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COBRA Changes – and Other New Requirements – Impose New Obligations on Plan Sponsors, Insurers, TPAs and PBMs

Labor and Employment John Barlament

A corporation employee benefit package manual.

In March 2021, President Biden signed into law the American Rescue Plan Act of 2021 (“ARPA”). ARPA contains several important employee benefit changes. We note them below, along with a discussion of some other recent employee benefit developments.

COBRA Changes

ARPA makes significant and immediate changes with respect to COBRA. In addition, on April 7, 2021 the Department of Labor (“DOL”) provided eagerly-awaited model forms and some modestly-helpful Frequently Asked Questions (“FAQs”) discussed below. The DOL also provided a link to a new website where it will post future ARPA- and COBRA-related guidance and contains the new FAQs and the model forms.

“Free” COBRA. ARPA provides that, from April 1, 2021 through September 30, 2021, the COBRA premium for an “assistance eligible individual” (“AEI”) must be “treated … as having [been] paid in full” by the AEI. In other words, the subsidy appears to be automatic. An AEI does not need to elect it (although the AEI likely must elect COBRA). It seems that the burden is on a plan sponsor to determine who is an AEI and ensure that an AEI is not charged for COBRA.

Plan sponsors of self-funded group health plans, and fully-insured plans which are subject to federal COBRA, will receive a credit in certain employment taxes as a way of paying for this “free” COBRA. It appears that the insurer, not the employer, will receive the tax credit for certain small, fully-insured health plans. Sponsors of such fully-insured plans should likely discuss the situation with the insurer, to ensure that both parties are coordinated in communications to AEIs (and to verify that the plan sponsor will not need to pay for coverage where the insurer is also receiving the tax credit).

Who is an AEI? A critical, but so far unresolved, question is who, exactly, is an AEI? We do have some general guidance but not many details. ARPA provides that an AEI is an individual who experienced a particular COBRA qualifying event which caused the loss of health plan coverage: either a reduction in hours or a termination of employment – but not if the termination of employment was “voluntary”.

In addition, the AEI cannot, it seems, become newly-eligible for other group health plan coverage or Medicare. Group health plan coverage which will disqualify an individual from AEI status does not include a qualified small employer health reimbursement arrangement (“QSEHRA”), excepted benefits (like most dental or vision coverage) or a health flexible spending account.

Voluntary Versus Involuntary Terminations. ARPA’s use of a “voluntary” standard creates some administrative difficulties. Plan sponsors may not have been tracking, over the past 18 months, which terminations were “voluntary”. So plan sponsors may need to review their records and make this determination. We expect that some cases will be clearly voluntary – e.g., an employee, who was doing well at work, unexpectedly quits. Others will be clearly “not voluntary” (e.g., an employer conducts an unexpected, permanent mass layoff). But many other situations are likely to be more “gray”. For example, an employer may be unhappy with a salesperson, while the salesperson may be unhappy with the employer. They mutually agree to part ways, before either party unilaterally could act (i.e., before the employer fired the employee; before the unhappy employee quit). Is that a “voluntary” termination? Would the terms of any severance or separation agreement help determine this?

While there is no Internal Revenue Service (“IRS”) guidance yet on this topic, in 2009 the IRS addressed a similar COBRA subsidy pursuant in 2009, under the American Recovery and Reinvestment Act (“ARRA”). Under ARRA, the federal government provided a 65% subsidy for COBRA coverage for AEIs. The concept – and even the defined terms – of ARRA are very similar to those used in ARPA. So, presumably, the ARPA guidance will look similar to the ARRA guidance.

Under ARRA, the IRS took a broad interpretation of who qualified as an AEI. In Notice 2009-27, the IRS stated that “involuntary” terminations could include some seemingly “voluntary” situations, including retirements in some situations and even situations which would seem to be temporary (e.g., a lockout by an employer). Until ARPA guidance is issued, it seems like the next-best option for plan sponsors is to review and try to follow the ARRA guidance (along with, of course, the ARPA statute text as the April 7 DOL FAQs do not provide much clarity on the meaning of this term).

