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May 24, 2021

IRS releases guidance on COBRA premium assistance and employer refundable tax credits

In Notice 2021-31, the IRS clarified many questions that arose after the American Rescue Plan Act of 2021 (ARPA) temporarily expanded COBRA coverage and provided premium assistance to subsidize 100% of COBRA premiums for assistance-eligible individuals (see Tax Alert 2021-0605).

In 86 questions and answers, the IRS covers many issues, including: (1) who is eligible for COBRA premium assistance, (2) which types of coverage are eligible for COBRA premium assistance, (3) when the COBRA premium assistance period begins and ends, and (4) how to calculate and claim the COBRA premium assistance credit. This Tax Alert focuses on how to calculate and claim the COBRA premium assistance credit.

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 (which may include employees' spouses and dependent children) from April 1, 2021 through September 30, 2021. 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 of 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. For COBRA-qualifying events that occur from April 1, 2021 through September 30, 2021, the ARPA requires this notice to include additional details concerning the premium assistance program and imposes additional notification requirements beyond the initial notice. The ARPA also gives an assistance-eligible individual whose COBRA-qualifying event occurred before April 1, 2021, an extended period to elect continuation coverage even if the individual had not previously elected COBRA. A special COBRA extension notice must be sent by May 31, 2021, to individuals in this situation. An assistance-eligible individual then has 60 days after receiving the COBRA extension notice to elect continuation coverage.

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 premium payee's share of Medicare tax for the premium assistance provided to assistance-eligible individuals.

Calculating the COBRA premium assistance credit

A premium payee can claim the premium assistance credit for up to the full premium that the premium payee would otherwise charge the assistance-eligible individual for COBRA coverage, including the 2% administrative charge. For a plan that charges less than COBRA would permit, the premium payee may claim a credit only for the amount charged. Subject to applicable notice requirements, however, the COBRA regulations permit such a plan to increase the charged premium up to the permitted amount. Notice 2021-31 specifically acknowledges that an employer may increase the charged premium (thereby shifting to the government a cost the employer would have paid) and then claim a credit on the increased premium, regardless of whether the employer makes a separate taxable payment in the same amount to the assistance-eligible individual. The credit is available only during a period of COBRA continuation coverage, so — depending on the facts — it may not apply in certain furlough or severance arrangements. For example, for employees that do not lose coverage under their employer's health plan until six months after an involuntary termination of employment, no credit is available during that six-month period, even if the employer bears the entire cost of that coverage.

Coverage required under comparable state continuation coverage provisions is eligible for premium assistance but not for individuals who would not be qualified beneficiaries under federal COBRA. State continuation coverage programs may be considered comparable even if the state program requires coverage for a longer period. In allocating premiums for this purpose, the premium assistance will only cover the premium for assistance-eligible individuals. The premium assistance will not extend to any extra cost for those who are not assistance-eligible.

Claiming the COBRA premium assistance credit

The premium payee entitled to the credit depends on the nature of the coverage:

  1. For a multiemployer plan, the premium payee is the plan
  2. For a plan that is not a multiemployer plan and is wholly or partially self-funded, the premium payee is the common-law employer that maintains the plan (i.e., the plan sponsor)
  3. For all other plans, the premium payee is the insurer

A premium payee becomes entitled to the credit upon receipt of the assistance-eligible individual's election of COBRA continuation coverage. If the coverage period has already begun, the premium payee can claim the unpaid premiums owed for those coverage periods. Once an assistance-eligible individual has made an election, the premium payee becomes entitled to its credit on the first day of each subsequent coverage period for which the individual continues to be eligible.

The premium payee claims the credit on its federal employment tax return, usually Form 941, Employer's Quarterly Federal Tax Return. Once a coverage period has begun entitling a premium payee to the credit, the payee may reduce its deposits of federal employment taxes, including withheld taxes, that would otherwise be due, up to the amount of the anticipated credit. To the extent that the anticipated credit exceeds the premium payee's employment tax deposits, the premium payee may request an advance of the difference by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

In the unlikely event that the premium payee has no employment tax liability, the credit is nevertheless claimed on the Form 941 for the quarter in which the payee becomes entitled to the credit. The payee would enter zero on all non-applicable lines.

If the assistance-eligible individual becomes eligible for disqualifying coverage, such as another employer's plan or Medicare, but does not inform the premium payee (and the payee does not otherwise learn of the disqualifying coverage), the payee remains entitled to the credit.

The credit is included in the premium payee's gross income.


Notice 2021-31 is generally consistent with prior IRS guidance concerning the 65% COBRA subsidy under the American Recovery and Reinvestment Act of 2009 (ARRA), with the differences stemming from statutory and regulatory changes in the group health plan space since 2009 and statutory differences between the ARRA and ARPA subsidies. Notice 2021-31 elaborates more than prior guidance on when entitlement to the premium credit arises and how it may be claimed. The ARRA credit could only be claimed via refund on the Form 941, whereas the ARPA credit may be claimed earlier via reduction in employment tax deposits or the Form 7200, mechanisms that have also been available to claim other COVID-19-related credits. Anecdotally, it seems that most employers have not been able to access these tools, or, in the case of the Form 7200, have not found them to be a faster process.

Employers may wish to consider what administrative processes may be needed to claim the COBRA premium assistance credit. For example, employers with third-party COBRA administrators and third-party payroll processors may benefit from discussing with them what data will need to be provided, by whom and when.

In some cases, employers will find that they will not be able to assemble all the relevant data in time to claim the full credit on their originally-filed Forms 941 for the second and third quarters of 2021. In those cases, employers may choose to claim a portion of the credit by amending their originally-filed returns based on the data available at the time and then decide after collecting additional data whether to file Forms 941-X to claim additional amounts.

Even if the additional COBRA premium assistance credit is not large enough to justify the cost and effort of filing Forms 941-X for this reason alone, there may be other reasons why filing them is necessary or beneficial. Unfortunately, waiting until the numbers are known with greater certainty and claiming the credit on the next Form 941 filed after that date (for example, the Form 941 for the fourth quarter of 2021) is not allowed.

Although the credit must be included in the premium payee's gross income, the premium payee generally should be allowed to deduct the payments that the credit is intended to reimburse. For example, an employer that pays COBRA premiums on behalf of an assistance-eligible individual to an insurance company and then receives a credit to reimburse those costs generally would be in the same net after-tax position (ignoring possible timing differences) as an employer that neither paid those premiums nor received the credit.

The IRS has not modified Forms 941 and 941-X for purposes of the COBRA premium assistance tax credit. Drafts of these modified forms, once available, will be posted on the IRS website.


Contact Information
For additional information concerning this Alert, please contact:
Compensation and Benefits Group
   • Christa Bierma (
   • Stephen Lagarde (
   • Rachael Walker (
   • Bing Luke (
Workforce Tax Services - Employment Tax Advisory Services
   • Kristie Lowery (
   • Kenneth Hausser (
   • Debera Salam (