The IRS, with concurrence from the Departments of Labor and Health and Human Services, recently published Notice 2021-58 (opens a new window), which clarifies certain COBRA aspects of both last year’s outbreak period guidance and this year’s COBRA subsidy program under the American Rescue Plan Act (ARPA). Among other items, the IRS has imposed some reasonable boundaries on the time a COBRA qualified beneficiary has to elect and pay for COBRA under the outbreak period guidance.
Lockton comment: We have discussed the outbreak period guidance and ARPA COBRA subsidy rules over the last year and you can review them here (opens a new window), here (opens a new window), here (opens a new window), here (opens a new window), and here (opens a new window). Hopefully, the need for further emergency measures will soon be behind us.
The guidance makes clear that any disregarded periods for making the initial COBRA election and the initial premium payment run concurrently.
If the COBRA qualified beneficiary makes the COBRA election within 60 days after the COBRA election notice is provided (the traditional timeline), the initial premium payment deadline under the outbreak period rules is one year plus 45 days after the qualified beneficiary’s election.
If the COBRA qualified beneficiary makes the COBRA election more than 60 days after the COBRA election notice is provided (pursuant to the outbreak period rules, that time period can be extended for a full year), the initial premium payment deadline under the outbreak period rules is one year plus 105 days after the COBRA notice is provided. These qualified beneficiaries will have until Nov. 1, 2021, to make their initial payment even if it is outside the stated time period (as long as it is within one year and 45 days of their COBRA election).
Regulators confirmed how the deferred COBRA election and premium payment rules under the outbreak period guidance were affected when the qualified beneficiary was also eligible for ARPA COBRA premium subsidies.
Outbreak period relief
In late April last year (and again in February this year), the Department of Labor, due to the pandemic outbreak, issued guidance under ERISA that paused the running of certain time periods in which a plan enrollee had to do something. The pause (which would last for 12 months or, if sooner, the 60th day following the rescission of the presidential national health emergency) provides the enrollee additional time to take action with respect to claims and appeals, HIPAA special enrollments, and the following COBRA actions:
The 60-day election period for COBRA continuation coverage
The dates for making COBRA premium payments
The date for individuals to notify the plan of a qualifying event or determination of disability to trigger a COBRA notice from the employer plan
The outbreak period guidance was originally unclear about how all the disregarded time frames run and whether each action – such as each monthly COBRA payment – is a separate deadline that is extended for up to 12 months. If so, theoretically the extensions could go on for years.
Fortunately, the recent guidance clarifies that was not the intent.
The notice clarifies that the disregarded period for an individual to elect COBRA continuation coverage and the disregarded periods for the individual to make initial and subsequent COBRA premium payments generally run concurrently.
With respect to the election of COBRA coverage, individuals must make the initial COBRA election within one year and 60 days after the individual’s receipt of the COBRA election notice, or within 60 days after the end of the outbreak period, if earlier.
With respect to COBRA premium payment deadlines, how the new guidance plays out depends on when the COBRA coverage election is made.
If an individual elected COBRA continuation coverage outside of the typical initial 60-day COBRA election time frame (a deferred election that is permissible under the outbreak period guidance), that individual generally will have one year and 105 days after the date the COBRA notice was provided to make the initial COBRA premium payment (the general 60-day election period plus a 45-day period to make the first COBRA premium payment, plus the up-to-one-year pause to these periods). Thus, regulators say the plan does not have to allow 45 days to make the initial premium from the time the COBRA enrollee actually makes the COBRA coverage election (unlike the way it works generally in the absence of the extension).
On the other hand, if an individual elected COBRA continuation coverage within the typical initial 60-day COBRA election timeframe, that individual will have one year and 45 days after the date of the COBRA election to make the initial COBRA premium payment.
Each subsequent premium payment is due within one year from the original due date plus the normal 30-day grace period, not – as some had surmised – one year after the due date of the immediately preceding premium payment (an interpretation that theoretically could have strung the stream of COBRA premium payments out for many years).
Notwithstanding these adjusted premium payment deadlines, regulators acknowledge the confusion their earlier guidance created, and thus the new guidance provides that anyone who made their COBRA election outside the typical 60-day window following the plan’s provision of the COBRA election notice and whose initial premium payment deadline would – under the new guidance – fall prior to Nov. 1, 2021, does not have to make their first COBRA premium payment before Nov.1, 2021, provided Nov. 1 is within one year and 45 days after the date they made their COBRA election (but this additional flexibility does not apply to subsequent premium payments).
