July 05, 2021
IRS Guidance on COBRA Subsidy: Practical Tips

By Paul M. Hamburger and Elizabeth D. Down

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The Internal Revenue Service (IRS) recently issued much-anticipated guidance on administering 100 percent subsidies for continuation coverage premiums under the Consolidated Omnibus Budget Reconciliation Act (COBRA).

IRS Notice 2021-31 (May 18, 2021) clarifies the premium subsidy requirements enacted under the American Rescue Plan Act of 2021 (ARPA), mostly by using a question-and-answer format. This column discusses the highlights of the notice and provides some practical tips for employers and other COBRA administrators.

Eligibility for COBRA Premium Assistance

The ARPA COBRA premium subsidy is available to any individual who:

  1. Is a COBRA qualified beneficiary as the result of the covered employee’s reduction in hours or involuntary termination of employment (other than for gross misconduct);
  2. Is eligible for COBRA coverage during some or all of the period from April 1, 2021, through September 30, 2021; and
  3. Elects COBRA.

If all three requirements are met, an individual is considered an “assistance-eligible individual” (AEI) under ARPA. Individuals who are COBRA-qualified beneficiaries for other reasons (e.g., divorce or cessation of dependent child status) are not AEIs.

For purposes of the COBRA subsidy, individuals are only treated as AEIs if they are qualified beneficiaries enrolled in the group health plan at the time of the reduction in hours or involuntary termination of employment and lose eligibility for coverage as a result of the reduction in hours or involuntary termination.

Importantly, if an AEI is or becomes eligible for coverage under another group health plan (such as a plan sponsored by a spouse’s employer) during the period from April 1, 2021, through September 30, 2021, the COBRA subsidy is not available to that individual, even though he or she may still be eligible for COBRA coverage itself.

Eligibility Determinations 

In the notice, the IRS provided more information on how employers and other COBRA administrators can determine eligibility for the COBRA subsidy. Employers can, but are not required to, require individuals to self-certify or attest that they are eligible for the subsidy and are not eligible for other disqualifying health coverage or Medicare.

The IRS is allowing employers to rely on that attestation or self-certification. Employers or other “premium payees” claiming the payroll tax credit who require an attestation or a self-certification must retain a record of it to substantiate an individual’s eligibility. If a premium payee does not require self-certification or attestation, it must retain other documentation to substantiate an individual’s eligibility for the subsidy.

Employers or other premium payees should make sure to retain adequate records to substantiate the eligibility of individuals for whom they take the COBRA subsidy tax credit. Some COBRA administrators are requiring telephonic attestations through call centers instead of using the model form from the U.S. Department of Labor (DOL). If an employer plans to rely on telephonic attestations through a COBRA administrator for tax credit purposes, it should confirm with the COBRA administrator that records of the attestation will be retained to substantiate eligibility.

Eligible Qualifying Events

The IRS provided some additional insight in the notice into what types of events qualify in order to be eligible for the ARPA COBRA subsidy.

Reduction in Hours

Importantly, a reduction in hours does not have to be involuntary (although it certainly can be). The notice makes clear that employees who voluntarily reduced their hours, perhaps in order to care for children when schools closed, and lost eligibility for health coverage as a result would be AEIs potentially eligible for the COBRA subsidy (Q&A-21).

Furloughed employees who lost health coverage are also AEIs due to the reduction (or total elimination) of hours. Furloughed employees are not considered to have an involuntary (or a voluntary) termination of employment because they still expect to return to work and have an employment relationship with their employer (Q&A-22).

Employees engaged in a lawful strike or another work stoppage (such as a lockout) are also considered to have a reduction of hours and can be AEIs if they lose health coverage because of that event. This is the case if, at the time of the work stoppage or lawful strike, the employer and employees intend to maintain the employment relationship (Q&A-23).

Involuntary Terminations 

One of the biggest questions arising out of ARPA’s COBRA subsidy provisions is what exactly constitutes an involuntary termination of employment. According to the notice, the IRS considers an involuntary termination to be:

  • A severance from employment;
  • Due to the independent exercise of the employer’s unilateral authority to terminate employment, other than due to the employee’s explicit or implicit request; and
  • When an employee was still willing and able to perform services (Q&A-24).

Whether a termination is voluntary is based on the facts and circumstances, and it’s not always clear. A termination categorized as voluntary by an employer can still be considered involuntary for COBRA subsidy purposes under the IRS’s guidance if the facts show that the employee was willing and able to work but quit because the employee knew that he or she was about to be terminated. This is often referred to as a “constructive discharge.”

The notice includes several helpful examples of voluntary and involuntary terminations. However, the facts of each termination can differ, and it is impossible to address every possible set of facts. Employers that are not relying on attestations or self-certifications should analyze the facts of terminations carefully when determining eligibility for the COBRA ARPA subsidy.


