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Businesses Required to Subsidize COBRA Premiums Will Be Reimbursed with Payroll Tax Credits

COBRA insurance

To help Americans struggling with job loss, the American Rescue Plan Act of 2021 (ARPA) will subsidize the costs of COBRA insurance premiums effective April 1, 2021. Employers are required to pay these premiums, but the ARPA will reimburse them with refundable payroll tax credits. COBRA assistance is only available through September 30, 2021, so employers should make sure they understand which costs are eligible for reimbursement and how they can claim the tax credits.

COBRA Insurance

Since it was passed in 1985, the Consolidated Omnibus Budget Reconciliation Act (COBRA) gives workers and their families the opportunity to continue receiving medical coverage through their former employers’ group health plans. Employers who offer group health plans and have 20 or more employees are required to provide COBRA continuing coverage to almost any former employee and to current employees who lost healthcare benefits because of a reduction in working hours.

ARPA’s COBRA Requirements

Employers that provide group health plans generally pay most of their employees’ insurance premiums as a benefit to employment, but they rarely extend this benefit to terminated employees. Healthcare premiums can be quite expensive, which means that many terminated employees cannot afford the premiums for COBRA coverage. To ensure terminated workers continue to have medical coverage during the current health crisis, the ARPA requires employers to subsidize those premiums. And to ensure the costs aren’t simply transferred from employee to employer, employers will be reimbursed for doing so.

The ARPA temporarily amends COBRA continuing coverage in the following ways:

Premium Assistance
Beginning April 1, 2021 and ending September 30, 2021, employers are required to subsidize 100% of the costs of COBRA premiums (including the 2% administrative fee).

In general, recently terminated employees are given a 60-day window to elect or waive COBRA continuing coverage. Those that elect coverage can accept COBRA insurance for up to 18 months following termination. The ARPA allows employees who had previously waived coverage to reapply if they are still within that original 18-month window. This means that most individuals who were terminated or lost full-time status in 2020 and 2021 have an opportunity to accept premium assistance for COBRA insurance.

This benefit also applies to continuing health coverage offered through state-run programs. Some states offer continuing health coverage similar to COBRA, and employers will be required to subsidize premiums through these programs, as well.

Payroll Tax Credits
Employers who subsidize COBRA premiums can be reimbursed for those costs with payroll tax credits. They can claim these credits each quarter on Form 941 by applying them against their Medicare tax liabilities. This credit is refundable, which means that even if the employer’s COBRA subsidies exceed their 1.45% Medicare tax liability, they will be refunded the difference.

These tax credits are also available to employers who provide continuing coverage through state-run, “mini-COBRA” programs.

Planning Considerations

The costs of subsidizing 100% of COBRA premiums could be significant, so businesses should prepare for additional cash outlays. Although they will be reimbursed, they may be required to float those costs until they can apply for reimbursement at the end of the quarter. It’s possible that the Department of Treasury will allow for advancements of the tax credit, but right now an advance is not an option.

Employers can prepare for this cash outlay by estimating the subsidies they will have to pay. To do this, they must determine which of their employees and former employees were eligible for subsidized COBRA continuing coverage. The IRS published Notice 2021-31 that helps employers make this determination. According to this notice, an individual whose COBRA continuing coverage will be subsidized is one who (1) had group healthcare coverage, (2) lost that coverage due to a qualifying event, (3) was eligible for COBRA continuing coverage for some portion of the period beginning April 1, 2021 and ending September 30, 2021, and (4) elected COBRA continuing coverage. Qualifying events include involuntary termination (other than for gross misconduct) or a reduction in working hours but does not include voluntary termination. If an employee left their position voluntarily and elected COBRA coverage, they might still be eligible for COBRA coverage, but they would not have their premiums subsidized.

The company must subsidize COBRA coverage for all eligible individuals, even if those individuals were not employees of their business. For example, qualified beneficiaries of the employee – like their spouse or children – are qualifying individuals for COBRA assistance purposes.

Employers should also track the payroll costs they use to claim this credit and other coronavirus relief benefits. Employers cannot request reimbursement for COBRA premium subsidies if those costs were also used to help them qualify for the Employee Retention Credit or loan forgiveness under the Paycheck Protection Program.

COBRA assistance for individuals and the subsidy for businesses is only temporary, and we expect the Treasury Department to provide guidance on how to apply for the payroll tax credits soon. But there is plenty you can do in the meantime to prepare for COBRA subsidies. If you have questions about this aspect of the ARPA or any other coronavirus relief measure, contact a professional in LaPorte’s Accounting Services Group.