IRS Releases New Guidance on COBRA Subsidies

On March 11, 2021, President Biden signed into law the American Rescue Plan Act (ARP), which includes wide-ranging relief provisions to assist individuals who lose company-sponsored health plans due to the COVID-19 pandemic. A key provision is a government mandate requiring employers and/or certain group plans to cover or “subsidize” 100 percent of premiums for COBRA continuation coverage. The federal government will reimburse the employers or plans for the subsidy on a dollar for dollar basis against their quarterly payroll tax obligations.

The subsidy extends from April 1, 2021 to September 30, 2021(subject to otherwise applicable maximum periods of coverage under COBRA), allowing eligible employees and their dependents to stay on a company-sponsored health plan. For self-insured plans, the COBRA premium is covered by the employer and reimbursed through a payroll tax credit. For fully-insured plans, the tax credit may be claimed by the insurer.

On April 7, 2021, the Department of Labor (DOL) published additional guidance on the COBRA Subsidy requirements, including model election notices and a list of frequently asked questions and answers. While helpful, the updated DOL guidance left some questions unanswered. Many of these remaining questions were addressed in a subsequent Internal Revenue Service (IRS) notice issued on May 18, 2021.

IRS Notice 2021-31 provides further clarification for employers, health insurance issuers and plan administrators on various implementation issues related to the ARP COBRA premium subsidy. This document includes detailed information about how to calculate and claim the tax credit, as well as guidance about other implementation issues, including (but not limited to) the following:

• Who is eligible for the premium subsidy
• The meaning of “involuntary termination” and “reduction in hours” for eligibility purposes
• The types of coverage and period of coverage to which the subsidy applies
• The right to make a special COBRA election
• The impact of enrollment in Medicare and other coverage on COBRA subsidy eligibility
• The role of insurers in paying the premium under “mini-COBRA” laws
• The interaction of the subsidy and prior COVID-19 emergency relief notices extending the COBRA election and premium-payment deadlines.

Employers should carefully review both the DOL and IRS guidance with their COBRA administrators to ensure compliance with the ARP COBRA subsidy requirements. For a copy of the new IRS guidance, please see IRS Notice 2021-31.


Pacific Federal is a Zenith American company and subsidiary of Harbour Benefit Holdings, Inc.