On April 7, 2021, the U.S. Department of Labor (DOL) issued guidance interpreting the premium assistance requirements for employers providing group health plan continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (COBRA).
On May 18, 2021, Treasury and the IRS published Notice 2021-31 containing interpretive tax guidance for COBRA premium assistance, including the employment tax credit available for sponsoring employers, insurers, certain third-party administrators or multi-employer plans. COBRA was amended on March 11, 2021, by the American Rescue Plan Act of 2021 (ARPA) to assist employees who lost health insurance coverage amid the Covid-19 pandemic.
COBRA requirements are set forth in the federal tax code, the Employee Retirement Income Security Act of 1974 (ERISA), and the Public Health Service Act of 1944 (PHSA). The April 7 Frequently Asked Questions followed Disaster Relief Notice 2021-01, which was issued by the DOL with concurrence from the Treasury on Feb. 26, 2021. Prior joint department guidance extended certain periods and dates for group health plans to comply with tax code Section 4980B continuation coverage requirements as the result of the Covid pandemic.
Thus. the DOL, the IRS, and the Department of Health and Human Services (HHS) share jurisdiction over group health plan administration and compliance with COBRA. Whereas the DOL has interpretive authority over notice and disclosure requirements, the IRS is authorized to issue regulations defining the required continuation coverage. HHS is authorized to interpret COBRA as it applies to state and local government plan sponsors, in conformity with DOL and IRS rules.
ARPA Section 9501(a) provides relief for assistance-eligible individuals, who generally are former employees or employees with reduced hours enrolled in a group health plan offered by a plan sponsor. Premium assistance eligibility among other factors requires the individual to be deemed a qualified beneficiary under ERISA. The ERISA definition likewise applies to premium assistance under group health plans not subject to COBRA, as discussed below. Assistance-eligible individuals are exempt from paying monthly premiums for COBRA continuation coverage during the premium assistance period defined below. The continued coverage premium amounts are not payable by employee to employer or insurer.
Instead, ARPA Section 9501(b)(1) provides an employment tax credit (premium assistance credit or “PAC”) for credited payments of premiums under extended COBRA coverage provided to terminated employees under a group health plan from April 1, 2021, through Sept. 30, 2021 (premium assistance period). Terminated employees or employees with reduced hours, who receive premium assistance, exclude the amounts of forgiven premiums from gross income. The income exclusion provisions are effective for taxable years of employees ending after March 11, 2021, the date of the enactment of ARPA. In contrast, the plan sponsor or the insurer providing group health plan coverage, which is eligible for the federal tax credit against employer portion of Medicare tax, includes the amount of the PAC in gross income to avoid a double tax benefit.
On April 7, the DOL published extensive guidance and model notices for employers providing premium assistance. Generally, not all employers sponsoring group health plans must offer COBRA coverage. COBRA generally exempts employers with fewer than 20 full-time employees, as well as certain religious organizations and their affiliates generally exempt from ERISA. However, ARPA rules apply to fully insured group health plans maintained by small employers and other exempt employers subject to state “mini-COBRA” laws discussed further below.
ARPA Section 9501(b) provides that—in the case of a plan of an employer not subject to COBRA continuation coverage provisions in the tax code, ERISA, or PHSA—the person to whom the premiums are payable, and thus, the person eligible for the PAC, is the insurer, rather than the employer. On May 18, 2021, Treasury and the IRS issued Notice 2021-31 providing extensive guidance for interpreting the ARPA premium assistance provisions. Notice 2021-31 addresses applicability of ARPA premium assistance provisions to small employers and employers that are religious organizations or affiliates, or “exempt employers.”
Although excepted group health plans sponsored by such employers are exempt from federal COBRA, a majority of the states have enacted “mini-COBRA” statutes that require small employers or other exempt employers to provide continuation coverage similar to COBRA under analogous circumstances, including involuntary termination, reduction in hours, or similar qualifying events. Mini-COBRA statutes also set forth similar standards for offering an election period to employees to elect state continuation coverage, providing notice of employee rights under mini-COBRA, and collecting or remitting premium payments, among other rules.
Whereas in general, ERISA as federal law fully or partially preempts mini-COBRA state statutes, under federal jurisprudence, there is a possibility for an ostensibly exempt employer to incur liability for violating federal COBRA. These legal doctrines are fluid, and exempt employers should consult with counsel if there is concern of becoming subject to federal COBRA. Taking this precaution into account, Notice 2021-31 clarifies lack of applicability of ARPA election period, notice, and premium assistance payment rules to exempt employers subject to mini-COBRA. In particular, Notice 2021-31 sheds light on whether exempt employers subject to mini-COBRA are exempt from paying premium assistance amounts under federal COBRA.
COBRA premium assistance credit previously was made available in connection with the “Great Recession” of 2008-2009 under Section 3001 of the American Recovery and Reinvestment Act of 2009, Public Law No. 111-5 (2009) (ARRA), and provided subsidized COBRA coverage, generally to involuntarily terminated employees and their families. ARRA offered a 65% subsidy for COBRA premiums paid generally by such employees, which phased out above an annual salary of $125,000 and was extended by subsequent legislation to apply for 15 months. By contrast, ARPA generally offers a 100% subsidy for employees who were let go or whose hours were reduced for a maximum duration of six months without an income cap.
