Steps Employers Must Take as Result of New COBRA Subsidy

29 March 2021 Blog
Authors: Leigh C. Riley Cristina Portela Solomon
Published To: Labor & Employment Law Perspectives Coronavirus Resource Center:Back to Business

As we recently wrote, the American Rescue Plan Act of 2021 (ARPA) provides up to six months of free COBRA coverage, effective April 1, 2021, for certain “assistance eligible individuals.”

But what about employers? What obligations, if any, do employers have to take into consideration as a result of eligible involuntarily terminated employees no longer having to pay for their own COBRA continuation premiums through September 30, 2021?

The most important issues for employers to address in connection with this change in the law are as follows:

  1. Reviewing and modifying the language of existing severance agreements or policies with respect to the payment of COBRA premiums;
  2. For involuntary terminations that occur during the six-month period from April 1 through September 30, and earlier for employees terminated during the prior 18 months, (the Covered Period), understanding and identifying who is eligible for the COBRA benefit and who is not; and
  3. Complying with the new procedures and deadlines regarding the issuance of COBRA notices in a variety of different scenarios.

Severance Agreements or Policies

First, an employer should eliminate the current language in its severance agreements or policies providing that employee benefits paid by the employer end upon termination of employment, but that employees may continue COBRA coverage at their own expense.

This is no longer the case.

Under the ARPA, during the free COBRA period, employees who are involuntary terminated can continue coverage without paying premiums. Employers now pay the full cost of the premiums and are reimbursed through payroll tax credits. Therefore, the language of an employer’s severance agreements or policies should be modified accordingly, i.e., COBRA will be provided without charge to the terminated employee through September 30, 2021, to the extent required by the ARPA.

After that period, employers should describe the treatment of COBRA the employer chooses to provide for the terminated employee. Also, keep in mind that if you are an employer that has typically paid a severance benefit of X months of base salary and Y months of COBRA premiums, you may need to consider an alternative benefit to provide for your involuntarily terminated employees.

Who is Eligible

The six-month free COBRA benefit is available only to employees who become COBRA eligible (or became COBRA eligible generally within the last 18 months) due to

involuntary termination OR a reduction in hours. The benefit ends when an employee qualifies for Medicare or another group health plan. Therefore, it is important for an employer to understand that it may still want to offer the benefit to an employee who is eligible under Medicare, for example, because that employee would not be eligible for the ARPA benefit.

New Notices and Deadlines

Finally, the ARPA also introduces a number of new notices that employers will be required to give and employers should be aware that the Department of Labor will issue updated COBRA notices by April 10, at which time employers are expected to begin using these notices immediately.

Employers will also be required to review their records of previous terminations, so they can send notices to employees who were involuntarily terminated during the last 18 months and are eligible for the benefit, but who did not choose COBRA coverage at that time. Employers must send this notice by May 31.

Employers must also send notices 15 to 45 days before an employee’s free COBRA coverage is about to expire.

Key Takeaway

While the requirements for employers as a result of these new COBRA subsidy benefits are fairly clear and straightforward, old habits die hard.

So employers need to be aware of and comply with the three principal changes under the ARPA in order to be in compliance with the new law. Stay tuned to further developments in this area.

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