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COBRA Guidance Updates for Employers

The IRS has issued new guidance regarding tax breaks that allow health coverage to continue under COBRA. Congress issued these tax breaks as part of the American Rescue Plan Act of 2021. The following details essential updates regarding the new COBRA guidance and its impact on employers.

What is the New COBRA Premium Assistance?

Section 9501 of the American Rescue Plan, also known as COBRA Premium Assistance, offers a temporary 100% reduction in the premium individuals would pay if they opted to continue health coverage under COBRA after reducing work hours or involuntary termination of their employment.

In addition, employers, health insurers, and plan administrators maintaining group health plans can also qualify for a corresponding tax credit.

The 100% premium reduction and the tax credit are also available for continued coverage provided for those events described under similar state laws. You can refer to the premium and the credit provided in this case as mini-COBRA.

What Do Employers Need to Know?

Notice 2021-31 offers guidance for employers, health insurers, and plan administrators regarding the COBRA tax credit. Employers can refer to this guide for information on:

  • Calculating the credit
  • Determining which individuals are eligible
  • Determining the premium assistance period
  • Other relevant information for understanding the credit

The new guidance requires employers, who are subject to COBRA, to send a special election notice to Assistance Eligible Individuals (AEIs) who are in their 18-month COBRA window starting April 1, 2021. The election notice states that individuals are eligible to elect COBRA during the defined subsidy period and receive premium assistance under the Act.

The guidance requires employers to notify eligible individuals of their eligibility status at least 15 days before (but not more than 45 days before) it expires.

Impact to Employers

The new subsidy could potentially increase costs for self-insured employers. Typically, only ten percent of terminated employees elect to use COBRA. However, the new subsidy will enable involuntarily terminated employees to continue receiving health coverage at no cost. Therefore, it could have significant cost implications for employers.

Self-insured employers required to offer COBRA benefits will have to re-evaluate their budget. So far, the impact of this budget is equivalent to the difference between the claims that COBRA participants make and the tax credit available to qualifying employers.

On average, the cost of a participant eligible for COBRA is 54 percent more than an active participant’s cost in terms of healthcare claims.

In the case of fully insured employers, the impact is limited to cash flow, which can fluctuate as per the timing of the tax credit.

Windes can Help

Do you need assistance reviewing your tax strategy to account for the new COBRA guidance? Then, reach out to the team at Windes today to answer your questions.

 

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