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4 Takeaways From New COBRA Subsidy Guidance

By Emily Brill · 2021-05-26 18:37:05 -0400

New guidance from the Internal Revenue Service attempts to clarify which ex-employees who have recently lost their job-provided benefits qualify for six months of free health care under COBRA, tackling questions that left employers scratching their heads after the Biden administration made the coverage available. Here, attorneys tell Law360 their most notable takeaways from the guidance.

Like the 2009 Notice, But Better

The Biden administration cleared the way for certain people to receive six months of free health care in March through a policy tucked into a sweeping $1.9 trillion stimulus bill intended to ameliorate the effects of the COVID-19 pandemic.

The policy authorizes the government to subsidize half a year's worth of health care premiums for workers who recently lost their job-provided coverage but chose to stay on the company's insurance plan, which is allowed for up to 18 months under the Consolidated Omnibus Budget Reconciliation Act.

In the wake of the stimulus bill's passage, benefits attorneys' most pressing questions were about who qualifies for the subsidies, which are available from April 1 until Sept. 30. The IRS' new guidance, released May 18, seeks to answer those questions.

For the most part, it does a good job, benefits attorneys said, praising Notice 2021-31's thoroughness. The document provides background on how the subsidies came to be before launching into an 86-question Q&A speaking to subsidy eligibility, how to administer the subsidy and other topics.

For many established companies, administering these COBRA subsidies won't be their first rodeo. The Obama administration authorized similar subsidies after the Great Recession, and the IRS released comparable guidance at the time. Attorneys familiar with both sets of guidance say Notice 2021-31 follows the blueprint laid out in 2009, but adds questions addressing situations related to the coronavirus pandemic.

"General impression is: comprehensive, follows prior guidance, but contains additional material specific to this subsidy," said Jennifer Rigterink, an associate in Proskauer Rose LLP's employee benefits and executive compensation group.

Help in Defining "Involuntary"

One of employers' key questions after the subsidies' release was how to determine whether employees lost their job-provided insurance by choice or against their will. This was important, because the subsidies are only available to those who lost insurance involuntarily — through a layoff, firing, furlough or involuntary reduction in hours.

The guidance gives employers a "road map" of how to determine whether the event that gave rise to the loss of insurance — in legal terms, the "qualifying event" — was something the employee did or did not choose, Rigterink said. It does so by addressing a number of specific situations in which the circumstances of an employee's departure or hours reduction create confusion in that area.

"What constitutes an 'involuntary termination' was what everyone had questions about. This guidance walks through most of those scenarios," said Timothy Stanton, a shareholder at Ogletree Deakins Nash Smoak & Stewart PC and member of its employee benefits and executive compensation group.

One such scenario asks whether people who were forced to resign from their jobs, such as workers who were required to move cities but couldn't do it, qualify for the subsidies. The guidance says that yes, they do, likening such situations to "constructive discharges," which occur when employees resign due to intolerable working conditions.

"If there's a constructive termination, they will be eligible. If someone resigns, they will not be eligible. But if they resign and it's considered a constructive termination, then they are eligible," said Gretchen Harders, a member of Epstein Becker & Green PC's employee benefits and executive compensation group.

Answers to a Tricky Question

Employers had wondered whether workers who experienced two qualifying events within several years — for example, an hours reduction, and, later, a job loss — would have access to the subsidies.

Depending on how the IRS answered this question, employers could have been stuck seeking out an enormous pool of ex-employees in order to notify them of the subsidies' availability.

But the IRS didn't go the route employers had feared, Ogletree's Stanton said. Instead, it clarified that the only ex-employees with double-qualifying events companies must notify are those who have been involuntarily terminated since 2018 and are still receiving COBRA coverage.

"That's a much simpler problem for employers to solve," Stanton said. "You don't have to find everybody who was involuntarily terminated, just the people who are still on COBRA."

One Bite of the Apple

In addition to making the subsidies available, the Biden stimulus bill gave workers who recently became eligible for COBRA coverage but declined it another 60 days to sign up. If those workers opt to sign up, they can set their first date of COBRA coverage as the day they were booted from their employer's health plan. This "retroactive coverage" is helpful for workers who have incurred medical bills since their layoff because it can shift responsibility for those bills to insurance companies, benefits attorneys say.

Notice 2021-31 references this section of the stimulus in the answer to its 59th question. There, the IRS states that workers who declined COBRA coverage initially, but now want to sign up for it under the extended 60-day deadline, have to decide whether they want retroactive coverage when they decide whether they want the six months of subsidized coverage.

If they say yes to the six months of subsidized coverage but no to the retroactive coverage, they can't change their minds about the retroactive coverage later on, the answer clarifies.

"The guidance sets a 'one bite of the apple' rule," Rigterink of Proskauer said. "If you decline electing retroactive coverage now, you cannot go back and do so later."

--Editing by Jill Coffey and Kelly Duncan.

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