This requirement also may pose administrative problems for plan sponsors. The “other coverage” almost certainly includes coverage that is available to a former employee, through the employment of the former employee’s spouse’s. (IRS Notice 2009-27, Q&A 34 takes this exact position under ARRA.) Thus, a plan sponsor, at least in theory, should know about a COBRA-qualified beneficiary’s other health plan coverage (or, at least, any “new” health plan coverage). Practically, plan sponsors often will not know this information. However, ARPA requires the qualified beneficiary – at least in theory – to provide this information to the plan sponsor, and the qualified beneficiary can even face a monetary penalty for failing to provide the information.

An April 7 DOL model form, which should be completed by an AEI, informs the AEI that it needs to tell the plan sponsor of any other coverage. That model form is discussed more below and is found here:

Summary of AEIs and COBRA Qualifying Events. Based on the above, here is a summary of AEIs and COBRA qualifying events.

Eligible “Group Health Plans” for ARPA Subsidy. The term “group health plan” traditionally refers to medical plans. However, it is usually broad enough to apply to other types of plans, such as dental, vision, health reimbursement arrangements and similar plans. Interestingly, the ARPA subsidy specifically does not apply to health flexible spending arrangements (“Health FSAs”). It remains to be seen if future IRS guidance will further clarify that other plans do not receive the ARPA subsidy.

Refunds. Given that ARPA was signed into law in March 2021 and applies starting April 1, 2021, it is very possible that some AEIs will have already paid for April 2021 COBRA coverage. If so, the plan sponsor, multiemployer plan or insurer (i.e., the entity which receives the ARPA subsidy, as noted above) will need to refund the overpayment. The refund must be paid within 60 days. This 60-day time period may be difficult to meet if the plan sponsor, multiemployer plan or insurer is still trying to determine whether the AEI had an “involuntary” termination and whether the individual has become eligible for other group health plan coverage or Medicare.

Is the ARPA Subsidy Program Voluntary? Some employers may view the ARPA subsidy program as too complicated and not a good use of their time. Can employers “opt out” and refuse to provide the “free” COBRA, then simply not claim the tax credit? Probably not. The statute is phrased in a way which makes it seem mandatory. There is no specific ability, under either the statute or the April 7 DOL FAQs, for an employer to “opt out” of the ARPA subsidy.

Alternative Plan Coverage (Optional). A plan sponsor can, if it wishes, allow an AEI to modify the current COBRA coverage and select a different group health plan option. Interestingly, the other option must be something of a “downgrade” – the premium cost for the alternative coverage can be cheaper than the current coverage the AEI has, or it can cost the same. But ARPA seems to provide no subsidy if the new coverage is more costly. Perhaps this is to avoid the “free” coverage from being more costly to the federal government.

The right to obtain this new coverage ends 90 days after the plan sponsor provides a notice of the right. It is unclear if there is a particular date by which the plan sponsor must provide this notice, if the plan sponsor does elect this optional provision.

The alternative coverage cannot consist of excepted benefit plans (e.g., most dental or vision), a Health FSA or a qualified small employer health reimbursement arrangement (“QSEHRA”).

Currently-Subsidized COBRA Premiums. Many plan sponsors provide subsidized COBRA coverage, often on a temporary basis (e.g., as part of a severance agreement, or perhaps, in the multiemployer plan context, by allowing a “dollar bank” or “hours bank”). Would the plan sponsor receive “more” as an ARPA subsidy if it did not subsidize the COBRA and, instead, required the qualified beneficiary to pay the full, unsubsidized COBRA premium? Can the plan sponsor make such a change? Unfortunately, the statute itself and the April 7 DOL FAQs do not completely answer this question. More guidance will be needed.

New Notices. ARPA provides several new notice obligations. Most plan sponsors should consider using the newly-released DOL model forms.

Existing Election Notices. A plan sponsor must update its typical, existing election notice to provide “an additional written notification” of: (1) the availability of the ARPA subsidy; and (2) the option to enroll in different coverage, if the plan sponsor allows that option. The DOL provides a model notice.

