that payment.
Regular COBRA continuation coverage entitlement – If an individual experiences an eligible COBRA qualifying event and elects COBRA continuation coverage within 60 days of the COBRA qualifying event (regular COBRA continuation coverage election period applies) during the Second or Third Quarter of 2021.
Extended COBRA coverage continuation entitlement – (1) If an individual experienced a COBRA qualifying event before April 1, 2021, but had not elected COBRA continuation coverage as of that date, and elects COBRA continuation coverage between April 1, 2021, and the date that is 60 days after the employer/plan administrator provides the mandatory notice, or (2) If an individual experienced a COBRA qualifying event before April 1, 2021, elected COBRA continuation coverage but discontinued COBRA continuation coverage prior to April 1, 2021, and elects COBRA continuation coverage between April 1, 2021, and the date that is 60 days after the employer/plan administrator provides the mandatory notice.
COBRA Premium Assistance Tax Credit for employers
With exceptions for coverage under multiemployer (union) plans and for State coverage continuation requirements (“Mini-COBRA”), the employer maintaining the group health plan will be entitled to a fully refundable federal payroll tax credit (technically, against the Medicare Tax) under new Internal Revenue Code Section 6432 (“Premium Assistance Credit”) on a quarterly basis. The amount of the Premium Assistance Credit is equal to the COBRA premiums the employer would have received from the individual for COBRA continuation coverage for the Second and/or Third Quarter of 2021, including the additional (2% maximum) administrative fee, and does not include any amount of COBRA subsidy the employer would have otherwise provided to the individual.
Below is a summary of the most significant aspects of the Premium Assistance Credit for employers. For more detail, see Notice 2021-31.
Private and public employers eligible – The Premium Assistance Credit is available for both private employers and state and local governments and their political subdivisions (and their agencies and instrumentalities), as well as federal government Section 501(c) organizations that are tax-exempt under IRC Section 501(a).
Premium Assistance Credit timing – As of the date the employer receives an eligible individual’s COBRA election, it becomes entitled to a Premium Assistance Credit for COBRA premiums (plus the administrative fee) not paid by the Assistance Eligible Individual for any coverage period that began before that date. In addition, as of the first day of each subsequent coverage period (typically, a calendar month), the employer becomes eligible for the COBRA premiums that the Assistance Eligible Individual will not be required to pay. Consequently, for monthly COBRA coverage, the employer becomes eligible for the Premium Assistance Credit as of the first day of the month.
Claiming Premium Assistance Credit – An employer can claim its Premium Assistance Credit for a quarter on its Form 941 for that quarter. Alternatively, in anticipation of receiving a Premium Assistance Credit, an employer can retain its otherwise-required federal employment tax deposits (federal income tax withholdings and the employer and employee portions of the Social Security and Medicare taxes) up to the amount of its anticipated Premium Assistance Credit. In addition, an employer can then file IRS Form 7200 (by fax) for any additional Premium Assistance Credit amounts. However, it is not permissible to reduce employment tax deposits and/or file Form 7200 for a period of coverage that has not yet begun.
Employer recordkeeping requirements – Employers claiming the Premium Assistance Credit will be required to maintain records sufficient to document that their ex-employee was entitled to the COBRA premium assistance that generated the employer’s Premium Assistance Credit.
Assistance Eligible Individual self-certification – For purposes of its entitlement to a Premium Assistance Credit, an employer can rely on the self-certification/attestation of an Assistance Eligible Individual, provided the employer is not aware that the information provided is not correct.
Assistance Eligible Individual notification failure for new coverage – The employer will be eligible for a Premium Assistance Credit where the Assistance Eligible Individual fails to inform the employer that he or she has become entitled to coverage under another group health plan or under Medicare, provided the employer was not aware of that coverage eligibility.
Credit amount taxable – The amount of an employer’s Premium Assistance Credit is includible in the employer’s gross income for federal income tax purposes, for the tax year that includes the last day of any calendar quarter with respect to which the Credit applies.
No ERC or FFCRA double-dipping – No Premium Assistance Credit is allowed for any amount taken into account as “Qualified Wages” for purposes of the Employee Retention Credit or for which a federal payroll tax credit is provided under the FFCRA.
Use of third-party payers – The employer can generally take the Premium Assistance Credit where it uses a payroll service provider or professional employer organization (PEO) to report and pay payroll taxes; however, special rules apply.
State Mini-COBRA laws – The insurer, rather than the employer, will typically be entitled to the Premium Assistance Credit where the COBRA premium assistance entitlement arises under a State Mini-COBRA law.
Expanded IRS assessment period – The limitation period on Premium Assistance Credit-related assessments is five years from the date of filing of the applicable Form 941.
Yet another temporary fully refundable federal payroll tax credit has been made available by Congress as part of its efforts to assist individuals impacted by the COVID-19 pandemic, in this case, certain individuals who have involuntarily lost their jobs or had their hours reduced and are paying COBRA continuation coverage premiums to their ex-employers. As these premiums are generally expensive and can trigger financial difficulties for the individuals attempting to meet the premium requirements to continue group health plan coverage for themselves and their families, the potential two-quarter premium holiday may be very significant.
From the employer’s perspective, however, the approach taken under the ARPA is less than perfect, as prior to receiving the Premium Assistance Credit, the employer must effectively front the premiums to its insurer for a fully insured plan, or must cover the related costs for a self-insured plan. In addition, the amount of the Premium Assistance Credit is fully taxable to the employer for federal income tax purposes.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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