IRS Issues Further Clarification on COBRA Premium Assistance and Tax Credit
Angela Lawrence, Quality Control Coordinator at Klatzkin, contributed to this post.
Among the many provisions of the American Rescue Plan Act (ARPA), enacted in March 2021, was one regarding the Consolidated Omnibus Budget Reconciliation Act of 1985, more commonly known as COBRA. COBRA is a program that provides certain employees (and their spouses and dependents) the right to temporarily continue group health coverage at the group rate if they have lost it. It generally applies to private-sector employers of 20 or more employees, employee organizations, and government workers at the federal, state, and local levels.
ARPA provides premium assistance in the form of a temporary 100% reduction in COBRA premiums for individuals and families who elect COBRA continuation coverage because of a loss in group health coverage due to a reduction in work hours or involuntary termination of their employment (although it does not apply to workers terminated due to gross misconduct). If the employee is eligible for coverage under another group plan or Medicare, they cannot take advantage of the ARPA premium assistance program. The COBRA election period has also been extended and the premium assistance includes periods of COBRA coverage beginning after April 1, 2021, up to September 30, 2021.
ARPA also allows for a corresponding COBRA tax credit. The tax credit is claimed by the employer or insurer to which the COBRA premiums are payable as a refundable tax credit against its share of the Medicare taxes. The tax credit amount is the amount of premium assistance provided in each quarter against that quarter’s Medicare taxes due or as a refundable overpayment for the tax year.
The IRS first issued guidance on this topic in Notice 2021-31 in May 2021. The 86 questions and answers gave employers and insurers information on applying the provision to provide premium assistance for COBRA benefits and claim the tax credit. It also covered determining an employee’s qualifying involuntary termination or reduction in hours, types of eligible coverage, and the covered assistance period. The IRS provided additional clarification and guidance in Notice 2021-46, issued July 26, 2021, in the form of 11 questions and answers that cover such topics as extended coverage periods for COBRA premium assistance, dental and vision coverage, and clarification on the entity that can claim the tax credit.
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©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date. The content is provided for informational purposes only and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.