Additional COBRA Subsidy Guidance and FAQs Released

On May 18, 2021, the Internal Revenue Service (IRS) issued Notice 2021-31 to assist plan sponsors with implementing the 6-month, 100% COBRA premium subsidy.

May 21, 2021

On May 18, 2021, the Internal Revenue Service (IRS) issued Notice 2021-31 to assist plan sponsors with implementing the 6-month, 100% COBRA premium subsidy, included in the American Rescue Plan Act of 2021 (ARPA). Background information and key details of the guidance are summarized below.


ARPA provides a 100% COBRA premium subsidy from April 1, 2021 to September 30, 2021 to certain individuals and their families (“assistance eligible individual” or “AEI”; see below) who elect COBRA continuation coverage.

ARPA defines AEI as any individual who:

  • 1 | Is a qualified beneficiary due to a loss of coverage from a reduction in hours or involuntary termination;
  • 2 | Is eligible for COBRA continuation coverage for some or all of the period beginning on April 1, 2021, through September 30, 2021; and
  • 3 | Elects the COBRA continuation coverage.

Individuals who are terminated for gross misconduct are not eligible.

AEIs also include spouse or dependent child(ren) of the qualified beneficiary, but not non-spouse domestic partners. Individuals cease to be AEIs if they become eligible for any other group health plan or for Medicare. Any other group health plan does not include health FSAs (flexible spending accounts), HRAs (health reimbursement arrangements) funded through salary reduction amounts and excepted benefits. Individuals receiving premium assistance are required to notify their former employer if they become eligible for another source of coverage. Failing to do so may result in IRS penalties for the individual.

For more background information, see our March public policy webinar.

Key FAQs

The guidance’s FAQs section covers subsidy eligibility, reduction in hours/involuntary termination, eligible coverage for premium assistance, beginning/end of premium assistance, calculating the credit amount and claiming the credit. A summary of key answers is listed below.

Subsidy Eligibility

  • Employers may require attestations to assist with determining eligibility and may rely on them for back-end substantiation with the IRS, unless employers have actual knowledge that the individual’s attestation is incorrect. The IRS recommends keeping attestations or other relevant information for substantiation.
  • Other COBRA qualifying events, such as a divorce, do not make an individual eligible for a premium subsidy.
  • COBRA premium assistance is available until the individual is eligible to enroll in another group health plan or Medicare, including during an applicable benefit waiting period.
  • AEIs who are currently enrolled in exchange coverage can be eligible for COBRA subsidies, but if they enroll in COBRA, they lose eligibility for exchange tax credits.
  • Retiree health coverage (that is not COBRA continuation coverage) offered through the same group health plan has no effect on an individual’s eligibility for COBRA subsidies. If the retiree coverage is offered via a separate group health plan, an individual would not be eligible for COBRA subsidies.
  • Owing COBRA premium payments for which the due date has been extended does not make an individual ineligible for COBRA premium assistance.

Reduction in Hours/Involuntary Termination

  • The IRS considers furloughs and lawful strikes as a reduction in hours if there is a reasonable expectation for an individual to return to work.
  • Involuntary terminations generally constitute “severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services.” The determination of whether a termination is involuntary is based on the facts and circumstances. The IRS provides examples of involuntary terminations, including:
    • An employer’s action to end an individual’s employment while the individual is absent from work due to illness or disability, if before the action there was a reasonable expectation that the employee will return to work after the illness or disability has subsided.
    • Retirement generally is not an involuntary termination but under certain circumstances it may be. For example, a forced retirement where an individual was willing and able to continue employment and the employee had knowledge that he/she would be terminated absent the retirement.
    • For cause, as long as the termination was not for gross misconduct.
    • Resignation due to a change in geographic location of employment for the employee.
    • So-called “window arrangements,” where employees with impending terminations of employment are offered a severance arrangement to terminate employment.
    • If an employee terminates employment due an employer’s actions (or inactions) to address workplace safety and those resulted in a material negative change in the employment relationship similar to a constructive discharge (e.g., intolerable working conditions).

Eligible Coverage for Premium Assistance

Premium assistance is available for:

  • Any group health plan, except a health FSA under §106(c) offered under a §125 cafeteria plan. This includes dental- or vision-only coverage.
  • Retiree coverage if it is offered under the same group health plan as the coverage made available to similarly situated active employees, even if premiums are more than those for active employees.
  • HRAs paid by employer contributions and not employee elections.
  • HRAs integrated with individual health plans and others.

Beginning/End of Premium Assistance

  • AEIs are first eligible to receive premium assistance as of the first applicable period of coverage beginning on or after April 1, 2021.
  • COBRA premium assistance applies until the earliest of (1) the first date the AEI becomes eligible for other group health plan coverage (with certain exceptions) or Medicare coverage; (2) the date the individual ceases to be eligible for COBRA continuation coverage; or (3) the end of the last period of coverage beginning on or before September 30, 2021.

Subsidy Calculation

  • If an employer does not subsidize COBRA premium costs for similarly situated qualified beneficiaries who are not AEIs, the subsidy is equal to the premiums not paid by AEIs for COBRA continuation coverage. Employer subsidization of COBRA premiums reduces the size of the credit.
  • The subsidy includes administrative costs to administer COBRA (generally 102% of the applicable premium).
  • Employers not charging the maximum premium for COBRA continuation coverage may increase the premiums if they do so for similarly situated covered employees and qualified beneficiaries.

Claiming the Credit

  • Employers and partners (e.g., reporting agent, payroll service provider, professional employer organization (PEO), certified professional employer organization (CPEO), or § 3504 agent) acting on the behalf of the employer:
    • Can claim the credit by reporting the credit (both the nonrefundable and refundable portions of the credit, as applicable) and the number of individuals COBRA subsidies on its federal employment tax return(s), Form 941.
    • May 1) reduce deposits of federal employment taxes that it would otherwise be required to deposit and 2) request an advance of the amount of the anticipated credit that exceeds federal tax deposits by using Form 7200.
  • Deposits may not be reduced, and advances may not be requested for periods of coverage that have not already begun.
  • Employers are still eligible for a COBRA premium subsidy when an AEI becomes ineligible and fails to notify their former employer unless the employer knew of the individual’s ineligibility. As soon as the employer learns that the AEI is no longer eligible, the employer is no longer eligible for the credit.


If you have questions, comments, or concerns about these or other regulatory and compliance issues, please contact us.

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

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