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On March 11th, 2021, President Biden signed the American Rescue Plan Act of 2021 into law. This legislation is the latest aimed at providing a variety of support to American people, businesses and states continuing to endure COVID-19 related challenges.
For employers, among other provisions, the bill extends the Employee Retention Credit (ERC) and tax credits for certain paid leaves. The summary below focuses on the health, dependent care, and retirement benefit plan provisions:
Health plans: temporary 100% COBRA subsidy
The bill includes multifaceted subsidized COBRA provisions with both required and optional employer plan changes. At its core, an employer’s plan must consider and treat an “assistance eligible individual’s" COBRA premium as having been paid for all applicable coverage months starting the first of the month following enactment of the bill (which is April 1, 2021) through the end of September, 2021 (“Subsidy Period”).
Employers will be required to provide new notices and information regarding the availability of subsidized coverage, provide certain new election opportunities, and recover any amount of the COBRA premium that’s treated as though it was paid through offsets against the employer’s Medicare employment tax obligations.
The following FAQs provide additional details about the COBRA provisions:
1.Do all qualified beneficiaries get a 100% subsidy?
No, the plan will be required to provide “free” (i.e., 100% subsidized) coverage only to “assistance eligible individuals” meaning qualified beneficiaries:
- whose qualifying event is an involuntary termination of employment or reduction in hours; and
- who are not otherwise eligible for Medicare or other group health plan coverage (other than excepted benefits, health FSA, or QSEHRA); and
- who elect such COBRA coverage.
All other qualified beneficiaries, including those based on voluntary terminations of employment, are not required be subsidized or otherwise treated as though they paid their premium during the Subsidy Period. An employer may subsidize other types of qualified beneficiaries, however, those subsidies would not be permitted to be offset from the employer’s Medicare tax obligations.
For qualified beneficiaries that would be assistance eligible but for their eligibility for other group coverage, the bill requires that they notify the plan of the other group coverage eligibility and may be subject to penalties if they fail to do so and continue to receive subsidized COBRA.
2. Is the subsidy retroactive?
No. The subsidy period ONLY applies to COBRA coverage provided from April 2021 through September 2021 and will not be applied to prior months of COBRA coverage the person may have received.
3. Which types of coverage provided through COBRA continuation will be considered paid during the Subsidy Period?
The premiums must be considered and treated as paid during the Subsidy Period for all lines of COBRA continuation coverage other than coverage continued for a health flexible spending account (“FSA”). This means that medical, dental, vision and other applicable COBRA coverages must be treated as if the premium was paid by the qualified beneficiary and then recouped by the employer (or carrier) from its Medicare employment tax obligations. COBRA premiums may continue to be charged for continuation health FSA coverage and will not be subsidized by the Federal government.
4. Do eligible qualified beneficiaries who are already on COBRA need to do anything additional in order to have the subsidy apply to them?
No. If the qualified beneficiary is subsidy eligible and has elected COBRA, the bill requires that any months of COBRA coverage in the Subsidy Period be treated as if the otherwise applicable premium has been paid. In fact, if the employer (or carrier) receives a COBRA premium payment for a month to which the subsidy would apply, the employer (or carrier) must refund the premium payment back to the individual within 60 days.
5. Does the subsidy impact people who previously qualified but never elected or elected and then discontinued COBRA?
Yes. The relief includes a new prospective election opportunity for eligible qualified beneficiaries with months of COBRA coverage that would have been remaining in the Subsidy Period had they elected or continued their originally available COBRA. The new election opportunity will run from April 1 through 60 days after the new “notice of extended election period” is provided. The bill includes detailed notice provisions for both new and existing qualified beneficiaries to ensure that all assistance eligible individuals get the opportunity to elect or renew their coverage. (see below)
The bill does not specifically address whether participants with accrued unpaid premiums (likely covered by the one-year extended payment timeline from Notice 2021-01) may still be billed the unpaid amount at some point. Guidance from the DOL may be provided on this issue, but our initial impression is that coverage during this Subsidy Period must be offered and granted without regard to any prior months of unpaid COBRA. Additionally, after the Subsidy Period, a covered individual will receive a new “notice of expiration of premium assistance” (see below) which will advise them that, among other things, additional unsubsidized COBRA months may remain available. However, it is unclear if premium payments intended for post-Subsidy Period coverage may be applied to accrued unpaid months of COBRA coverage from prior to the Subsidy Period or if those prior months must essentially be “forgiven.”
6. What new notices are required and when do they need to be sent?
The bill adds three new temporary notice provisions that employers will need to develop and distribute within prescribed additional timelines. The DOL will provide a model for each of the new notices, but the timing for developing the models may create a backlog for distribution and some of the elections for April and May 2021 may be delayed. It’s not entirely clear in the bill but given that the use of COBRA model notices is generally voluntary, we expect use of the new model notices may also be voluntary.
- General notice supplement. For new qualified beneficiaries who first become COBRA eligible on or after April 1, 2021, additional information must be provided in their COBRA notices, including details regarding the possible availability of premium assistance and, if adopted by the employer, any option to change to different coverage (described in the optional relief section below). The DOL will develop the model notice within 30 days of enactment, but employers may need to act prior to the release of the model in order to incorporate the additional information into routine notices without impacting normal delivery times.
- Notice of extended election periods. For assistance eligible individuals who became entitled to COBRA prior to April 1, 2021, a new notice with specific information must be provided. In general, it’s expected that employers will want to send these notices to all qualified beneficiaries whose qualifying event was either an involuntary termination or a reduction of hours because it may be difficult or impossible to presume that they have other group coverage available that would disqualify them from assistance in order to avoid sending the notice. The DOL will develop the model notice within 30 days of enactment and the required information must be provided to the appropriate individuals within 60 days of April 1, 2021.