Employers subject to mini-COBRA may have various arrangements with insurers for collection and payment of health insurance premiums. An employer voluntarily may pay all or a portion of the continuation coverage premium of an employee under various arrangements with the insurer, subject to group health plan terms and employment or severance agreements with the employee. For instance, an employer may make payments of premium to the insurer and subsequently be reimbursed by the employee. Alternatively, an insurer may accept direct payments of premiums from the employee, and the employer may reimburse the employee for the payments or pay the employee the amount of premium in advance as severance.
In other cases, an employer does not pay or reimburse any portion of employee continuation coverage. In those instances, an employer still may have an obligation to collect and remit the premium payments to the insurer in compliance with applicable mini-COBRA laws. On the other hand, absent a statutory requirement, an employee may make direct payments of continuation coverage premiums to the insurer, without the employer as intermediary.
Even if an exempt employer must collect any premium payments from the employee and remit the amounts or otherwise pay the amounts to the insurer, neither ARPA Section 9501(a)(1)(A) nor Notice 2021-31 require the employer to make premium assistance payments. ARPA Section 9501(a)(1)(A) states in passive voice that an assistance eligible individual (AEI) “shall be treated for purposes of any COBRA continuation provision as having paid the full amount of such premium.” Thus, for an exempt employer, which either must pay an amount of premium or is a mere intermediary for its collection and remittance, there is no affirmative requirement under ARPA to make up any deficit in the premium assistance amount. Instead, the insurer, which is entitled to the PAC, must treat the assistance-eligible individual as having paid the full amount of the premium for purposes of claiming the employment tax credit.
Conversely, ARPA Section 9501(a)(1)(A) does not exempt the employer sponsoring an excepted plan subject to mini-COBRA from statutory or contractual liability for failure to pay all or a portion of the continuation coverage premium to the insurer. This rule applies despite the fact that the insurer, and not the exempt employer, would be entitled to the PAC under tax code Section 6432(a). Accordingly, the 2009 ARRA notice clarified that, even if a small employer subject to mini-COBRA paid 65% of the COBRA premium to the insurer, along with the subsidized amount collected from employee, the small employer would not be eligible for PAC for any portion of the paid premium amount. Notice 2021-31 provides similarly that, if an exempt employer must make COBRA premium payments to the insurer, the exempt employer does not receive the PAC for any of the continuation coverage payments.
On the other hand, ARPA Section 9501(a)(1)(A) does not impose statutory penalties on the exempt employer for failure to pay the employer portion of the premium payment to the insurer. The reason is that an excepted group health plan sponsored by an exempt employer generally is not subject to COBRA. Under ARPA Section 9501(a)(1)(A), the insurance carrier providing coverage for an excepted group health plan must treat the employee as having made the premium payment in full in order to claim the PAC for the amount of the forgiven premiums. The insurer also would have recourse at common law against an exempt employer for breach of contract due to failure of the employer to pay its portion of the continuation coverage premium to the insurer pursuant to applicable arrangements.
Confirming this treatment of an employer subject to COBRA, the ARRA notice provided that, if the insurer and employer agreed that the insurer would collect the premiums directly from individuals, the insurer would have to treat the 35% payment as having been made in full even if the employer failed to remit any payment. The insurer would be liable for excise tax under tax code Section 4980B for failure to provide benefits. Notice 2021-31 sets forth a similar requirement with respect to payment of ARPA premium assistance. However, in contrast to a group health plan subject to COBRA, the excise tax liability would not apply to an employer or insurer with respect to an excepted plan.
If downsizing, small employers and religious organizations or their affiliates sponsoring group health plans excepted from COBRA but subject to state mini-COBRA laws nevertheless should take note of the federal requirements under ARPA, ERISA, and the tax code. Exempt employers sponsoring fully-insured group health plans should be aware that they are not eligible for the ARPA employment tax credit for any continuation coverage payments made or remitted to insurer pursuant to plan terms or mini-COBRA requirements, even if the payments satisfy the premium assistance requirements. Instead, insurers claim the PAC with respect to such plans.
Thus, employers have a disincentive to make continuation coverage payments for terminated or newly part-time employees unless required by mini-COBRA, provided that a COBRA exception applies. Therefore, exempt employers that enter into new arrangements with plan providers during the premium assistance period have more flexibility to contract out of a premium payment arrangement and instead to require an employee to pay continuation coverage amounts directly to the insurance carrier. Likewise, exempt employers have a disincentive to covenant pursuant to terms of an employment or severance agreement to pay a portion of continuation coverage premiums for employee not required by mini-COBRA or federal COBRA.
Exempt employers also must note that, even though they are not eligible for the ARPA tax credit, ARPA also does not impose any liability on exempt employers in addition to penalties that may be incurred under mini-COBRA or for failure to live up to terms of group health plan documents or employment or severance agreements. Conversely, exempt employers must be keen to ensure that the COBRA exception applies, and that they comply with the mini-COBRA. The reason is that ARPA does not provide relief from liability exempt employers could incur under applicable state statutes or under common law for breaching contractual terms.
Accordingly, small employers and religious organizations or their affiliates considering restructuring the workforce should review group health plan documents, including arrangements with insurers and third party providers. Sponsors of excepted group health plans also should analyze employment or severance agreements with employees being let go or whose hours will be reduced. In reviewing these arrangements, exempt employers should consult with counsel with a view of ensuring compliance with state continuation coverage laws and contract terms and maximizing the cost effectiveness of health benefits offered to affected employees in light of current COBRA relief legislation.
This column doesn’t necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.
Marina Vishnepolskaya is principal of Marina Vishnepolskaya, Esq., P.C., an international law firm specializing in domestic and cross-border corporate, tax, employee benefits, executive compensation and exempt organization matters.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.
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