Two Key Changes Coming for COBRA and Dependent Care Assistance Plans
Tucked into the American Rescue Plan Act of 2021 (Act) are changes to COBRA administration and notices, and dependent care assistance plans (DCAP) benefit limits and plan documentation. While these changes will help individuals affected by the COVID-19 pandemic, they will also require employer action to effectuate. Employers should determine how these changes affect the administration of these benefits, update plan documents, and provide notices to potentially affected employees and former employees by May 31, 2021.
COBRA Changes
In order to assist former employees and their families in maintaining medical coverage, the Act provides for fully paid and tax-free COBRA coverage for “assistance eligible individuals (AEIs)". An AEI is an individual who is on COBRA coverage due to a reduction in hours or an involuntary termination of employment (other than for gross misconduct) as of April 1, 2021. An AEI who timely elects COBRA will be treated as having paid for coverage during the period starting April 1, 2021 and ending September 30, 2021.
AEIs also include individuals who lost coverage due to a reduction in hours or an involuntary termination of employment but have not elected COBRA or dropped the coverage prior to April 1, 2021 if such coverage would have otherwise been in effect as of April 1, 2021 had they made such an election (this would not include someone who secured other coverage during the interim). Such individuals must be given a new opportunity to elect COBRA with the premium assistance.
An AEI's fully paid COBRA coverage ends on the earlier of (i) the date the AEI’s maximum period of COBRA coverage would otherwise end, (ii) the date the AEI is eligible for Medicare or other group health coverage (except for medical coverage with limited benefit such as plans consisting only of excepted benefits or a health flexible spending arrangement), or (iii) September 30, 2021. AEIs who elect to take premium assistance must notify the group health plan when they are no longer eligible for the premium assistance. Except for cases of reasonable cause, AEIs who fail to notify their group health plans that they no longer qualify for the assistance are subject to a penalty of $250 or, if greater, 110% of the premiums paid for the AEI after the date the AEI was no longer eligible for the premium assistance.
If the plan sponsor allows other similarly situated employees to choose a different medical plan as part of their COBRA coverage, then an AEI may choose medical coverage different than the coverage the AEI was enrolled in prior to the involuntary termination/reduction in hours, so long as the different medical coverage does not cost more. The AEI must make this choice before the 90th day following the AEIs notice of this provision.
Plan sponsors must provide AEIs notice of these new rules. The Act allows for notice by either amending current COBRA notices or by adding a separate document to the current forms. The notice must contain information on the availability of the premium assistance, the ability to choose a different coverage option (if permitted), the forms needed to establish eligibility for the assistance, contact information for the person who can answer the AEIs questions, and an explanation of the penalties involved for failure to abide by the AEIs obligations for receiving premium assistance. The amended COBRA notices must be provided starting on April 1. In addition, AEIs who are eligible for the extended election period must be given notice of such no later than May 31, 2021. On April 7, the DOL issued model notices for employer use, see https://www.dol.gov/agencies/ebsa/laws-and-regulations/laws/cobra/premium-subsidy.
Plan sponsors must also notify AEIs when the premium assistance is set to expire. These notices must be sent between 45 and 15 days prior to the end of the premium assistance and should include the clearly identifiable date the premium assistance expires and how the AEI can continue medical coverage through COBRA (without the assistance) or through a group health plan. This notice does not need to be sent to AEIs whose premium assistance is ending because the AEI became eligible under another group health plan. The DOL is required to provide a model notice by May 15, 2021. The DOL’s April 7th guidance also contains a model expiration notice.
Funds to pay for premiums under the Act are created by refundable Medicare payroll tax credits. These credits are claimable by the employer and by the plan if it is a multi- employer plan. If the credits exceed the quarterly Medicare payroll tax, the excess is treated as an overpayment and is refundable according to the Code’s overpayment rules. In addition, if an AEI mistakenly pays part or all of the premium during the assistance period, the entity claiming the credit shall reimburse the employee.
DCAP Changes
Prior to the pandemic, the limit on employee pre-tax contributions into a DCAP, as set by Code Section 129, was $5,000 (if married filing jointly) or $2,500 (if married but filing separately). For taxable years starting after December 31, 2020, if an employer elects, these limits are increased to $10,500 (up from $5,000) and $5,250 (up from $2,500). The increased limits are applicable only to the 2021 tax year.
An employer choosing to increase the DCAP limits must amend their Cafeteria and/or DCAP by the last day of the 2021 plan year. The amendment can be made retroactive to the start of the 2021 tax year so long as the plan has been operated consistent with the terms of the amendment since the start of the 2021 tax year.
Required Actions
Plan sponsors and employers have some quick decisions to make and actions to take, particularly with respect to the changes to COBRA. Initial actions should include reviewing COBRA census and elections to determine which COBRA beneficiaries qualify as AEIs and making sure those individuals receive proper notice of the premium assistance and if elected, their individual notice obligations to the group health plan. Employers should also start drafting the notices which will inform AEIs of the termination of their premium assistance rights under the Act.
As for dependent care accounts, employers should decide whether to amend the plan to allow for the increased pre-tax contributions. While notice to employees is not required under the Act, if an employer elects to include the increased limits for 2021, informing DCAP participants of the increase is advisable.