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Are Your Former Employees Eligible for COBRA?

If you've had to lay off employees as far back as Nov. 1, 2019, a tiny portion of the $1.9 trillion American Rescue Plan Act (ARPA) might go to them. That's the good news for eligible former employees. The bad news for employers is that your company will have some administrative responsibilities to see that the funds those employees are entitled to actually reach them. In other words, your company will need to pay the cost of maintaining health benefits through your health plan under COBRA provisions and recoup those costs later.

The six-month effective date of the new COBRA tax credit program runs from April 1 through Sept. 30 of this year. "Assistance eligible individuals" or AEIs as they're referred to in ARPA, are former employees who were laid off, that is, involuntarily terminated for economic reasons, but not for "cause." Under these COBRA rules (as opposed to regular COBRA rules) former employees who quit on their own aren't eligible for this additional benefit.

Laid-off employees who opted not to receive COBRA coverage when they left might be eligible to reapply for coverage now and receive some fully subsidized benefits going forward.

COBRA Period Not Extended

This COBRA subsidy program doesn't extend COBRA benefits beyond the regular 18-month maximum time frame. For example, a former employee whose 18-month COBRA anniversary (end date) is July 1 wouldn't be eligible for the subsidized COBRA benefits after that date, even though the ARPA benefit runs through September.

A laid-off employee can only qualify for the maximum six-month benefit if he or she would have been eligible for regular COBRA benefits for the full April 1, 2021 through Sept. 30, 2021 period. Suppose, for example, the 18-month eligibility for regular unsubsidized COBRA benefits began April 1, 2020. It would end Sept. 30, 2021. For every one month period prior to April 1, 2020, the COBRA eligibility period began, the maximum eligibility period for the fully subsidized benefit would be reduced by one month. So, for example, if the employee became eligible for COBRA on March 1, 2020, his or her 18-month eligibility would run out at the end of Aug. 2021, one month short of the end of the subsidy period that ends Sept. 30, 2021.

Similarly, if an employee became eligible for COBRA after April 1, 2021, the fully subsidized COBRA would be reduced, because the program ends Sept. 30, 2021.

How Employers Get Reimbursed

As noted, you'll be "made whole" through tax credits. They'll be applied to the Medicare hospital insurance portion of your quarterly federal payroll tax filings, if you're self-insured. If the amount of the subsidy exceeds that payroll tax obligation, you can make up the difference by getting a tax credit against other federal tax obligations.

If instead you have a state-regulated fully insured health plan, your health insurance carrier will front the subsidy and receive the tax credit.

AEI Rights and Responsibilities

Former employees receiving health benefits under COBRA as of April 1, 2021, don't need to apply for the ARPA benefit; they're entitled to it and will just receive it. It's a different story for former employees who didn't apply for a regular COBRA benefit when they first became eligible and are still within the 18-month regular COBRA benefit period.

Those former employees have a special "second chance" right to obtain subsidized COBRA benefits under this program as of April 1, 2021. As the employer, you're required to give employees who declined COBRA a heads-up about this "second chance" opportunity within 60 days of April 1, 2021.

No matter how "AEIs" receive the COBRA subsidy, they lose their entitlement to that benefit as soon as they become eligible to receive health benefits through another employer, or Medicare. When that happens, the AEIs are required to inform your plan administrator immediately or face federal penalties if they don't and are caught.

No Gaming the System

The law tries to give COBRA beneficiaries some flexibility, but not to the point of allowing them to game the system. Below is an example of how that could happen.

Former employees who are using regular COBRA benefits may change from the original health benefit option they were using at the time they became COBRA-eligible. This option is also available under the ARPA subsidized premium benefit, within limits, including that they can't switch to a more expensive plan to maximize the value of the full subsidy.

Unanswered Questions

The law includes more details on how the program is designed to work but a lot of questions remain unanswered at this time. Here are a few questions that still await guidance from the U.S. Department of Labor:

  • Is a former employee who took advantage of an incentive plan to leave your company as part of a downsizing eligible for a COBRA subsidy?
  • Do COBRA plan features that are eligible for subsidy include dental and vision benefits as well as basic medical coverage?
  • What happens if you ordinarily provide a COBRA subsidy to terminated employees? Can you drop that benefit so that its cost can be picked up by the federal government?

While these issues and more are being addressed by the Department of Labor, employers need to determine which former employees are at least potentially eligible for this benefit, and the notification requirements that apply to them. In the meantime, detailed guidance can be obtained from your health benefits technical experts.

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