The Department of Labor recently published model notices plan
sponsors and plan administrators may use to meet their disclosure
obligations under the temporary COBRA subsidy added by the American
Rescue Plan Act of 2021 effective April 1, 2021 (
discussed here). At the same time, the DOL issued a series of
Frequently Asked Questions about the temporary subsidy. While the
FAQs are directed primarily to individuals, they clear up some
questions about administration that were unclear from the statute.
In this Benefits Brief, we will summarize the key clarifications
from the DOL and highlight the key areas where further guidance is
needed.
WELCOME CLARIFICATIONS
Reduction in Hours. A termination
of employment that results in a loss of coverage must be
“involuntary” to qualify for the subsidy; in contrast, a
reduction in hours resulting in a loss of coverage will qualify
whether the reduction is voluntary or involuntary.
Non-Federal COBRA Plans. The FAQs
confirm that the new rules do not change any state law requirements
for plans subject to state “mini-COBRA” provisions. They
also confirm the new special enrollment period does not apply to
plans subject to state “mini- COBRA” laws unless state
law permits a special enrollment. In addition, a qualified
beneficiary under a state “mini-COBRA” law can elect a
less expensive option if the plan offers it. The model notices
issued by the DOL include a notice for plans subject to a state
“mini-COBRA” law.
60-Day Election Period. Unlike
current law, the 60-day election period for subsidized federal
COBRA runs from receipt of the notice, not mailing according to the
model notices and the DOL’s summary of the new law. This means
plan sponsors and administrators will have to document receipt, for
example, by using certified mail, return receipt.
Cessation on Eligibility for Another Group Health
Plan/Medicare. Eligibility for the subsidy will
terminate upon eligibility for coverage under another group health
plan or Medicare, even if the individual does not enroll in that
coverage. For this purpose, another group health plan includes a
group health plan of another employer or the individual’s
spouse’s employer’s group health plan.
COVID-19 Extended Deadlines Not
Applicable. The extended deadlines allowed under
the Department of Labor’s COVID-19 relief (
discussed here) do not apply to elections for the COBRA
subsidy. This does not, however, affect the individual’s rights
under the extended deadlines to elect coverage on a non-subsidized
basis.
Election Rights. Consistent with
current law, each qualified beneficiary can make an independent
election for subsidized COBRA without regard to elections made by
another qualified beneficiary.
Penalties. A failure to comply
with the COBRA subsidy rules could subject the plan sponsor to an
excise tax penalty of up to $100 per day per qualified beneficiary
(not exceeding $200 per day per family).
UNANSWERED QUESTIONS
“Involuntary”
Terminations. The biggest disappointment of the
DOL guidance is its failure to clarify the meaning of
“involuntary” termination of employment to be eligible
for the subsidy. For example, does a termination occurring at the
mutual consent of the parties or a termination is for good reason,
attainment of a mandatory retirement age, or a voluntary incentive
program qualify? Likewise, does an employee who terminates after
being notified that layoffs are imminent qualify? The DOL did
confirm an employee terminated for “gross misconduct”
(and his/her qualified beneficiaries) would be ineligible for the
subsidy, however, very few employers are willing to classify a
termination as due to “gross misconduct” because the high
threshold to establish “gross misconduct.”
Application to Dental and Vision
Plans. The DOL guidance fails to clarify
whether the subsidy applies to stand-alone dental and vision plans
or just major medical plans. The statute refers to “group
health plans” with certain exclusions not including dental and
vision plans, therefore qualified beneficiaries under stand-alone
dental and vision plans are likely eligible for subsidized
coverage.
Employer’s Reliance on Employee’s
Representations. The FAQs do not indicate
whether an employer can rely on a qualified beneficiary’s
representation that he/she is eligible for the subsidy without risk
of liability. Seldom will an employer know what options an employee
or former employee (or other qualified beneficiary) has for
coverage so logic would suggest an employer has no risk of
liability if a qualified beneficiary is determined to be ineligible
absent actual knowledge to the contrary.
Impact on Sale of Business Transactions. The FAQs do not address
how responsibility is assigned in connection with a sale of a
business. Presumably, the existing COBRA regulations govern
this.
OBSERVATIONS AND ACTION ITEMS
This guidance was issued by the Department of Labor rather than
being jointly issued by the DOL and the Internal Revenue Service.
This suggests that additional guidance from the IRS may be
forthcoming.
Plan sponsors and administrators need to be diligent in
identifying persons required to be notified, getting the required
notices distributed, and documenting when and how the notifications
were made. Even if a COBRA administrator has been engaged, the plan
sponsor remains responsible for legal compliance (even though the
plan sponsor may have a contractual claim against the COBRA
administrator if it fails to meet its contractual obligations).
The IRS excise tax penalties in many cases will not be the
greatest liability. A greater risk to the plan sponsor could be
having to provide coverage retroactively, perhaps on a self-funded
basis, for failing to provide the proper notifications.
At the present time, qualified beneficiaries who obtain coverage
eligible for the subsidy may be unable to drop that coverage upon
expiration of the subsidy and obtain coverage under a Marketplace
policy (which will often be less expensive than COBRA coverage)
without a break in coverage. The FAQs, however, hint that the
Marketplace rules may be revised to adopt a special enrollment
period at the expiration of the subsidy period to allow replacement
without a gap in coverage.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.