COBRA Premium Employer Tax Credit
Pandemic-related layoffs and reductions of hours left many employees facing a loss of paid health care benefits, and while COBRA continuation is available, it can be expensive. To ease the burden, the American Rescue Plan Act (ARPA) provides up to six months of government-subsidized COBRA continuation to eligible employees who lose group health plan coverage for qualifying events. Coverage premiums are initially paid by employers, who then receive reimbursement in the form of a payroll tax credit.
Notice 2021-31 provides general guidance on the COBRA premium assistance credit and several potential scenarios to determine eligibility and credit calculation.
COBRA generally requires employers with 20 or more employees to offer a continuation of health plan coverage to certain participants and beneficiaries covered by their group health plan when a qualifying event occurs resulting in the loss of health care coverage. However, this coverage is often paid for by the individual, rather than the employer, at a cost of up to 102% of premiums.
Assistance Eligible Individuals
Instead of employees footing the bill, the ARPA requires employers to pay premiums for Assistance Eligible Individuals (AEIs) entitled to federal COBRA coverage from 4/1/2021 through 9/30/2021. An AEI is any individual who elects COBRA coverage and is eligible for such coverage because of either of the following qualifying events:
The employee was involuntary terminated (other than by reason of such employee’s gross misconduct), or
The employee’s hours were voluntarily or involuntarily reduced.
Qualifying events that would give rise to general COBRA continuation coverage other than those listed above do not qualify for subsidized COBRA coverage under the ARPA.
Eligible individuals may be those who become an AEI during the subsidy period, but also may be employees previously involuntarily terminated or who had a reduction in hours and still remain in the continuation coverage period under COBRA rules that either did not elect COBRA coverage when it was previously offered or that ended COBRA coverage early for reasons other than becoming ineligible. Generally, the health plan or issuer was required to notify these individuals that they are eligible for subsidized COBRA premiums no later than May 31, 2021. Qualifying individuals have until 60 days after they are notified that they are eligible to elect subsidized COBRA coverage, but benefits will not extend beyond the normal COBRA continuation period.
Subsidized COBRA eligibility ends when an individual becomes eligible for Medicare or group health plan coverage elsewhere (for example through a new employer or a spouse’s plan), or the individual’s COBRA coverage period expires. It’s the AEI’s responsibility to inform their plan if they become ineligible and not doing so can result a tax penalty. Fortunately, Notice 2021-31 gives a break for employers in these situations who do not knowingly take a credit for individuals who no longer qualify.
Those who qualify as an AEI and receive assistance will not recognize taxable income for any premiums paid on their behalf.
Claiming an Employer Tax Credit
The amount of the credit is equal to premiums not paid by AEIs for COBRA continuation coverage as a result of ARPA relief and, depending on the plan, is claimed by either the multiemployer plan, the insurer, or the sponsoring employer – whoever is paying the premiums. Premiums for the purposes of the COBRA continuation credit may include an administrative fee of up to 2% of premium costs.
The credit is claimed as an offset to payroll taxes for each quarter there are eligible COBRA premium payments on behalf of AEIs, reduced by any wages claimed in the quarter for paid sick or family leave credits under the Families First Coronavirus Response Act (FFCRA) and the Employee Retention Credit (ERC). If the COBRA premium assistance credit exceeds these amounts in a quarter, a refund is due upon completing the quarterly payroll tax filing. In anticipation of a credit, employers can reduce federal payroll tax deposits, understanding that any understatement of a deposit resulting from an overstatement of a credit will be assessed and collected as normally done for failure to timely deposit payroll taxes. If such deposits are not enough to cover the anticipated credit, an advance may be requested using Form 7200.
As with other payroll credits, no double benefit is allowed for the premium paid with regard to the COBRA continuation premium assistance credit. In addition, entities taking the credit must include the amount of the credit in gross income in the tax year that includes the last day of any calendar quarter with respect to which the credit is allowed.
Review the Rules and Claim a Credit
Rules surrounding COBRA premium assistance are complex and depend upon the facts and circumstances of each employee’s loss of health coverage. Employers mandated to provide these benefits should make sure to take advantage of the new tax credit for related COBRA premiums paid.