What Is the COBRA Subsidy and How Does It Work?

The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law providing temporary continuation of group health coverage after certain life events. While COBRA requires individuals to pay the full premium, a significant initiative was the COBRA subsidy, a temporary measure introduced under the American Rescue Plan Act (ARPA) of 2021. This program assisted eligible individuals with health insurance premiums.

Understanding the COBRA Subsidy Program

The COBRA subsidy was a temporary program covering 100% of COBRA premiums for eligible individuals. It was active from April 1, 2021, through September 30, 2021, as part of the American Rescue Plan Act of 2021. Its primary purpose was to alleviate the financial burden of maintaining health coverage during a period of economic uncertainty, particularly for those who lost employer-sponsored benefits.

The program ensured that “Assistance Eligible Individuals” (AEIs) could maintain health, dental, and vision coverage without out-of-pocket premium costs. This government-funded support did not extend to Health Flexible Spending Accounts (HFSAs) but broadly applied to most employer-sponsored group health plans subject to federal COBRA or similar state continuation laws. The subsidy represented a direct financial relief for individuals, as the entire premium amount was covered.

Eligibility Requirements for the Subsidy

To qualify as an Assistance Eligible Individual (AEI) for the COBRA subsidy, an individual needed to be eligible for COBRA continuation coverage due to an involuntary termination of employment or a reduction in hours. This specifically excluded voluntary resignations or terminations for gross misconduct.

The qualifying event could have occurred at any point, provided the individual’s maximum COBRA coverage period overlapped with the subsidy timeframe (April 1, 2021, through September 30, 2021). An AEI could not be eligible for other group health plan coverage, such as through a new employer or a spouse’s plan, nor could they be eligible for Medicare. Certain excepted benefits, like stand-alone dental or vision plans, did not disqualify an individual from the subsidy.

How the Subsidy Was Implemented

Eligible individuals were not required to pay their COBRA premiums during the subsidy period. The employer or plan administrator responsible for the COBRA plan directly covered these premium costs. This arrangement ensured that individuals received their health coverage without interruption due to financial constraints.

If an individual had already paid COBRA premiums for coverage between April 1, 2021, and September 30, 2021, they were entitled to reimbursement. A special 60-day election period was provided for those eligible for the subsidy who had not initially elected COBRA or had previously discontinued it. They needed to notify their former employer or plan administrator of their eligibility and elect the subsidized coverage.

Employer Responsibilities and Reimbursement Process

Employers initially covered the cost of COBRA premiums for Assistance Eligible Individuals (AEIs). To recover these costs, employers were reimbursed by the federal government through a refundable tax credit.

This tax credit was applied against the employer’s Medicare taxes under Internal Revenue Code Section 3111. Employers claimed this credit on their quarterly federal employment tax returns using Form 941, Employer’s Quarterly Federal Tax Return. Sections such as lines 11e, 11f, and 13f, along with Worksheet 5 on Form 941, were designated for reporting these credits. Employers could also file Form 7200, Advance Payment of Employer Credits Due to COVID-19, to request an advance of the credit if their anticipated credit exceeded their tax liability.

Employers had specific notification requirements. They provided eligible individuals with special notices about the subsidy, including a special election notice by May 31, 2021, for certain individuals. Additionally, employers had to issue an expiration notice, informing AEIs when their subsidy period was ending, typically between 15 and 45 days before the expiration date. Employers were advised to retain records, such as self-certifications from AEIs, to substantiate eligibility for the tax credit.