Generally, the notice indicates that the IRS does not consider retirement to be an involuntary termination. However, if employees only retired because they became aware that their employer was planning to terminate them, and otherwise would not have retired and were willing and able to continue working, the termination is considered to be involuntary (Q&A-26).

This is one area that can be very confusing for COBRA subsidy purposes. On the one hand, a “retirement” has a voluntary connotation to it. However, in some cases, even if an employee is involuntarily terminated from employment, the employee might be eligible to “retire” under a retirement plan because the employee met the age and service conditions for retirement. Again, the key is for plan administrators and plan sponsors to evaluate the facts carefully and make sure they understand whether the employment relationship was involuntarily terminated.

Termination for Cause

Involuntary termination of an employee for cause is an involuntary termination of employment for COBRA subsidy purposes, except if the termination is due to the employee’s gross misconduct.

Note: Not all group health plans use the “gross misconduct” exception to COBRA; some provide COBRA coverage to all involuntary terminations for cause. The way the notice is phrased, it makes it seem that the IRS would disqualify individuals for a COBRA premium subsidy if they were terminated for some unclear reason of “gross misconduct” regardless of whether an employer applies the exception. The better reading of the guidance is that if an employer does not apply the gross misconduct exception generally, it ought not to deny the availability of the COBRA premium subsidy on that basis. It is best to consult with benefits counsel to consider the available options and issues.

Employee-Initiated Terminations

The notice provides several examples of situations in which an employee initiates a termination of employment but it is still considered an involuntary termination of employment. For example, an employee who quits because the employer materially changed the geographic location of the employee’s job or materially reduced the employee’s hours of employment (without a loss of health coverage) would be treated by the IRS as having an involuntary termination (Q&A-28).

An employee who leaves a job due to concerns about workplace safety is generally not considered to have terminated employment involuntarily (Q&A-30). However, that same termination of employment could be considered involuntary if particular actions (or inactions) by the employer caused a material change in the employment relationship similar to a constructive discharge.

Similarly, if an employer fails to take required action or reasonably accommodate an employee’s request related to personal circumstances such as a health condition or the inability to find child care, an employee’s otherwise voluntary termination of employment might be considered involuntary for COBRA subsidy purposes (Q&A-30-31).

An employee who left a job because school or day care was closed due to the pandemic is not considered to have experienced an involuntary termination of employment (Q&A-31). However, a leave of absence under these circumstances with the intent to return to work and maintain the employment relationship could constitute a voluntary reduction in hours of employment, and that employee could become an AEI for subsidy purposes (assuming group health plan coverage was lost due to the leave).

Voluntary Termination or Retirement Window Programs

Employers sometimes offer voluntary severance or retirement window programs to incentivize employees to leave their job voluntarily. The notice indicates that participation in one of these programs generally would constitute an involuntary termination of employment as long as the program was offered during a period of “impending terminations of employment.” In other words, the program is an incentive to voluntarily quit before the employer anticipates further involuntary terminations of employment (Q&A-29).

However, if a program is truly voluntary and the employer does not plan on or announce any related impending terminations of employment, then the window program might be truly voluntary. This situation requires careful consideration by counsel before a final decision is made one way or the other on whether the termination was involuntary.

Contract Employees

If an employer does not renew an employee’s employment contract, that is generally treated as an involuntary termination of employment for COBRA subsidy purposes. However, if both the employer and the employee always intended that the employee would provide services only for a set period of time and there was no understanding that the agreement could be renewed, the termination of the employment relationship is not considered to be involuntary (Q&A-34).

Second Qualifying Events

One area of some uncertainty that was clarified in the notice is how to treat multiple or second qualifying events. The notice provides that individuals who are enrolled in COBRA for an extended period due to a second qualifying event, disability determination, or state “mini-COBRA” law are still potentially eligible for the COBRA subsidy as long as their original qualifying event was a reduction in hours or involuntary termination of employment (Q&A-17).

Types of Coverage Eligible for COBRA Premium Assistance

Under ARPA, COBRA premium assistance is available for COBRA coverage provided through a group health plan subject to the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code, or the Public Health Service Act (other than a health flexible spending account (FSA)), as well as state law-required coverage comparable to COBRA coverage.

The notice also says that retiree health coverage offered under the same plan as active coverage for similarly situated employees can be treated as COBRA coverage for subsidy purposes. This is the case if the amount the retiree pays for the coverage is not more than the maximum premium allowed by COBRA (Q&A-36).

One interesting coverage eligibility issue involves dental and vision coverage. The notice clarifies that the premium subsidy could be available for COBRA coverage provided through vision and dental plans (Q&A-35). At the same time, the availability of dental or vision coverage under another group health plan does not cause an AEI to lose eligibility for the COBRA subsidy for dental or vision coverage. However, available coverage under a general medical group health plan could terminate the availability of the COBRA subsidy for dental or vision coverage. This anomalous result is under review by the IRS for further consideration.