- Notice of expiration of period of premium assistance: For assistance-eligible individuals who elected and are receiving the subsidized coverage, notice must be provided explaining the end of the premium assistance period and that additional COBRA or other coverage may be available. This notice must be provided between 15 and 45 days prior to the end of subsidized COBRA coverage and the DOL will provide a model notice within 45 days of enactment.
This notice will need to be provided to qualified beneficiaries whose subsidy is ending because their otherwise applicable COBRA period (e.g., 18 months) is ending, and to those who have remaining unsubsidized COBRA months after September 2021. This notice does not need to be sent to a person who self-reported eligibility for other group health coverage and is therefore disqualified from further subsidized COBRA coverage.
7. How does the credit get paid by the Federal government to the plan on behalf of the qualified beneficiary?
Employers subject to federal COBRA will generally recover the entire premium amount, including the permitted 2% administrative fee, for each assistance eligible qualified beneficiary by offsetting the employer’s regular Medicare employment tax obligation. Further, any excess credits are advanceable and refundable to the employer. For certain employers with insured plans, the carrier may be responsible for treating the premium as paid and recovering the credit against its own Medicare tax obligations for its own employees. Employers will want to discuss the details with their carrier(s) and make sure each parties’ responsibilities are clear.
The bill includes coordination provisions for other credits that an employer or carrier may be taking against its applicable tax obligations so employers should consult with their tax advisor and/or tax credits consultant to ensure they maximize all available credits.
8. How does this legislative relief work considering the DOL/EBSA’s emergency relief?
Although this new relief may further complicate some of the messaging and relief timelines recently clarified by the Department of Labor’s (DOL’s) Employee Benefits Security Administration (EBSA) issued Notice 2021-01, it is separate from the EBSA relief and only applies prospectively for the period of April through September 2021.
We do expect the DOL/EBSA to provide additional guidance on the legislation and clarify any interaction between this legislative relief and the relief granted in Notice 2021-01.
9. What is the optional relief employers may, but are not required to, adopt related to COBRA?
We do not expect wide employer uptake of this provision as it tends to complicate the election process and not be as valuable to reduce an employee’s cost of coverage when COBRA is 100% subsidized. That notwithstanding, employers have the option to allow qualified beneficiaries up to 90 days from the date of their qualifying event to make a limited change to the coverage they were enrolled in at the time of their qualifying event. Since COBRA only requires an offer of continuation coverage to be made for the exact coverage that applied to the qualified beneficiary at the time of their qualifying event, this appears to facilitate employers allowing qualified beneficiaries who had more expensive active coverage to get a cheaper plan during the COBRA period.
In order to allow this retroactive coverage change, all of the following conditions must be met:
- the employer permits the enrollment change (i.e., voluntarily adopts it);
- the premium for the new coverage must be the same price or cheaper than the prior coverage;
- the new coverage must also be coverage that’s offered to similarly situated active employees; and
- the new coverage must not just consist of excepted benefits, QSEHRA coverage, or a health FSA only.
Dependent care assistance
2021 voluntary temporary increase to employer dependent care assistance and plans: The bill provides that for taxable year 2021, employers may increase the amount excludable from income for dependent care from the usual $5,000 to $10,500, and may amend their Section 125 and 129 plans by the end of the plan year during which the amendment is effective (as long as while the amendment is pending the plan operates consistently with what the amendment will provide).
Defined benefit (DB) retirement plans
The retirement plan relief provided in this bill is focused only on DB plans. There are no provisions directly targeting defined contribution (DC) plans.
Multiemployer DB plan relief
The legislation provides special financial assistance to financially troubled multiemployer plans through the PBGC. While not directly impacting clients’ single employer plans supported by Alight, this development is viewed as favorable for single employer DB plan sponsors because it reduces the risk of lawmakers potentially using the well-funded PBGC insurance program for single-employer plans to help solve the funding crisis for multiemployer plans.
Single-employer DB plan funding relief
- 15-year amortization: This relief is intended to provide pension plans, and plan sponsors with greater stability and a longer period over which to pay for long-term liabilities. Under the bill, the following rules would apply to all single-employer pension plans, effective for plan years beginning after December 31, 2021, (or beginning after December 31, 2018; December 31, 2019; or December 31, 2020 at the plan sponsor’s option):
- All shortfall amortization bases for all plan years preceding the first plan year beginning after December 31, 2021,or after whichever earlier data as the sponsor elects (as noted above), as well as all shortfall amortization installments determined with respect to such bases shall be reduced to zero.
- All shortfalls would be amortized over 15 years, rather than seven years.
- Interest rate smoothing: On multiple occasions over the last decade, Congress provided for pension interest rate smoothing to address concerns that historically low interest rates were creating inflated pension funding obligations. Smoothing is achieved by defining a narrow corridor of the applicable minimum and applicable maximum percentages of the 25-year average of the segment rates. Under current law, a phase-in of an expanded corridor was to start in 2021. To preserve the stabilizing effects of interest rate smoothing, the law provides:
- A narrower corridor of 95%- 105% effective for plan years starting in 2020 through 2025.
- The phase-in of an expanded corridor would be delayed until 2026, at which point there would be a more gradual expansion of the corridor until it is set at 70%-130% in the year 2029, where it would stay.
- A 5% floor on the 25-year averages of the first, second and third segment rates. This floor further reduces the potential for excessive volatility.
