100% COBRA Subsidy for Employees and Corresponding Payroll Tax Credit for the Employer
For periods of coverage from April 1, 2021 through September 30, 2021, the American Rescue Plan Act provides a federal subsidy equal to 100% of the COBRA premiums for people who lose coverage due to a reduction of hours or an involuntary termination of employment, along with a corresponding refundable payroll tax credit to employers, plan administrators, and health insurers in the amount of the premiums subsidized and not paid by the employee. The IRS just released Notice 2021-31 which provides information such as the calculation of the credit, eligibility, and navigating the premium assistance period.
COBRA premium assistance is available for COBRA continuation coverage of any group health plan, except a health flex spending account offered under a §125 cafeteria plan. Group health plans include vision-only and dental-only plans, regardless of whether the employer pays for a portion of the premiums for active employees.
Amounts received for premium assistance are not taxable income to the individual and the individual may enroll in COBRA even if they did not do so previously. In addition, the individual may elect a different coverage plan than the one they were previously enrolled in, provided that the premium does not exceed the prior plan’s premium. The temporary premium assistance is also available to individuals enrolled in continuation health coverage under State programs that provide for coverage comparable to COBRA continuation coverage, often referred to as “mini-COBRA.” However, premium assistance is not available if an individual is eligible for coverage under any other group health plan or for Medicare
The payroll tax credit can be claimed by employers with group health plans that are subject to Federal COBRA continuation provisions (which excludes small employers with under 20 employees) which some or all of the coverage is not provided by insurance (i.e. a plan that is self-funded in whole or in part). Multiemployer plans and insurers providing coverage (generally fully insured coverage subject to State continuation coverage requirements, versus Federal COBRA) may also claim the tax credit. The credit offsets the employer, multiemployer plan, or insurer’s share of Medicare taxes claimed on the quarterly payroll tax return. In anticipation of receiving the credit to which it is entitled, the taxpayer may (1) reduce the deposits of federal employment taxes, including withheld taxes, that it would otherwise be required to deposit, up to the amount of the anticipated credit, and (2) request an advance of the amount of the anticipated credit that exceeds the federal employment tax deposits available for reduction by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
The gross taxable income of the employer, multiemployer plan, or insurer claiming and receiving the payroll tax credit will be increased in 2021 (the period the credit is being claimed for) by the amount of the credit. No credit is allowed with respect to any amount taken into account for purposes of the employee retention credit or the paid sick and family leave credits.