The American Rescue Plan Act Includes Required COBRA Subsidy

On March 11, 2021, President Biden signed into law the American Rescue Plan Act (ARPA). The law contains various provisions that impact employers, including a new COBRA subsidy.

The ARPA COBRA Subsidy

For a limited period, the ARPA requires employers to cover 100% of the employee’s cost of continuing group health coverage under COBRA for up to six months if an employee has lost coverage under their employer’s health care plan due to a reduction in hours or involuntary termination (for reasons other than gross misconduct) and elects COBRA continuation. The subsidy does not apply to employees who voluntary terminate employment.  Those eligible to receive the COBRA subsidy include eligible employees and covered dependents who (i) are either already enrolled in COBRA, (ii) did not elect COBRA when it initially became available to them, or (iii) elected COBRA initially but let the coverage lapse.

The ARPA COBRA subsidy period is between April 1, 2021 and September 30, 2021.  Importantly, the ARPA subsidy is available only to those whose initial COBRA period ends (or would have ended if COBRA had been elected/did not lapse) either during or after this six-month period.  The subsidy does not lengthen the COBRA period.  Accordingly, those eligible for the subsidy will generally be those employees who were first eligible for COBRA coverage in November 2019 or later.  If a former employee’s 18-month COBRA period begins after April 1, 2021 or ends before September 30, 2021, the ARPA subsidy will be shorter than six months.1

For example, if an employer terminated an employee on January 1, 2020, and the employee became eligible for COBRA coverage on February 1, 2020, the employee’s 18-month COBRA period would end July 31, 2021.  Thus, the ARPA COBRA subsidy would be available to this individual for four months only due to the expiration of the 18-month COBRA coverage period during the ARPA COBRA subsidy window.  In addition, individuals are not eligible for the ARPA COBRA subsidy if they are either eligible for coverage under another employer’s group health plan or under Medicare.

The ARPA COBRA subsidy is provided by the federal government and not the employer.  Under the ARPA, however, an employer must front any COBRA premium owed to a COBRA provider or plan administrator.  Then the government makes the employer whole by providing a dollar-for-dollar tax credit to the employer on the employer’s quarterly payroll tax filings.

The subsidy applies to both insured and self-insured plans subject to COBRA, as well as self-funded and insured plans that are not subject to COBRA but are subject to continuation coverage under state law.

COBRA beneficiaries who have elected COBRA and are covered under COBRA on April 1, 2021 need not enroll to be covered by the subsidy. For those eligible individuals who did not initially elect COBRA or who let COBRA lapse, however, there will be a special enrollment period under which employers must inform affected individuals of this new benefit and allow them to elect coverage during the special enrollment period that begins on April 1 and ends 60 days after the delivery of the COBRA notification. 

To comply with these requirements, employers along with their benefit providers and third-party administrators (TPA) should identify assistance-eligible individuals and provide notice about the new benefit and the special enrollment period.  Employers will also have to take steps to claim the tax credit on those former employees who utilize the ARPA COBRA subsidy.  Employers must address this issue quickly as the statute requires notice to potential beneficiaries by May 30.  The statute directs the Department of Labor (DOL) to publish model notices within 30 days of the statute’s March 11 enactment date.  As of the date of this article, the DOL has not published those forms.

There are a number of legal issues that are not yet clear from the guidance issued under ARPA.  The statute does not clearly define whether the ARPA subsidy will cover medical, dental and vision coverage or just medical coverage. It also may not be clear whether a particular termination of employment is voluntary or involuntary.  There could be questions of whether the employer must provide the subsidy where the employer and employee resolve to mutually terminate their relationship, the termination occurs under a voluntary exit incentive program, an employee leaves for “good reason,” or an employee retires after a mandated retirement age.  The DOL will need to provide further guidance so that employers know whether terminations in these situations require the ARPA COBRA subsidy.  

Coordinating the ARPA COBRA Subsidy with Existing Programs

The ARPA also raises issues regarding coordination of the COBRA subsidy with the employer’s existing termination and severance programs.  For employers subject to COBRA health plan continuation coverage, notice of COBRA rights typically is included in documentation provided at the time of termination of employment.  This notice will need to be updated to include information about the subsidy and the special enrollment period, or if the employer has issued notices previously to a qualified terminated employee, the employer will have to provide supplemental notice of the ARPA COBRA subsidy.

Some employers offer paid COBRA continuation coverage for part of the COBRA continuation period as an element of individual or group severance programs if the employee elects COBRA coverage after receiving notice.  To comply with the ARPA COBRA subsidy, employers have two options—provide only the mandatory six months’ COBRA continuation coverage or provide paid COBRA continuation coverage in addition to the mandatory six-month subsidy. Both options present their own set of severance package-related issues that employers should take into consideration.

If the employer regularly provides a COBRA subsidy as part of a severance program, the employer may not be able to rely solely on the ARPA COBRA subsidy to meet the employer’s obligations under an ERISA or other severance plan.  Furthermore, employers sometimes rely on employer-paid COBRA benefits as consideration for a release of claims.  Consideration for a release generally must be something of value in addition to what the employer is otherwise required to provide.  The legally required ARPA COBRA subsidy at least during the limited period of April 1 to September 30 may not be adequate consideration alone for a release in this situation.  Most employers, however, provide severance as well as a COBRA subsidy, which typically is sufficient consideration for the release.  Moreover, even if the sole consideration for a release of claims is paid COBRA continuation coverage that is less than the mandatory six-month subsidy, then the employer may provide continuation of paid COBRA past the mandatory ARPA six-month period to provide adequate consideration for the release and to comply with plan terms.  Employers should keep in mind that this scenario arises only for newly terminated employees if the employee becomes eligible or is already enrolled in COBRA between April 1, 2021 and September 30, 2021.   

Other Concerns Regarding Employer-Paid COBRA Continuation Coverage

Providing paid COBRA benefits may have unintended consequences.  Employees generally have a limited time period after termination of employment to move to another plan such as a spouse’s plan or a plan purchased on a state or federally run insurance exchange. If the employer subsidizes COBRA continuation coverage through either or both the ARPA COBRA subsidy and the employer’s own subsidy, this may encourage terminated employees to remain on the employer’s health plans even though the plan will be more costly when the subsidies end.  Employees may find that they are locked into the employer’s plan and have to pay the high cost of COBRA continuation coverage after the end of the ARPA COBRA subsidy period until they can enroll in a different program, such as during the insurance exchange open enrollment period.  Former employees who remain on the employer’s plan until the next opportunity to enroll in another plan also tend to be heavy users of health plans, which raise costs to the employer.  There also is some question of whether the tax credit will be sufficient to cover the actual cost of providing the subsidy, especially for employers with self-funded plans because the COBRA rate is merely an estimate of the actual cost of health care coverage.

These are only a few of the issues employers should keep in mind in light of the new COBRA subsidy. As always, employers should consult with counsel to determine their COBRA subsidy obligations under the ARPA, including its effect on employers’ severance programs.  Employers also will need to coordinate with their health plans and TPAs to update COBRA notices to comply with the ARPA obligations and monitor the responses of eligible former employees to this new program.

See Footnotes

​1 It is unclear if the ARPA subsidy must be made available to those who were eligible for COBRA coverage earlier than November 2019 on account of a longer COBRA period – namely, a 29-month period for disabled employees or a 36-month period for those who have incurred a “second qualifying event.”

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.