Federal Subsidies for Group Health Plan Continuation Coverage
In general, when an employee loses group health plan coverage due to termination of employment or a reduction of working hours, the employee may elect continuation coverage under federal COBRA or similar state law. The employee generally pays 100% of the continuation coverage cost. The maximum period of coverage is 18 months.
As provided in the American Rescue Plan Act (ARPA), passed by Congress in March 2021, the federal government will now cover 100% of the cost (i.e., fully subsidize the cost) of continuation coverage during the 6-month period from April 1, 2021, through September 30, 2021, for employees whose termination of employment (or reduction of hours), resulting in loss of group health coverage on or after November 1, 2019, was involuntary. Although the primary targets of the subsidy are employees whose involuntary termination (or reduction of hours) was due to a COVID-related downturn in the business of their employers, the subsidy applies to all employees whose termination (or reduction of hours) was involuntary and who could have obtained continuation coverage for up to 18 months (“Applicable Eligible Individuals” or AEIs). According to ARPA, such AEIs must now be given an opportunity to elect the subsidized continuation coverage, beginning April 1, 2021, until the end of their usual maximum 18-month period. If they are eligible for Medicare or other group health plan coverage (such as through a new employer), however, they are not eligible for the subsidy.
In the previous paragraph, the date of November 1, 2019, is not a typographical error. Because the maximum period of continuation coverage is 18 months, an involuntarily-terminated employee who lost regular coverage beginning November 1, 2019, could have obtained continuation coverage for up to 18 months, until the end of April 2021, which is one month into the 6-month subsidy period created by ARPA. Therefore, if an employee was fired, laid off, furloughed, or otherwise involuntarily terminated or compelled to cut back on the number of work hours, and thereby lost regular group health plan coverage beginning on or after November 1, 2019, then the employer must notify him or her of the new opportunity to elect continuation coverage beginning April 1, 2021, with the federal government paying for that coverage.
The U.S Department of Labor has provided guidance and a model notice that employers could use for sending the proper notice to their AEIs: current and former employees whose involuntary termination (or reduction of hours) resulted in their loss of regular coverage. Employers must provide the notice, even to employees who originally failed to elect continuation coverage, or who elected it but then dropped it. Ideally, employers have a valid address for each such former employee.
The federal subsidy is not paid directly to the employee. Instead, it is a credit against the employer’s share of the Medicare taxes imposed on employee wages, which the employer reports on its quarterly payroll tax returns. The employer is required to pay the continuation coverage premiums on behalf of each AEI who elects continuation coverage during the 6-month subsidy period.
The subsidy applies regardless of whether the continuation coverage is under federal COBRA law or similar state continuation coverage law.
If you have questions, consult your insurance broker or an attorney knowledgeable about group health plan continuation rules.