What employers need to know now about COBRA subsidy changes and the ACA

What employers need to know now about COBRA subsidy changes and the ACA

The Biden Administration’s American Rescue Plan expands access to health care coverage to millions of Americans. While some of the Act’s provisions increase ACA penalty risk to employers, the new COBRA coverage subsidy should be a welcomed game changer for employers and their employees across the nation.

The American Rescue Plan Act provides for fully subsidized COBRA premiums. This new law allows employers to reduce an employee’s premium to zero in anticipation of a credit and will reduce an employer’s ACA penalty risk.

How the law reduces employer risk
If an employee has a reduction in hours that results in the loss of health coverage, the employer must offer that individual COBRA coverage. From April 1 to September 30, 2021, COBRA premiums will not be charged to employees, and will be recouped by the applicable entity through a tax credit.

  • Employers of self-insured plans are entitled to claim the subsidy as payroll tax credits.
  • For fully-insured health plans, the insurance carrier is entitled to the credit.
  • For multi-employer health plans (union-sponsored), the plan is entitled to the credit.

Because the employee does not pay for the coverage, the COBRA subsidy reduces an employer’s risk of incurring Penalty B fines for providing unaffordable coverage under the ACA employer obligations.

The IRS assesses Penalty B fines, which can be substantial, to employers that fail, for whatever reason, to offer affordable coverage (less than 9.83% of income for 2021) that meets minimum value requirements.

Failure to meet this affordable offer of coverage requirement will result in a $4,060 fine per full-time employee who receives an advanced premium tax credit (also called a subsidy) when purchasing insurance through a public healthcare exchange.

Why it matters
Here’s a common situation today. Due to the pandemic and economic implications, an employer reduces an employee’s hours to contain costs. The employee is now receiving less income. While the employer offers a COBRA plan, the plan is too expensive for the employee and the employee instead goes to the exchange where they get a subsidy. The subsidy triggers a 226-J Letter to the employer, and the COBRA coverage is deemed unaffordable to the employee. The employer is assessed a fine.

Now under the American Rescue Plan, because the employee’s cost of the COBRA coverage is zero, the COBRA coverage offer is considered affordable and the employer is not at risk for Penalty B.

A closer look at the changes
The termination or reduction in hours does not have to be related to the pandemic. Under the new law, any worker who would be eligible for COBRA as of April 1, 2021, is eligible for this subsidy and the special enrollment period beginning April 1. Since COBRA is typically available for 18 months after termination, this means employers will need to notify any employee who was eligible for COBRA as far back as November 2019.

Employees who receive the subsidy are still subject to otherwise applicable maximum periods of coverage under COBRA (generally 18 months), meaning that an individual who has been on COBRA for 16 months will only get two months of subsidized coverage. The subsidy also ends if an individual becomes eligible for coverage under another group health plan or Medicare. (Anyone who fails to notify the group health plan of such eligibility is subject to a penalty of $250, or the greater of $250 or 110 percent premium assistance, provided the failure to notify was intentional.)

As is typical for COBRA eligibility, relief is not available for employees who voluntarily end employment or were fired for gross misconduct.

Employers are obligated to notify each employee who is eligible for this subsidy, as well as when the subsidy terminates. The Department of Labor will produce model COBRA election notices within 30 days of the law’s enactment, as well as model COBRA premium subsidy expiration notices within 45 days of enactment.

Finally, the Act also provides for a “Plan Enrollment Option,” which would allow a COBRA-eligible individual to switch to a lower-cost coverage option within 90 days of receiving notice from their employer if the plan sponsor elects to permit such changes. Importantly, the premium for the lower-cost option must be less than the premium for the coverage the individual was enrolled in at the time of the COBRA qualifying event, the lower-cost option needs to be offered to similarly situated employees, and the lower-cost option must provide more than limited health coverage.

According to Health Affairs.org, “with some exceptions, individuals who are currently enrolled in COBRA continuation coverage have up to 90 days to enroll in a different plan with that employer if they want to and the employer allows it; if so, the COBRA subsidies will apply toward the new plan.”

The American Rescue Plan represents the most significant change to health reform since the ACA was signed into law by President Barack Obama. Health e(fx) is rooted in health reform expertise. We help the largest and most complex employers and partners in the nation with ACA and state individual mandate reporting and compliance. If you have questions or need more information about these new developments, we can help. Contact us at sales@healthefx.us.