Lockton comment: We wish plans and their COBRA administrators good luck in attempting to administer these initial premium payment due dates under the new guidance. At a minimum, it would seem to be a best practice for COBRA administrators to notify any COBRA qualified beneficiaries, who will be affected by these new rules regarding premium payment deadlines, of those deadlines.
Interaction with ARPA and premium subsidies
To make sure employers stay confused, Congress passed a provision in ARPA that provides for a second bite at COBRA (opens a new window) for certain COBRA qualified beneficiaries (assuming the individual was still within the potential federal COBRA or state mini-COBRA coverage periods), plus a 100% COBRA premium subsidy for payments due, generally speaking, for the period between April 1, 2021, and Sept. 30, 2021.
However, the time to make various elections under the ARPA subsidy rules was not deferred or suspended pursuant to the outbreak period guidance.
So how did the outbreak period guidance interact with the ARPA rules? The affected ARPA subsidy-eligible individual could elect COBRA under ARPA retroactive to April 1, 2021, and obtain the subsidy for the period from April 1, 2021. through, typically, Sept. 30, 2021, or the end of the original COBRA coverage period if sooner. If the ARPA subsidy-eligible individuals have additional time left in the COBRA coverage period after Sept. 30, 2021, they can continue to apply the extended payment deadlines under the outbreak period guidance to such later premium payments, until the end of the COBRA coverage period or the end of the outbreak period.
Yes, we have examples
The guidance offered some examples which do help to illustrate how the agencies view the way the rules should work. These examples assume the outbreak period has not ended.
1. COBRA election made more than 60 days after receipt of COBRA election notice, under the outbreak period guidance
Rory had a qualifying event on Aug. 1, 2020 and received a timely COBRA notice from the employer plan. Rory elected COBRA on Feb. 1, 2021 – after what would have been her typical 60-day election window – retroactive to Aug. 1, 2020. Rory will be required to make her initial COBRA payment no later than Nov. 14, 2021 (one year plus 105 days after Aug. 1, 2020). That payment would need to include the monthly premium payments for August through October 2020. The November 2020 payment would be due no later than Dec. 1, 2021 (one year plus 30 days after Nov. 1, 2020) with subsequent payments for each month of coverage due monthly thereafter.
If Rory fails to make any subsequent premium payments within the outbreak period guidance relief (one year plus 30 days from the original due date), the plan will not be obligated to pay for otherwise covered services that were provided in the months for which the COBRA premiums were not timely paid.
What if Rory’s qualifying event had occurred earlier, and the plan provided her COBRA election notice on April 1, 2020, and she elected COBRA after her typical 60-day COBRA election window but within one year and 60 days after the plan provided the election notice (for example, by Oct. 1, 2020)? Under the new guidance, her initial premium would have been due before Nov. 1, 2021 (in this case July 14, 2021, one year plus 105 days after the plan’s provision of the COBRA notice). But the new guidelines make it clear that her initial premium payment is not due until Nov. 1, 2021, because Nov. 1, 2021, is within one year plus 45 days after her COBRA election.
2. COBRA election made within 60 days after the plan’s provision of the COBRA election notice
Scott had a qualifying event and the plan sent his election notice on Oct. 1, 2020. He elects COBRA on Oct. 15, 2020, with coverage retroactive to Oct. 1. Scott timely elected COBRA (even without the outbreak period guidance) but does not make his initial COBRA premium payment by the typical deadline of 45 days after his COBRA election. He has until Nov. 29, 2021, (one year and 45 days after his COBRA election) to make his initial COBRA premium payment. The payment for November 2020 (and all subsequent monthly payments) is due one year plus 30 days after the premium would have otherwise been due (e.g., Dec. 1, 2021, for the premium due for the month of November 2020).
Examples demonstrating the interaction of the outbreak period guidance with the ARPA premium subsidy
Because the ARPA subsidy rules provided a second opportunity to obtain COBRA coverage (but not necessarily retroactively to the original COBRA qualifying event), they caused some additional complexity and ironic results. The subsidy, like the outbreak period guidance, did not extend the maximum COBRA coverage period, and all the other rules described above still apply unless the individual made a timely COBRA election under the subsidy rules to grab a slice of the ARPA subsidies.
