American Rescue Plan Act Of 2021: COBRA Subsidies and Increase in Dependent Care Assistance

Cathy Kelaghan, ckelaghan@stall-legal.com
March 17, 2021

The American Rescue Plan Act of 2021 (the “Act”) includes new COBRA continuation coverage requirements, as well as an increase in the income exclusion for employer-provided dependent care assistance programs in 2021.

COBRA Premium Subsidies

The Act’s COBRA provisions intend to make health insurance coverage more accessible and affordable by creating a six-month subsidy period from April 1, 2021 through September 30, 2021 during which “assistance eligible individuals” may qualify for a 100% subsidy for COBRA coverage.  What this means is that qualified individuals would pay zero in monthly COBRA premiums for medical, dental, or vision coverage during the six-month subsidy period and this is a requirement for employer-sponsored group health plans. The employer or insurer may recover the cost of the coverage by claiming a credit against its quarter Medicare payroll tax liability and could claim a refund if the subsidy paid exceeds the taxes due for that quarter.

To qualify and be an “assistance eligible individual,” one must be a qualified beneficiary under the regular COBRA rules because of an involuntary termination of employment or a reduction in hours.  The Act also creates an extended COBRA election period for assistance eligible individuals who previously declined COBRA coverage or whose COBRA coverage was terminated due to nonpayment of premiums if their COBRA coverage period is during the subsidy period.  These individuals can enroll and receive the subsidized coverage for the length of the subsidy period.

The Act also imposes new notice requirements for employer-sponsored group health plans.  For COBRA qualifying events that occur on or after April 1, 2021, the COBRA notice must contain provisions outlining the relief, employers must send out notices to assistance eligible individuals who previously terminated employment or who previously experienced a reduction in hours no later than 60 days after April 2, 20201, and employers must notify individuals who are receiving the premium subsidies of the pending expiration of the subsidy no earlier than forty-five days, and no later than fifteen days before the expiration date.  Luckily, the Departments of Labor, Health and Human Services and Treasury are to provide model notices that satisfy the various requirements.

Increase in Dependent Care Assistance

Another provision in the Act increases for 2021 the income exclusion for employer-provided dependent care assistance programs.  For married individuals who file a join tax return, the amount increases from $5000 to $10,500 and for single individuals or those who are married but file a separate tax return, the amount increases from $2500 to $5250.  Employers who sponsor dependent care flexible spending benefits may retroactively amend their plan documents by the last day of the plan year.  Dependent care assistance benefits remain subject to annual nondiscrimination testing so employers should consider these tests when deciding whether to allow highly compensated employees to increase their dependent care elections.

As always, Stall Legal is available to assist and answer any questions you may have.