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On May 18, 2021, the IRS provided much-needed advice to employers on how to implement the COBRA premium subsidy provisions under the American Rescue Plan Act (ARPA). Notice 2021-31 includes over seven dozen questions and answers, which cover topics such as eligibility requirements, periods of coverage and applicable limitations, as well as notification and election procedures.
As summarized in our previous article, ARPA includes a 100% COBRA premium subsidy for “people eligible for assistance” who choose (or have previously chosen) COBRA continuous coverage for the period April 1, 2021 to September 30, 2021. “Persons eligible for assistance” “are generally those whose dismissals occur as a result of involuntary dismissal (other than for serious misconduct, for which COBRA is not available) or due to a reduction of hours.
ARPA anticipates that, by May 31, 2021, employers are required to distribute a notice regarding COBRA premium subsidies to “persons eligible for assistance.” Given the May 31 deadline, employers have been eagerly awaiting advice from the IRS on many aspects of COBRA premium subsidies. Pending the issuance of guidelines by the IRS under ARPA, many have turned to the published guidelines to implement the American Recovery and Reinvestment Act (ARRA) COBRA Grant of 2009 to obtain an indication of how the IRS might interpret the ARPA provisions. Fortunately, much of ARPA’s guidance – especially regarding what constitutes involuntary termination – is consistent with these earlier ARRA guidelines.
As a general rule, Notice 2021-31 provides that termination of employment is involuntary if it is due to “the independent exercise of the employer’s unilateral authority to terminate employment, other than due to the employee’s implicit or explicit request, when the employee was willing and able to continue to provide services. However, the questions and answers contained detailed examples of various types of layoffs, and employers should consult their advisers and lawyers to determine whether a particular layoff can be considered involuntary. For example, a retirement could be considered involuntary if a employee knew he or she would be terminated in the absence of retirement; a resignation due to a material change in geographic location is considered an involuntary termination.
Notice 2021-31 also describes how to calculate the amount of any premium subsidy, including for people who have partially or fully subsidized COBRA coverage. Eligibility for assistance and the amount of the subsidy are apparently based on the amount of the COBRA premium charged to the individual, meaning that if an employer provided fully subsidized COBRA free of charge to an involuntarily terminated employee, no subsidy ( ni tax credit)) would be available. The questions and answers do not directly address how to treat a person eligible for assistance who received a taxable cash amount that related to COBRA, but was not required to use it (such as a lump sum in cash). cash or installments equal to the cost of COBRA during a specified period). However, according to the principles set out in Notice 2021-31, such a person eligible for assistance would be eligible for a COBRA premium subsidy (as they would still be billed in full for COBRA), and the employer (or any other eligible person) be eligible for the refundable tax credit.
The Q&A also answered questions about the extended timelines that currently apply to COBRA elections and bonus payments due to the COVID-19 pandemic. More importantly, the IRS has confirmed that notwithstanding these extended deadlines, those eligible for a COBRA premium subsidy under ARPA must choose COBRA coverage within 60 days of COBRA notification.
Employers (and other eligible people) will generally claim the refundable tax credit for the grant on their Form 941. Although Form 941 has not yet been updated to reflect ARPA, we expect forms revised will be published shortly – again, probably along the same lines as the Revised Form 941 used for the ARRA COBRA 2009 grant.
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