IRS COBRA Subsidy Guidance Marked by Unexpected Changes

The guidance, including some unexpected changes, focuses on subsidy eligibility during extended coverage periods, dental and vision coverage, claiming the tax credit and state continuation coverage.

August 20, 2021

Produced in partnership with Groom Law Group, Chartered

On July 26, 2021, the IRS released Notice 2021-46 (the “Notice”), which provided new guidance on the 100% COBRA premium subsidies (the “Subsidies”) and the related tax credit under the American Rescue Plan Act of 2021 (March 11, 2021) (“ARP”). The Notice supplemented previous guidance provided under Notice 2021-31 and addressed additional issues. (See the Business Group on Health’s prior Policy & Advocacy article: Additional COBRA Subsidy Guidance and FAQs Released.)

The Notice contained some unexpected surprises, which is unfortunate because employers and insurers spent the past few months implementing the Subsidy in good faith based on the statute and guidance in Notice 2021-31. As a result, employers and insurers may have had to scramble to make amendments and/or last-minute changes to their Form 941 filings, which were due on July 31 – only 5 days after the Notice was issued.

After reviewing the Notice, employers and insurers should confirm their processes and eligibility for the tax credit with their tax/legal counsel. The Notice may cause certain employers to pursue the credit when they otherwise thought their insurer or another stakeholder would do so – or vice-versa. In some cases, employers and plans may not have had enough time to make necessary changes or coordinate with other parties, so they may need to amend their filed Form 941s to align with the new requirements.

The Notice provided guidance relating to four topics in the form of 11 Q&As. Below is a summary of the key guidance in each of the four topics.

Eligibility for Subsidy During Extended Coverage Periods

The Notice stated, for the first time, that if an assistance eligible individual’s (“AEI’s”) original 18-month COBRA continuation coverage expired, but the AEI remained entitled to elect extended continuation coverage, the AEI could still qualify for the subsidy for the extended period of coverage if it falls between April 1, 2021, and September 30, 2021. An AEI might be eligible for extended continuation coverage due to a disability determination, second qualifying event, or an extension under state mini-COBRA. Importantly, the Notice illustrated that the otherwise applicable notice deadlines for the individual to elect extended COBRA continuation coverage are also subject to and extended under prior emergency relief for up to 1 year (even if such election had not yet been made when the Notice issued). This appears to be a change from prior guidance, and employers now may need to look back more than 18 months for information about the extended second election opportunity. (See the Business Group on Health’s prior Policy & Advocacy article: COBRA, ERISA, and Other Plan Deadlines: Guidance on COVID-19.)

Dental and Vision Coverage

The Notice clarified that if an AEI previously elected COBRA continuation coverage for dental or vision-only coverage, subsidy eligibility ends when the AEI becomes eligible for any other disqualifying group health plan or Medicare, even if the disqualifying coverage does not include all of the benefits provided by the previously elected COBRA continuation coverage. For example, eligibility for Medicare would end eligibility for the subsidy for previously elected dental or vision-only COBRA continuation coverage, even though Medicare may not offer dental or vision coverage.

Claiming the Tax Credit

The Notice provided further technical guidance on claiming the tax credit in connection with the subsidy, the most notable of which is summarized below:

  • For purposes of determining the common law employer maintaining the plan (and thus the entity generally eligible to claim the tax credit as described in Notice 2021-31, Q/A 72(2), subject to certain exceptions), the “common law employer” is the common law employer for AEIs whose hours have been reduced or the former common law employer for those individuals who have been involuntarily terminated.
  • If a group health plan (other than a multiemployer plan) subject to Federal COBRA covers employees of two or more members of a controlled group, each common law employer that is a member of the controlled group is a premium payee entitled to claim the tax credit for its respective employees or former employees (subject to certain exceptions regarding third-party payers and business reorganizations).
  • If an employer offers a fully insured plan that is not subject to federal COBRA through a Small Business Health Options Program (SHOP), the common law employer is the premium payee entitled to claim the tax credit if the following four conditions are satisfied:
    • The employer participates in a SHOP exchange that offers multiple insurance choices to employees enrolled in the same small group health plan;
    • The SHOP exchange provides the employer with a single premium invoice, aggregates all premium payments and then allocates and pays the applicable premium amounts to insurers;
    • The employer has a contractual obligation with the SHOP exchange to pay all applicable COBRA premiums to the SHOP Exchange; and
    • The employer would have received the state mini-COBRA premiums directly from the AEIs were it not for the subsidy.

Assuming these four conditions are satisfied, then the insurer of a plan that is not subject to federal COBRA is not treated as the premium payee, and therefore is not eligible to claim the tax credit. The Notice clarified, however, that in all other cases of a fully insured plan solely subject to State mini-COBRA, the insurer (and not the common law employer) is the premium payee entitled to claim the tax credit.

State Continuation Coverage

  • The Notice confirmed that state continuation coverage provides comparable coverage to COBRA continuation coverage (and thus permits AEIs to access the subsidy) even if the state program only covers a subset of state residents (for example, only employees of a state or local government).
  • The Notice stated that if a plan is subject to both state-mandated continuation coverage and federal COBRA, the common law employer is the “premium payee” eligible to claim the tax credit (and not the insurer). Even if the state-mandated continuation coverage requires the AEI to pay premiums directly to the insurer after the period of federal COBRA ends, the insurer is still not entitled to claim the COBRA premium assistance.

We provide this material for informational purposes only; it is not a substitute for legal advice.

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More in Policy & Advocacy


  1. Eligibility for Subsidy During Extended Coverage Periods
  2. Dental and Vision Coverage
  3. Claiming the Tax Credit
  4. State Continuation Coverage