On July 26, 2021, the IRS issued Notice 2021-46 (the “Notice”), which provides new guidance in the form of 11 questions and answers on the COBRA premium subsidy and the related tax credit under the American Rescue Plan Act of 2021 (“ARPA”). The Notice expands on previous guidance provided under Notice 2021-31. Read our recent QuickStudy.

As background, ARPA provides certain COBRA eligible individuals who elect COBRA coverage due to a loss of group health plan coverage as a result of an involuntary termination of employment or reduction in hours with a COBRA premium subsidy equal to the full cost of coverage.  The COBRA premium subsidy is available from April 1, 2021, through September 30, 2021.

The Notice provides helpful clarifications on the following points:

  • Eligibility for Subsidy During Extended Coverage Periods

The Notice clarifies that COBRA premium assistance is available to assistance eligible individuals who are entitled to elect COBRA coverage for an extended period if the extended period falls between April 1, 2021 and September 30, 2021.  An assistance eligible individual may be eligible for extended COBRA coverage due to a disability determination, second qualifying event or an extension under State mini-COBRA laws.  This is the case even if the individual has not notified the plan or insurer of the intent to elect extended COBRA coverage before the start of such period.

  • Dental and Vision Coverage – End of COBRA Premium Assistance Period

The Notice clarifies that if an assistance eligible individual elected COBRA continuation coverage for dental-only or vision-only coverage, COBRA premium assistance ends when the AEI becomes eligible for coverage under any other disqualifying group health plan or Medicare, even if the other coverage does not include all of the benefits provided by the previously elected COBRA continuation coverage.  For example, eligibility for Medicare will end eligibility previously elected dental-only or vision-only COBRA coverage even though Medical generally does not provide vision or dental coverage.

  • State Continuation Coverage

The Notice confirms that a State program does not fail to provide comparable coverage to

Federal COBRA continuation coverage solely because the program covers only a subset of State residents (for example, only employees of a state or local government).  Thus, COBRA premium assistance is available to assistance eligible individuals enrolled in State mini-COBRA programs, as long as the program provides coverage otherwise comparable to Federal COBRA.

  • Additional Clarification on the Entity that May Claim Tax Credit

The Notice provides additional clarification on the entity that may claim the tax credit:

  • The common law employer, and not the insurer, is the premium payee entitled to claim the tax credit where the group health plan is subject to both State-mandated continuation coverage and Federal COBRA (i.e., a period of state-mandated coverage that extends beyond the Federal COBRA period). The insurer is not entitled to claim the COBRA premium assistance credit even if the State-mandated continuation coverage would require the Assistance Eligible Individual to pay the premiums directly to the insurer after the period of Federal COBRA ends.
  • If a group health plan covers employees of two or more members of a controlled group, each common law employer that is a member of the controlled group is the premium payee entitled to claim the tax credit with respect to its employees or former employees. The entity within the controlled group that sponsors the group health plan is not entitled to claim the tax credit for the COBRA subsidy for assistance eligible individuals who are employees of other members of the controlled group.
  • If a group health plan covers employees of two or more unrelated employers, the entity entitled to claim the tax credit is generally the common law employer of the assistance eligible individuals, and generally not the sponsor of the group health plan.

 In the case of a business reorganization (i.e., acquisition or sale), if the selling group remains obligated to provide COBRA coverage after the business reorganization, the entity in the selling group that maintains the group health plan, and not the common law employer (which may be an entity in the buying group) is the premium payee entitled to claim the COBRA premium assistance tax credit.

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