1. Retroactive COBRA continuation coverage under the outbreak period guidance, for a potential subsidy-eligible individual under ARPA
Suzanne had an involuntary termination of employment on March 1, 2021 (and the plan sent her COBRA election notice the same day). She was subsidy-eligible under ARPA, and therefore received the notice regarding the ARPA extended COBRA election period on May 31, 2021. She elected COBRA continuation coverage with ARPA COBRA subsidies beginning April 1, 2021 but chose to not elect COBRA continuation coverage retroactive to March 1, 2021.
Because Suzanne elected the ARPA subsidy-eligible COBRA coverage but did not timely elect the retroactive coverage to March 1, 2021, she is no longer entitled to the retroactive coverage for the month of March 1, 2021. In short, her election of subsidy-eligible COBRA trumped the outbreak period rules, and she was forced to choose then whether to take COBRA coverage retroactive for periods prior to April 2021. If she had not elected subsidy-eligible COBRA, the outbreak period rules would not have been trumped, and she would have had until April 30, 2022 (one year and 60 days after March 1, 2021) to elect the retroactive COBRA coverage.
Lockton comment: Yes, it seems ironic that by taking the ARPA subsidy and not electing retroactive COBRA for periods prior to April 2021 she lost the right to do that later. In an additional twist, however, she can continue her COBRA coverage after the ARPA subsidies expired, until the end of the original 18-month COBRA period which started March 1, 2021.
2. Payment for retroactive COBRA continuation coverage under the outbreak period guidance by a subsidy-eligible individual under ARPA
Ethan had an involuntary termination of employment on Nov. 1, 2020, and the plan provided the COBRA election notice on the same date. He did not elect COBRA coverage, deferring that election pursuant to the outbreak period guidance. On April 30, 2021, however, he received the notice of the ARPA extended election period and on May 31, 2021, he elected subsidized ARPA coverage beginning April 1, 2021, and – unlike Suzanne – retroactive COBRA coverage back to the date of his qualifying event, to wit, Nov. 1, 2020.
In order for Ethan to retain that retroactive COBRA coverage to Nov. 1, 2020, under the recent guidance, he has until Feb. 14, 2022, to make the initial COBRA premium payment (one year and 105 days after Nov. 1, 2020), and that payment would include premium payments for November 2020 through January 2021. The monthly COBRA premium for February 2021 would be due by March 3, 2022 (one year and 30 days after Feb. 1, 2021), and the March 2021 premium payment would be due by March 31, 2022 (one year and 30 days after March 1, 2021). Premium payments would be due every month after that for the months Ethan is eligible for COBRA continuation coverage, except that no payments would be due for the periods beginning on or after April 1, 2021, through Sept. 30, 2021, due to the ARPA subsidy.
If Ethan, when making his first retroactive premium payment by Feb. 14, 2022, pays for some but not all of the months for the period between Nov. 1, 2020, and January 2021, he has no COBRA coverage for the unpaid months for which premium was due by Feb. 14, 2022, but was still entitled to ARPA-subsidized COBRA coverage for the period from April 1, 2021 through Sept. 30, 2021.
Lockton comment: Note that Ethan would have to start making payments again for coverage periods after September 2021 if he wanted to have the COBRA coverage continue after September, but the payments would not be due until one year and 30 days after their respective due dates (e.g., by Oct. 31, 2022, for the October 2021 coverage period). Yes, this second bite of the apple adds additional selection risk to the plan as Ethan would not have to make the payments until after he knew whether he had incurred any expenses for those months.
The outbreak period rules, when issued in April 2020, were promulgated quickly and in an ad hoc manner and thus are very confusing and, in many ways, counterintuitive. The recent guidance provided some needed clarity, around COBRA premium payment deadlines. Nevertheless, since they are so different than the traditional rules, we wonder how many COBRA administrators will be able to administer these deferred premium payment deadlines accurately, particularly where there is interplay between the outbreak period guidance and the ARPA subsidies. It will take a very sophisticated, as well as unlucky (i.e., high-cost claimant), individual to understand the opportunity to select against the healthcare plan. While under the new guidance it seems unlikely that anyone can plan to use these complex rules to their advantage, the anti-selection risk to the plans is real.
Not legal advice: Nothing in this alert should be construed as legal advice. Lockton may not be considered your legal counsel, and communications with Lockton's Compliance Services group are not privileged under the attorney-client privilege.