Publish Date

Mar 23, 2021

American Rescue Plan Act Provides COBRA and Dependent Care Relief

A&M Tax Advisor Weekly

On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 (“Rescue Plan”). The Rescue Plan contains numerous provisions to help alleviate the impact of the COVID-19 pandemic on individuals and businesses. This article highlights a few provisions affecting employer-provided benefits, which may be of interest to individuals and employers alike, including:

COBRA Relief to Address Loss of Coverage
Increased Limit for Dependent Care Assistance
COBRA Relief to Address Loss of Coverage

The Problem

The pandemic has had a substantial impact on the ability of certain individuals to maintain medical coverage. The typical scenario involves a layoff or reduction in hours that results in loss of group health plan coverage. Throughout the pandemic, these situations have been widespread.

In many cases, the individual losing coverage in this manner would have insufficient alternative income to purchase continuation coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”). Because COBRA coverage is not employer-subsidized, the cost of such insurance is significantly higher than many individuals can afford, especially when their eligibility for COBRA was caused by a loss of coverage due to layoff or reduction in hours.

The Solution

The Rescue Plan contains provisions intended to restore coverage for individuals who found themselves in this situation. Specifically, it provides a 100% subsidy for COBRA premiums for periods of coverage beginning April 1, 2021 and ending September 30, 2021. The Rescue Plan also allows individuals who lost coverage due to a layoff or reduction in hours, but who did not elect or maintain their COBRA coverage, to re-enroll for coverage in their employer’s plan under COBRA, so long as they would still be eligible for continued coverage had they elected it. The subsidy provided under the Rescue Plan ends on September 30, 2021.

A&M Insight: Employers are required to provide notices to all individuals in this category, explaining the renewed election period. Eligible individuals have 60 days following receipt of the notice to elect COBRA, with coverage effective as of the first period of coverage commencing on or after April 1, 2021.

Duration of Relief

Coverage may not extend beyond the maximum coverage period that would have applied based on the original qualifying event—in most cases, this would be 18 months following loss of coverage due to layoff. In connection with the offer of coverage, employers must also permit eligible individuals to elect different coverage than the coverage for which the individual was enrolled at the time coverage was lost, provided the alternative coverage has a premium less than the premium applicable to the coverage option in which they were previously enrolled.

A&M Insight: The effect of these provisions of the Rescue Plan is that individuals who previously lost coverage due to layoff may now receive COBRA coverage at no cost for the period April 1, 2021 through September 30, 2021.

Employer Reimbursement

To reimburse employers for the cost of subsidized coverage provided under this provision, the Rescue Plan provides for a refundable tax credit against the employer’s Medicare payroll tax obligations, equal to the aggregate COBRA premium amounts not paid by the individuals receiving the subsidy.

A&M Insight: Employers should familiarize themselves of these new provisions and ensure that whoever administers their COBRA coverage is compliant, as employers may be subject to a penalty of $250 per violation for failure to provide the required notices.

Increased Limit for Dependent Care Assistance

In addition to the COBRA subsidy provisions, the Rescue Plan also increased the limits applicable to dependent care assistance provided under section 129 of the Internal Revenue Code. Under section 129, employers may make dependent care available to employees on a tax-free basis, up to specified limits. Typically, dependent care benefits of this type are funded through pre-tax employee payroll deductions under a cafeteria plan. However, it is important to remember that the annual limit applies regardless of whether the benefits are funded by the employee or the employer.

Under prior law, the annual limit applicable to excludable dependent care expenses was $5,000 (or $2,500 for married individuals filing separately). For 2021 only, this limit is increased to $10,500 (or $5,250 for individuals who are married filing separately). This is a welcome change for those who have expanded needs for childcare due to the impact of the pandemic.

Although this change may be implemented immediately, employers are required to adopt amendments to their dependent care and cafeteria plans that are retroactive to the date of implementation. The deadline for adopting amendments to plans for 2021 is December 31, 2021. Thus, employers who allow their employees to take advantage of this increase should ensure compliance by amending their dependent care and cafeteria plans in a timely manner.

A&M Tax Says

The Rescue Plan provides welcome relief for employers and employees impacted by the COVID-19 pandemic, adding new and expanding existing programs to minimize the adverse effects of the pandemic. However, employers should ensure that they stay apprised of emerging compliance issues with respect to the new and expanded programs. If you have questions or need assistance, your A&M professional is here to help.