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The American Rescue Plan Act (ARPA) temporarily expands COBRA coverage and increases premium tax credits. These changes interact with Affordable Care Act requirements regarding employer penalties and employee notices.

Background on ACA

The ACA added Section 4980H to the Internal Revenue Code (IRC), which applies to applicable large employers (ALEs). An employer is an ALE if the combination of full-time employees (generally those who work an average of at least 30 hours per week) and part-time employees converted to full-time "equivalent" employees (FTE) equals or exceeds 50 in the prior calendar year. For more information on calculating hours of service see Tax Alerts 2014-0357 and 2015-2439).

IRC Section 4980H provides for an excise tax — the employer shared responsibility payment (ESRP), commonly referenced as the employer mandate penalty. Under IRC Section 4980H, an employer can be subject to ESRPs under either IRC Section 4980H(a) or IRC Section 4980H(b). Under IRC Section 4980H(a), all ALEs must offer "minimum essential coverage" to at least 95% of their full-time employees and their dependents each month or be subject to ESRPs based on the total number of their full-time employees if a single full-time employee secures coverage through the ACA marketplace using premium tax credits (the A penalty). Under IRC Section 4980H(b), employers that fail to offer their employees affordable coverage are liable for ESRPs for each full-time employee who seeks and receives coverage through the ACA marketplace using the available premium tax credits. In that case, an employer would be liable for the penalty for each full-time employee who receives the premium tax credit (the B penalty).

ALEs must use Forms 1094-C and 1095-C to report information required under IRC Sections 6055 and 6056 about the offer of employer-sponsored health care coverage and the employees' enrollment in that coverage. These forms are used by the IRS to assess ESRPs.

For more discussion on the impact of COVID-19 on ACA determinations, see Tax Alert 2020-0856.

ARPA provisions on COBRA premium assistance

Section 9501 of the ARPA subsidizes 100% of COBRA continuation coverage premiums for coverage provided to assistance-eligible individuals (including their spouses and dependent children) from April 1, 2021 through September 30, 2021 (and may include the 2% administrative fee allowed under IRC Section 4980B(f)(2)(C)). Eligibility ends when (1) the individual becomes eligible for Medicare benefits or coverage under another group health plan or (2) the individual's COBRA coverage period expires.

An assistance-eligible individual is one who (1) has qualified for COBRA continuation coverage due to a reduction in hours or an involuntary termination in employment that is not due to the employee's gross misconduct and (2) elects COBRA continuation coverage. All other qualifying reasons for COBRA continuation coverage do not qualify for this premium assistance. Employers should continue to charge those individuals the regular COBRA rate.

Under normal circumstances, a plan administrator is responsible for providing a notice of continuation coverage when a COBRA-qualifying event occurs. From April 1, 2021 through September 30, 2021, the ARPA requires this COBRA extension notice to include additional details concerning the premium assistance program and imposes additional notification requirements beyond the initial notice. The COBRA extension notice must be sent within 60 days of April 1, 2021. An assistance-eligible individual then has 60 days after receiving the COBRA extension notice to elect continuation coverage even if coverage had not been previously elected or the coverage had lapsed. In addition, the ARPA allows plans to permit eligible individuals to elect into certain different coverage of a same or lesser value to the individual's previous enrollment within 90 days of being notified of this right.

Assistance-eligible individuals are not taxed on the amount of the premium assistance and must be reimbursed by the plan, employer or other coverage provider if they pay premiums not required by virtue of the premium assistance.

The ARPA adds a new IRC Section 6432, which allows a refundable credit against the employer's share of Medicare tax for the amount of premium assistance provided to assistance-eligible individuals. Depending on the type of coverage, the credit may be claimed by either the multiemployer plan, the issuer of insured coverage or the sponsoring employer for all other coverage. The credit is treated as gross income to the entity and subject to a five-year statute of limitations period.

ARPA provisions on premium tax credits

Section 9661 of the ARPA expands the eligibility for premium tax credits for all income levels. As a result, access to subsidies to pay premiums to ACA marketplace plans is no longer capped at 400% of the federal poverty level. In addition, medical premiums for marketplace benchmark plans are capped at 8.5% of household income.

Implications

ACA consequences to employers of increased COBRA subsidies

No ESRP liability: Under some employer plans, certain employees whose hours have been reduced are ineligible for coverage, but they may remain "full-time" employees as determined under IRC Section 4980H. Thus, employees who lose an offer of active coverage due to a reduction of hours may be eligible for COBRA coverage. However, COBRA premiums are generally not affordable, so IRC Section 4980H-full-time employees may seek and receive coverage through the ACA marketplace using the available premium tax credits, which leaves employers liable for ESRP penalties under IRC Section 4980H(b).

With the 100% COBRA subsidy, however, there is no cost to the employee for enrolling in coverage. As a result, the coverage would be considered affordable and employers will not face ESRP liability for the six months when the subsidy is in place. This will only impact employers with employees who become COBRA-eligible due to a reduction in hours because those employees remain active. Terminated employees do not subject the employer to potential penalties.

Reporting challenges: The reporting aspect of the unusual COBRA cost of $0 for only six months may be challenging for employers and service providers. In completing Form 1095-C for each full-time employee, an ALE must report the "employee required contribution." (For reporting purposes, the "employee required contribution" is not the amount that the employee is actually paying for coverage, but the employee's share of the monthly cost for the cheapest minimal essential coverage that the employer's plan (or plans) offers the employee for employee-only coverage. The "self-only employee cost" is what is reported regardless of whether the employee elects self-only coverage, coverage that includes dependents or declines coverage.) The temporary nature of a $0 COBRA premium presents employers and their service provider with the challenge of adjusting their reporting temporarily for the six months that the employee's cost of COBRA coverage is reduced.

In IRS Notice 2020-76, the IRS indicated that it was removing the good-faith accuracy-penalty waiver starting in 2021, so accurately reporting on Forms 1095-C will be more important than ever (see Tax Alert 2020-76{}). It remains to be seen whether the IRS will extend the waiver for one more year due to the mid-year change. Employers should not count on any extension of the reporting-penalty waiver and make their 2021 Forms are accurate as possible.

Increased risk pool: While employers will be faced with new administrative challenges substantiating costs to claim the tax credit, there could be a side benefit to the government subsidizing COBRA coverage. In normal conditions, only individuals who expect to incur claims that are higher than their premiums cost will enroll in COBRA. With the subsidy, almost all eligible individuals would be expected to enroll. Because the government will be subsidizing this cost at the employer's established COBRA cost, including the administrative fee, the employer's COBRA experience should be improved for the period of the subsidized coverage. This could have the positive effect of improving the employer's overall COBRA claims experience for the period of the subsidy.

Ineligible dependents: COBRA take-up rates will likely increase due to the subsidy. While a refundable payroll credit exists for employers to offset the premium costs, claims costs are still the full responsibility of the employer for those with self-insured coverage. With the potential for increased COBRA enrollment and otherwise rising health care costs, employers should verify that only qualified recipients receive health care benefits.

ACA consequences to employers of expanded premium tax credits

If an employer's lowest-cost plan premiums are not affordable, the employer may be liable for ESRP when full-time employees enroll in marketplace coverage and qualify for premium tax credits. With the expanded access, greater subsidies and reopening of the marketplaces by the Biden administration (in mid-February through May 15), more employees may enroll in marketplace coverage. However, even though the subsidy caps a household's cost of coverage at 8.5% of household income, the affordability threshold for employers remains at 9.5% (as indexed — 9.83% for 2021) of household income. Employers do not need to revisit their 2021 insurance premiums due to the changes to the PTC.

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