Benefit News

IRS Issues Cobra Subsidy Guidance

June 07, 2021

On May 18, 2021, the Internal Revenue Service (IRS) released Notice 2021-31, a guidance document on the American Rescue Plan Act (ARPA) subsidy for the continuation of health coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA).

The 40-page Notice discusses the background of the subsidy and includes 86 questions and answers (Q&As) about its application.

Key Highlights

The ARPA subsidy covers 100 percent of COBRA and state mini-COBRA premiums from April 1 – September 30, 2021, for certain assistance-eligible individuals (AEI) whose work hours were reduced or whose employment was involuntarily terminated. The subsidy is funded via a tax credit provided to employers, insurers, or group health plans, according to the terms of the statute. Employers must document an individual’s eligibility for the subsidy in order to claim the credit.

Key highlights clarifying certain outstanding issues are summarized below.

NOTE: Please review carefully. The deadline to notify AEIs of the subsidy was May 31, 2021. While much of this Notice closely follows previously issued COBRA subsidy guidance under the American Recovery and Reinvestment Act of 2009 (ARRA), there are some slight differences that may result in additional individuals becoming subsidy eligible.

Eligibility for the Subsidy

In general, an AEI is an individual who lost coverage due to a reduction in hours or involuntary termination of employment and is not eligible for other group health coverage or Medicare. That said, an individual who is in a waiting period for other group health coverage may still be an AEI during the waiting period. AEIs also may include spouses and dependents who were covered under the plan at the time of the qualifying event.

An individual could be an AEI more than once. For example, an individual loses coverage for a group health plan due to an involuntary termination of employment and becomes an AEI on April 1, 2021. In July 2021, the individual gains coverage under the group health plan of his or her spouse’s employer but in August 2021 loses that coverage because of the spouse’s involuntary termination of employment.

Employers can require AEIs to self-certify or attest that they lost coverage due to a reduction of hours or involuntary termination of employment and that they are not eligible for other disqualifying group health plan coverage or Medicare (Department of Labor form “Request for Treatment as an Assistance Eligible Individual” can be used for this purpose). Further, employers may rely on the self-certification or attestation unless they have actual knowledge that the individual is not eligible for a subsidy. If an employer uses an AEI’s self-certification or attestation, it must maintain that document to substantiate eligibility for the subsidy. If an employer does not use the attestation, however, it must keep documentation to substantiate that the individual is eligible for the subsidy.

The IRS also clarifies that if the original qualifying event was a reduction of hours or involuntary termination of employment, the subsidy is available for extended periods of COBRA coverage between April 1 and September 30, 2021, due to a disability determination, second qualifying event, or extension under state mini-COBRA.

Reduction of Hours

Both a voluntary and involuntary reduction of hours, as well as a furlough or a work stoppage resulting from a lawful strike or a lockout initiated by the employer, that causes a loss of coverage, but maintains the employment status of the individual, could make the individual an AEI.

Involuntary Termination of Employment

ARPA maintains the general definition of involuntary termination of employment that was under ARRA: “a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services”.

The determination of an involuntary termination of employment is based on the facts and circumstances. The Notice clarifies that the following situations may or may not constitute an involuntary termination for purposes of determining whether the individual is an AEI (Note: this is not an all-inclusive listing):

Types of Coverage Eligible for the Subsidy

The subsidy is available for all group health plans subject to COBRA except health care flexible spending accounts. This includes health reimbursement arrangements (HRAs), as well as dental-only and vision-only plans. It is also available with respect to retiree health coverage that is provided under the same group health plan that coverage is made available to similarly situated active employees. The amount charged to the retiree cannot exceed the maximum amount permitted under federal COBRA.

Beginning and Ending of the Subsidy Period

An AEI is first entitled to receive a subsidy as of the first applicable period of coverage beginning on or after April 1, 2021. This date depends upon the period with respect to which premiums would have normally been charged by the plan if the individual had paid the premium. Thus, the AEI may still elect subsidized coverage at a later date during the 6-month subsidy period, and as long as the qualified beneficiary makes a COBRA election within his or her 60-day election period, he or she could potentially still be an AEI should the election period extend beyond September 30, 2021.

The COBRA subsidy generally applies until the earliest of (1) the first date the AEI becomes eligible for other group health plan coverage or Medicare coverage, (2) the date the individual ceases to be eligible for COBRA continuation coverage, or (3) the end of the last period of coverage beginning on or before September 30, 2021. If an AEI dies during the subsidy period, it will not affect the eligibility of his or her spouse or dependent who is also an AEI.

