On May 18, 2021, the Internal Revenue Service (“IRS”) published Notice 2021-31 (“Notice”), containing much-anticipated guidance on the American Rescue Plan Act’s (“ARPA”) COBRA premium assistance program.
The Notice seeks to clarify certain matters related to the COBRA premium tax credit and explain which requirements apply to employers or plan sponsors, group health plans and/or health insurance issuers.
Here are some key takeaways gleaned from the 83 questions and answers:
1. Depending on the specific plan, either the employer, multiemployer plan, or insurer could be entitled to the tax credit.
The person eligible to claim the tax credit – i.e., the “person to whom premiums are payable” or the “premium payee” – is:
- The multiemployer plan, in the case of a group health plan that is a multiemployer plan;
- The employer, in the case of a group health plan that is subject to Federal COBRA or under which some or all of the coverage is self-funded;
- The insurer providing the coverage, in the case of any other group health plan not described above (generally, this will be fully-insured plans that are subject to mini-COBRA continuation requirements). See Q/A-73.
2. There are special considerations for single-employer, insured plans that are subject to Federal COBRA.
For a single-employer, insured plan that is subject to Federal COBRA, if the insurer and the employer have agreed that the insurer will collect the COBRA premiums directly, the insurer is required to treat an “assistance eligible individual” or “AEI” as having paid the full premium. However, notwithstanding any agreement between the employer and the insurer, the employer is required to pay the premium to the insurer for the months of COBRA premium assistance with respect to any AEI claiming coverage. See Q/A-60.
3. Employers who sponsor fully-insured plans subject solely to state mini-COBRA are not entitled to a tax credit.
In this case, the “premium payee” is the insurer providing the coverage under the group health plan, even if the employer pays the full premium to the insurer. The Treasury Department and the IRS acknowledged that this requirement may create administrative issues for certain Small Business Health Options Program exchanges that aggregate premiums paid by participating employers or where State rules require full payment of premiums by the employer; the Treasury Department and the IRS are continuing to consider this issue. See Q/A-62.
4. The available tax credit does not include employer subsidies.
If an employer does not subsidize COBRA premium costs for similarly situated qualified beneficiaries, the employer’s tax credit for a quarter is equal to the amount of premiums paid on behalf of AEIs (i.e., not paid by AEIs) for COBRA continuation coverage for the quarter. If the employer does subsidize COBRA premium costs, then the tax credit for a quarter is the amount of premiums that the employer actually would have charged to an AEI in the absence of the subsidy. In other words, the tax credit does not include any premium amounts that the employer would have otherwise paid. See Q/A-63 and 64.
5. The available tax credit does include administrative costs.
For purposes of calculating an employer’s tax credit, the premium amount includes any administrative costs otherwise allowed (usually 102% of the applicable premium under IRC § 4980B(f)(4)). See Q/A-64.
6. Premium payees with no employment tax liability are entitled to claim the tax credit.
If the premium payee does not have employment tax liability—for example a multiemployer plan—the premium payee should claim the tax credit on the Form 941 and report any advance payments received in anticipation of the credit on the same Form 941. The premium payee should enter zero on all remaining non-applicable lines so that the overpayment amount on the Form 941 is the amount of the credit reduced by any advance payment received. See Q/A-77.
7. Premium payees should not file a Form 7200 at this time.
The IRS has instructed taxpayers not to file a Form 7200 at this time as it is being updated.
8. Employers that use third-party payers may be entitled to a tax credit.
A premium payee who uses a third-party payer (e.g., PEO, CPEO, or § 3504 agent) to report and pay employment taxes to the IRS may be entitled to the tax credit, but there different rules that apply depending on which type of third-party payer the premium payee uses. See Q/A-81 through 84 for specific guidance by entity type.
9. Involuntary terminations of employment should be carefully considered.
For purposes of establishing COBRA subsidy eligibility, determining whether an involuntary termination of employment occurred is nuanced. In certain circumstances, resignation due to a material change in location, acceptance of a severance package, or even early retirement could be deemed involuntary terminations. See Q/A-24 through 34 for specific factual scenarios.
10. A self-certification of eligibility is recommended, but not required.
Employers who claim the tax credit must retain in their records either a self-certification or other documentation to substantiate each individual’s eligibility for COBRA premium assistance. The Department of Labor (“DOL”) published a model “Request for Treatment As An Assistance Eligible Individual” form that employers can use to determine AEI status and record the employer’s decision and justification. See Q/A 4 through 7.
11. COBRA premium assistance is available for dental, vision, and health reimbursement arrangements.
Generally, COBRA premiums assistance is available with respect to any group health plan, including a dental-only, vision-only, or health reimbursement arrangements (“HRAs”). The exceptions are IRC § 106(c) health flexible spending arrangements (“FSAs”) offered under IRC § 125 cafeteria plans and Qualified Small Employer Health Plans (“QSHERAs”). See Q/A 35 through 40.
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