Interaction with the Disaster Relief Extensions

The notice confirms that the pandemic-related extension of certain benefit plan deadlines provided by the DOL, IRS, and U.S. Department of Health and Human Services (HHS), including the deadline to elect COBRA coverage, does not apply to either the deadline for an employer to provide the ARPA notice or the 60-day deadline from receipt of that notice to elect subsidized COBRA coverage (Q&A-56). This means that an AEI may have to act quickly to benefit from a COBRA subsidy and cannot rely on the pandemic-related relief from election period deadlines.

Additionally, the notice provides that AEIs whose qualifying events occurred before April 1 and who elect subsidized COBRA coverage within 60 days of receiving the ARPA notice must decide at that time whether to elect or decline COBRA coverage retroactive to the date of their qualifying event.

An AEI who declines retroactive COBRA coverage at the time of electing subsidized COBRA coverage prospectively cannot later rely on the extended election period deadline (due to the pandemic relief) to elect COBRA for that retroactive period. On the other hand, if an AEI does elect retroactive COBRA coverage at the time he or she elects subsidized COBRA during the subsidy period, the extension of the deadline to pay the retroactive premiums for that COBRA coverage could still apply (Q&A-58).

The Tax Credit—Calculating and Claiming It

ARPA subsidizes an AEI’s COBRA premiums through a tax credit for the “premium payee” (the employer in the case of a self-insured group health plan, the insurance carrier in the case of an insured group health plan not subject to federal COBRA (typically, a small-employer group health plan), or a multiemployer plan). The notice describes how to calculate the tax credit, as well as how a premium payee can claim it. These rules and the IRS forms used to claim the credit can be quite tricky to prepare and submit.

In short, the notice confirms that a premium payee can claim the tax credit by completing a particular section of IRS Form 941, the federal payroll tax return (Q&A-75). The premium payee can also reduce its deposits of the Medicare hospital insurance tax up to the amount of the anticipated credit and request an advance of any amount of the anticipated credit that will exceed the federal employment tax deposit available for reduction by filing IRS Form 7200 (Advance Payment of Employer Credits due to COVID-19).

A multiemployer plan with no employees that is not required to pay employment taxes can still claim the credit by completing the applicable part of IRS Form 941 (Q&A-77). The plan should also report any advanced payments it receives in anticipation of the credit and then enter zero on all other inapplicable lines so that the overpayment amount on Form 941 is the amount of the credit reduced by any advanced payment the plan received.

Separately, the notice includes several rules to consider in cases when an employer otherwise subsidizes COBRA coverage. By way of background, the regular COBRA rules allow a group health plan to charge generally up to 102 percent of the applicable group health plan premium for COBRA coverage. If there is no employer subsidy for COBRA coverage, then premium payees may generally claim a full tax credit under ARPA for the full COBRA premium (including any administrative costs that may be charged under the COBRA rules) (Q&A-63).

If the premium payee does subsidize COBRA coverage for similar qualified beneficiaries who are not eligible for the ARPA subsidy (for example, some employers regularly subsidize COBRA as part of a severance plan), then the tax credit amount is limited to the amount that an AEI would have been charged for COBRA if there was no ARPA subsidy (Q&A-64).

This means that an employer cannot claim a credit for a COBRA subsidy amount that it would have paid anyway regardless of the ARPA subsidy. However, the notice also indicates that an employer could potentially change its severance plan on a prospective basis to reduce or remove the employer-provided COBRA subsidy in order to take advantage of the ARPA subsidy and related tax credit. The employer could also give employees an additional taxable severance benefit in the amount it otherwise would have paid as a COBRA subsidy if the ARPA subsidy was not in effect.

Practically speaking, this guidance may have been issued too late for some employers to make prospective changes to their severance plans; nevertheless, it is worth it for employers to consider their options in deciding how to implement new severance “deals” for subsidized health coverage.


The rules governing the ARPA subsidy are, on their own, quite complicated and tricky. The IRS notice provided a great deal of helpful information on the applicable rules. However, there are undoubtedly more questions and ambiguities to resolve. Employers and plan sponsors need to keep apprised of further developments, as the IRS may very well issue additional guidance until the ARPA subsidy rules end.

Paul M. Hamburger is co-chair of the Employee Benefits, Executive Compensation, and ERISA Litigation Practice Center and head of the Washington, D.C., office of law firm Proskauer Rose LLP. He is also a leader of the Practice Center’s health and welfare subgroup and a member of Proskauer’s Health Care Reform Task Force. Hamburger has more than 35 years of experience in advising employers and administrators and is the author of numerous articles and publications on COBRA and other employee benefits issues affecting pension and welfare plans. Hamburger is contributing editor of BLR’s Mandated Health Benefits—The COBRA Guide.

Elizabeth D. Down is an associate in Proskauer Rose’s Labor & Employment Law Department and a member of the Employee Benefits & Executive Compensation Group. Down represents multiemployer plans, public and private companies, not-for-profit organizations, and other fiduciaries in legal and regulatory matters affecting employee benefit plans.

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