Extended COBRA Election Period

ARPA also provides certain individuals with a second opportunity to elect COBRA to take advantage of the subsidy. Those qualified beneficiaries who were still within their COBRA continuation coverage period as of April 1, 2021 (including within the extension timeframes under the Emergency Relief Notices described below), and who did not elect COBRA for some or all of the coverage options when first eligible, have a special 60-day election period to do so prospectively. However, their COBRA continuation coverage period does not get extended beyond the maximum continuation coverage period had the individual elected COBRA when first available.

This second opportunity to elect COBRA applies only to a group health plan subject to federal COBRA and does not apply to plans providing continuation requirements under a state program unless that state program provides for a similar extended election right.

Extensions under the Emergency Relief Notices

The Joint Notice issued by the Departments of Labor and U.S. Treasury on May 4, 2020, and the EBSA Disaster Relief Notice 2021-01 issued on February 26, 2021 (collectively, the Emergency Relief Notices), extend timeframes for group health plans and their participants and beneficiaries to provide certain notices during the COVID-19 “outbreak period”, including the deadline to provide the 60-day election notice.

A qualified beneficiary who received a COBRA election notice before April 1, 2021 (to which the extensions provided by the Emergency Relief Notices apply) but did not elect COBRA for any or all of his or her coverage options, and then receives the notice of the ARPA extended election period, has 60 days to elect COBRA continuation coverage and obtain the subsidy for periods of coverage beginning on or after April 1, 2021.

In a surprise twist, the IRS will also require the individual to elect or decline COBRA retroactive to the loss of coverage if he or she wants to take advantage of extensions under the Emergency Relief Notices. If retroactive coverage is elected, the individual will be required to pay the COBRA premiums for periods of coverage beginning before April 1, 2021. If the individual declines retroactive coverage, the employer may treat the individual as having not elected COBRA coverage until the first period of coverage beginning on or after April 1, 2021, and the extensions provided by the Emergency Relief Notices will no longer be available even though the outbreak period has not ended.

Calculating and Claiming the COBRA Subsidy Credit

In general, the amount of the premiums not paid by AEIs is the premium amount charged for COBRA continuation coverage to other similarly situated covered employees and qualified beneficiaries. The premium amount also includes any administrative costs otherwise allowed (that is, generally 102 percent of the applicable premium). It does not include any amount of the cost of coverage that is subsidized by the employer.

Those entitled to the credit are referred to as premium payees, and they are generally entitled to receive the credit regardless of whether a third-party payer is utilized (for example, a reporting agent, payroll service provider, or a professional employer organization). The credit is generally taxable income to the premium payee.

The credit can be taken either on the quarterly IRS Form 941 employment tax return or as an advance using IRS Form 7200. If the plan (other than a non-multiemployer plan) is covered by federal COBRA, it is the employer that is the premium payee (this includes most self-insured and fully insured group health plans). If the group health plan is a multiemployer plan, the multiemployer plan is eligible for the credit, and for most other group health plans (generally those that are subject to state continuation coverage requirements), it is the insurer that will be eligible to take the tax credit, even if the employer pays a portion of the premium directly to the insurer.

The COBRA subsidy is limited to premiums attributable to AEI’s COBRA continuation coverage and is not available to portions of any premium attributable to those who are not AEIs (for example, domestic partners or other non-COBRA beneficiaries covered), or for amounts subsidized by the employer. To determine the amount eligible for the subsidy tax credit when the COBRA premiums include coverage for both AEIs and non-AEIs, the premium amounts are to be first allocated to the premiums attributable to the AEI coverage. The incremental cost above the premium amounts allocated to the AEI coverage will be allocated to the non-AEI coverage and will not be eligible for the subsidy tax credit.

For additional information, please contact your Burnham Consultant or Burnham, A Baldwin Risk Partner at 949‐833‐2983 or inquiries@burnhambenefits.com.


Burnham Benefits does not engage in the practice of law and this publication should not be construed as the providing of legal advice or a legal opinion of any kind. The consulting advice we provide is intended solely to assist in assessing its compliance with the Patient Protection and Affordable Care Act and other applicable federal and state law requirements, and is based on Burnham Benefit’s interpretation of federal guidance in effect as of the date of this publication. To the best of our knowledge, the information provided herein, and assumptions relied on, are reasonable and accurate as of the date of this publication. Furthermore, to ensure compliance with IRS Circular 230, any tax advice contained in this publication is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.

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