American Rescue Plan Act—COBRA subsidies and dependent care contributions

On March 11, 2021, President Biden signed into law the American Rescue Plan (ARP) Act. The COBRA Subsidies and Dependent Care Contribution provisions impact employee benefits:

COBRA subsidies

Temporary COBRA subsidies are available to Assistance Eligible Individuals (AEI). AEI’s are qualified beneficiaries (employees and their enrolled dependents) who have experienced a qualifying event that was either an involuntary termination of employment (other than for gross misconduct) or a reduction of hours and who are not eligible for other group coverage or Medicare. Note: Involuntary termination and reduction of work hours have not been clarified; additional guidance is expected.

AEI’s must also either:

• Become COBRA eligible during the subsidy term;
• Be currently enrolled in COBRA and remain enrolled for some portion of the subsidy term;
• Have failed to elect COBRA, but would be on COBRA during the subsidy term if they had elected; or
• Have elected COBRA and subsequently dropped it, but would be on COBRA during the subsidy term if they had not dropped it.

COBRA subsidy amount and duration

The subsidy amount will be 100% of the total cost of COBRA coverage (employee and covered dependents, including the up-to-2% permitted administrative fees) and is currently available from April 1, 2021 through September 30, 2021. The subsidy may end earlier if the individual’s COBRA continuation period ends earlier than September 30, 2021. It also will end if the individual becomes eligible for other group health plan coverage or Medicare.

COBRA reimbursement

Generally, under the ARP, the entity to whom COBRA premium payments are due is responsible for covering COBRA premium costs up front and then seeking the tax credit from the federal government afterward. The responsible entity depends on the type of plan and how the plan is funded.

Different COBRA coverage options

The ARP permits, but does not require, employers or plans to allow an AEI to enroll in a different, less expensive coverage option than the individual had at the time of their qualifying event.

COBRA notice requirements

Federal agencies are providing model notices, and employers or their COBRA Administrators are required to send updated notices disclosing the availability of the subsidy by May 31, 2021. A notice that the subsidy is expiring must also be provided. Failure to meet the ARP notice requirements is a violation of COBRA’s notice requirements under ERISA, the Internal Revenue Code, and the Public Health Services Act.

Increase to the maximum contribution for dependent care assistance programs

The ARP allows for a temporary increase in dependent care contributions, from $5,000 to $10,500 and from $2,500 to $5,250 in the case of a separate return filed by a married individual.

This increase in allowed contribution is not mandatory, and the employer will need to decide if they want to amend their offering. The temporary increase to the maximum contribution applies only to the taxable year beginning after December 31, 2020 and before January 1, 2022 (i.e., the 2021 calendar year for most plans). Employers will want to review previous nondiscrimination testing results to determine whether an increase in the amount of dependent care assistance will impact that analysis for 2021.

If you are amending your coverage, you will need to incorporate this into your flexible spending plan documents. Your tax-favored account vendor may provide you with amendment language and you may also have to complete additional paperwork. You should contact your tax-favored account vendor with any questions.