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Additional IRS Guidance on COBRA Subsidies

On May 18th, the Internal Revenue Service (IRS) issued Notice 2021-31 to provide additional guidance regarding the COBRA subsidy available to certain individuals between April and September of this year. The IRS Notice includes 86 questions and answers regarding issues that plan sponsors and COBRA administrators have raised since the subsidies were enacted. (Please see our prior client communication for background information.) This notice includes important information for clients that are utilizing MedCost's COBRA Administration Service.  If MedCost does not administer COBRA for your plan, we would advise ensuring your COBRA Administrator is up to speed on the latest guidance. 

The guidance is largely as we anticipated, except for one item: subsidy eligibility for individuals with an extended COBRA period due to a disability determination or second qualifying event. Most industry experts expected such individuals to be eligible for the subsidy only during their original 18-month COBRA period, but the IRS clarified that individuals who are in an extended COBRA eligibility period are still eligible for the subsidy as long as their first qualifying event was a reduction in hours or an involuntary termination of employment. See FAQ #17.

In light of this guidance, MedCost will need additional information regarding the original termination reason (voluntary or involuntary) for individuals currently in an extended COBRA period. Our COBRA team is preparing a list of COBRA members who may be impacted. If your Plan has COBRA members in this category, your MedCost Account Manager will reach out with a list so you can provide the termination reason.

Aside from that step, the remainder of this communication is for informational purposes only - no further action is required.  Below is a summary of other IRS clarifications that address common questions from our clients. The full FAQ is available here.  MedCost’s COBRA team (COBRA@medcost.com or 1-800-852-7040) and your Account Manager are available to assist with any additional questions.

Subsidy Eligibility

  • An employer may rely on an individual’s attestation regarding a reduction in hours or involuntary termination of employment, and eligibility for other disqualifying coverage, for the purpose of substantiating eligibility for the credit, unless the employer has actual knowledge that the individual’s attestation is incorrect. FAQ #6.

  • If an individual is eligible for another group health plan or Medicare beginning on or after April 1st, they will lose eligibility for the subsidy even if they do not actually enroll in the other coverage that is available to them, so long as that other coverage is not itself COBRA. FAQ #11.

    • However, if the individual is no longer covered by (or no longer eligible to enroll in) the other group health plan coverage as of April 1, 2021, that prior coverage by a group health plan does not disqualify the individual from the subsidy. FAQ #9 & #10.

  • An employee’s reduction in hours that results in a loss of coverage qualifies for the subsidy regardless of whether the reduction in hours is voluntary or involuntary. FAQ #21.

  • A furlough – defined as a temporary loss of employment or complete reduction in hours with a reasonable expectation of return to employment or resumption of hours (for example, due to an expected business recovery of the employer) such that the employer and employee intend to maintain the employment relationship – may be a reduction in hours regardless of whether the employer initiated the furlough or the individual volunteered. FAQ #22

Involuntary Termination of Employment

  • The Notice includes 10 questions that employers may find helpful in evaluating whether an individual’s termination should be considered voluntary. FAQ #24 to #34.

  • An involuntary termination of employment means a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services. In addition, an employee-initiated termination of employment constitutes an involuntary termination of employment if the termination of employment constitutes a termination for good reason due to employer action that results in a material negative change in the employment relationship for the employee analogous to a constructive discharge. FAQ #24

  • The determination of whether a termination is involuntary is based on the facts and circumstances. For example, if a termination is designated as voluntary or as a resignation, but the facts and circumstances indicate that the employee was willing and able to continue performing services, so that, absent the voluntary termination, the employer would have terminated the employee’s services, and that the employee had knowledge that the employee would be terminated, the termination is involuntary. FAQ #24

  • Involuntary termination of employment includes an employer’s action to end an individual’s employment while the individual is absent from work due to illness or disability, if before the action there is a reasonable expectation that the employee will return to work after the illness or disability has subsided. However, mere absence from work due to illness or disability before the employer has taken action to end the individual’s employment is not an involuntary termination of employment. Whether the absence from work is a reduction in hours potentially resulting in COBRA continuation coverage depends on whether the absence from work results in a loss of coverage. FAQ #25.

  • An employer’s decision not to renew an employee’s contract will be considered an involuntary termination of employment if the employee was otherwise willing and able to continue the employment relationship and was willing either to execute a contract with terms similar to those of the expiring contract or to continue employment without a contract. However, if the parties understood at the time they entered into the expiring contract, and at all times when services were being performed, that the contract was for specified services over a set term and would not be renewed, the completion of the contract without it being renewed is not an involuntary termination of employment. FAQ #34.

 

Claiming Tax Credits for the COBRA Subsidy

  • The amount of the credit is the premium that would have been charged to the individual in the absence of the subsidy program and does not include any amount that the employer would have normally covered. FAQ #64.

    • The credit includes the up-to-2% of administrative costs that may be included in COBRA premiums, if the employer routinely includes such costs in the premiums charged to COBRA members. FAQ #63.

  • If an individual fails to provide notice that they are no longer eligible for the COBRA premium assistance due to eligibility for other disqualifying group health plan coverage or Medicare, the employer is still entitled to the tax credit received for that period of ineligibility, unless the employer knew of the individual’s eligibility for the other coverage. FAQ #63.