The American Rescue Plan Act of 2021, the most recent stimulus and COVID-19 relief package, requires employers to extend offers of free COBRA coverage to certain qualified employees from April 1 through September 30, 2021.
What is the COBRA subsidy eligibility? What employees does it apply to?
The COBRA subsidy applies to any eligible former employee and their qualified dependents whose COBRA eligibility falls during the period between April 1 and September 30, 2021. The COBRA subsidy will not apply to any employee who resigned from their position or who was terminated for gross misconduct.
Terminated employees who previously did not elect coverage or stopped coverage will be allowed to enroll during a special 60-day enrollment period as long as they are still within their 18 months of eligibility. Employees cannot enroll if they are covered under another qualified employer plan.
The law requires employers to extend offers of COBRA coverage to other individuals whose right to COBRA coverage previously ended, which means that the termination of employment could have occurred as far back as November of 2019.
What is the penalty for non-compliance?
The penalty for non-compliance generally is $250 per incident or more if the failure is intentional.
What is the COBRA subsidy employer tax credit?
This legislation provides a COBRA subsidy tax credit to employers to offset the costs of this coverage. The COBRA Premium Assistance Credit essentially reimburses the cost of providing “free” COBRA coverage to eligible individuals. The tax credit is worth the amount of COBRA premiums not paid by COBRA enrollees. It does not include any amount of the COBRA subsidy the employer would have otherwise provided.
For example, assume the cost of COBRA for an assistance-eligible employee is $1,000 per month. Without the American Rescue Plan, the employer would require individuals electing COBRA to pay $500 per month, effectively providing a $500 per month subsidy. The employer could claim $500 per month as a COBRA Premium Assistance Credit for all eligible employees enrolled from April 1, 2021 through September 30, 2021.
The COBRA subsidy employer tax credit is intended to offset the employer’s Medicare tax liability. It is a fully refundable tax credit, meaning that employers can receive a refund from the IRS if the available credit exceeds their Medicare tax liability for the quarter.
To claim the credit, employers can report the COBRA premium assistance provided to qualifying individuals on the quarterly employment tax return, Form 941. Worksheet 5 in the IRS Instructions for Form 941 outlines how to calculate the two parts of the credit:
- The non-refundable portion of the credit, meaning the amount by which the credit offsets the employer’s Medicare tax liability, and
- The refundable portion of the tax credit, which is the amount by which the provided COBRA premium assistance exceeds the employer’s Medicare tax liability (if any).
Employers can claim the COBRA Premium Assistance Credit in advance of filing Form 941. To do this, the employer reduces the federal employment taxes it would normally be required to deposit (including portions withheld from employees), up to the amount of the anticipated credit. In addition, the employer can file IRS Form 7200 to claim any remaining anticipated credit after reducing available federal employment tax deposits.
Any COBRA Premium Assistance Credit advance will need to be reconciled when the employer later files Form 941.
Where can I get more information?
If you need additional information, reach out to your Warren Averett advisor directly, or ask a member of our team to reach out to you.