Extended Election Period Notice. Plan sponsors must provide a brand-new notice to AEIs who became eligible to elect COBRA prior to April 1, 2021, if the individual is entitled to a special second election period. This notice generally will be sent to AEIs who, as of April 2021, are still in their 18-month COBRA window. This will generally include individuals who had a reduction in hours or involuntary termination on or after October 1, 2019.

The DOL's model notice must be provided to AEIs by May 31, 2021. Individuals will have 60 days to elect this special COBRA election opportunity. An individual generally will have a choice of electing COBRA as of April 1, 2021 (i.e., when the coverage is “free”) or prospectively (e.g., after the individual returns the election form).

In a bit of welcome news, this 60-day time period for individuals to make this election is not extended by the COVID-related relief noted below (i.e., pursuant to EBSA Disaster Notice 2021-01). That is, individuals do not receive “one year plus 60 days” to make this election – only “60 days”.

Plans which are subject to state mini-COBRA laws but not COBRA itself do not need to distribute this notice.

Subsidy Expiration Notice. The ARPA subsidy will expire for a particular AEI either on September 30, 2021 or when the AEI’s COBRA terminates (e.g., if a former employee’s 18-month COBRA period expires on June 30, 2021). ARPA requires plan sponsors to provide a brand-new notice informing AEIs of the expiration of the ARPA subsidy. This expiration notice must be provided in advance of when the ARPA subsidy is expected to expire: at least 15 days in advance, but no more than 45 days in advance. No notice needs to be provided if the individual loses AEI status because of becoming eligible for other group health plan coverage or Medicare.

State Notice. In the April 7 guidance, the DOL also provided a model notice for group health plans which are not subject to COBRA (e.g., a “small employer” plan). Such a plan often will be subject to a state “mini-COBRA” law.

Verifying Status as an AEI. An employer may not know whether a former employee is an AEI. As noted above, the former employee may become eligible for other group health plan coverage, and the employer would be unlikely to know that fact. But the employer likely would want some evidence of the former employee’s AEI status before the employer claims a tax credit.

Likely to address this, the DOL provided a new form, “Request for Treatment as an Assistance Eligible Individual”. Plans should use this form to verify AEI status.

Stop-Loss Insurance Implications. Plan sponsors of self-funded group health plans who also have stop-loss insurance should discuss with their stop-loss carriers the implications of both these new COBRA rules and the extended participant “individual action” rules. There are some possible stop-loss concerns. For example, a stop-loss policy may require that a claim be submitted and/or paid within 12 – 18 months of the medical service being provided. As noted above, in the example involving Sam, it may be over 2 years before a plan even knows if an individual has actually elected and paid for the COBRA. This circumstance should be discussed with stop-loss carriers.

Dependent Care Exclusion

ARPA also increases the income exclusion for employer-provided dependent care assistance programs (“DCAPs”). For 2021, the maximum contributions by employees increase to $10,500 from $5,000 and to $5,250 from $2,500 (depending on filing status). Employers will want to quickly examine this potential benefit to determine if they want to allow this increase.

Single Employer Defined Benefit Changes

ARPA provides funding relief for defined benefit plans by extending the period over which funding shortfalls can be amortized. This change from seven to fifteen years provides plan sponsors with additional time to make up for funding shortfalls and is effective for plan years beginning after December 31, 2021 (January 1, 2022, for calendar-year plans). Plan sponsors may elect to have the 15-year amortization period apply for years prior to the general effective date.

ARPA also provides an extension of the pension funding stabilization percentages which are used to calculate minimum required contributions for single-employer defined benefit plans. ARPA essentially extends the minimum corridor provisions of several prior laws which prescribe the use of higher historical interest rates, higher funding ratios, and which lead to lower minimum required contributions. The provisions are generally effective for plan years beginning after December 31, 2019 (January 1, 2020, for calendar year plans).

Multiemployer Plan Changes

ARPA provides several types of relief to multiemployer plans adversely affected by the pandemic, such as a temporary delay in designating multiemployer plans as endangered, critical, or critical and declining status. It also makes financial assistance available to severely underfunded multiemployer plans. ARPA also increases the Pension Benefit Guaranty Corporation's ("PBGC") premiums for multiemployer plans to $52 per participant (up from $31 per participant) for plan years beginning after December 31, 2030.

Executive Compensation Changes

ARPA expands the list of covered employees subject to the Section 162(m) $1 million deduction limit. Effective for taxable years beginning after December 31, 2026, five additional employees are added to the covered employee list.

New CAA / MHPAEA Guidance Issued

While ARPA has a number of important changes, a different law from a few months ago has even more changes for plan sponsors, insurers, third party administrators (“TPAs”) and pharmacy benefit managers (“PBMs”). The Consolidated Appropriations Act 2021 (“CAA”) has numerous changes that will need to be addressed in 2021 and beyond.

One CAA requirement is that employers and health insurers "perform and document" a "comparative analysis" of the "nonquantitative treatment limitations" ("NQTLs") which apply to mental health or substance use disorder Mental Health Parity & Addiction Equity Act ("MH/SUD") benefits. The analysis must compare how those NQTLs apply to MH / SUD benefits compared to medical / surgical benefits. That type of written analysis was probably a "best practice" which should have been conducted in the past, but the new FAQs clarify that the process is "required".

The DOL, IRS and HHS (the “Agencies”) just issued new FAQs on April 2, 2021 which provide the first guidance on this new requirement. The new FAQs are significant for several reasons, including the following:

1. No Delay -- Enforcement Possible Immediately. Many had hoped that the Agencies would take months or even longer before telling the industry what was required as part of the written NQTL analysis. The theory was that the Agencies were unlikely to ask for the NQTL analysis until they informed the industry what was required to actually be in the NQTL analysis.

Instead, in the FAQs the Agencies seem to be taking a "full steam ahead" approach. They clarify that the Agencies can demand the written NQTL analysis immediately (e.g., today) (see Q&A 1). And even that others (plan enrollees or state regulators) can immediately demand that written analysis (see Q&A 6). The Agencies also strongly suggest that additional guidance on this topic is unlikely in the near future (see Q&A 7).

This new development means that many in the industry will need to immediately focus on this new CAA requirement. Delaying compliance while we wait for additional details does not seem possible.

2. High-Level Overviews Seem Insufficient. Clients -- ranging from employers with self-funded health plans to health insurance issuers, third party administrators ("TPAs") and pharmacy benefit managers ("PBMs") -- have taken different approaches to MHPAEA compliance. Some insurers and TPAs have produced high-level overviews of their MHPAEA compliance efforts.

That type of high-level overview may have been sufficient in the past. However, the new FAQs, especially Q&A 2, strongly suggest that a high-level overview is not sufficient under the CAA. For example, Q&A 2 discusses how nine different "elements" had been "best practices" in the past. Now, though, they are "required".

The required NQTL analysis of the nine elements "must include a robust discussion" of each element. The discussion must be "detailed, written and [include a] reasoned explanation of the specific plan terms and practices at issue". They must identify the "specific" mental health / substance use disorder provisions in the group health plan / health insurance policy. The multiple references to "specific" and "detailed" plan or policy terms cast doubt on the strategy of creating only a "high-level overview". It appears that any type of “high-level overview” must be applied on a very specific basis to a plan sponsor’s particular terms.

The NQTL analysis also must contain the underlying "factors, evidentiary standards or sources" used, along with whether some factors "were given more weight than others". Experts which were used -- along with their qualifications -- must be documented.

This type of specific detail goes beyond what is often seen in the industry. In other words, it seems like a big change. Employers with self-funded group health plans, insurers, TPAs and PBMs need to immediately focus on this CAA requirement. If they already have a detailed, in-depth NQTL analysis, they should make sure that it contains all nine "elements" mentioned in the new FAQ. If they do not have a detailed, in-depth, written NQTL analysis, they should quickly start strategizing how to obtain that analysis.

Next Steps

These new ARPA and CAA changes require plan administrators and others to quickly determine how to comply with an assortment of new changes. The Quarles & Brady Employee Benefits team is monitoring for future developments and will continue to offer our insights as well.

If you have specific questions about aspects of ARPA or CAA compliance, please contact your local Quarles & Brady attorney or: