At the risk of sounding like “Captain Obvious”, the past almost year and a half has certainly been one of the most trying periods we’ve seen in a quarter century or so. In some way or another, we have all been touched by the Covid-19 pandemic, be it physically with our health, emotionally or economically (I won’t even touch things politically).
If there has been a silver lining to it all, it is that for the most part we’ve all been in this together, and there has been a great outpouring of help and support from individuals, business, and the government.
The government for its part went to great measures through the CARES Act and subsequent legislation to incentivize business to keep employees on their payrolls even as business activity slowed down, if not ceased altogether. This had the effect of keeping many employees on payrolls that otherwise would have become unemployed.
Still, despite those efforts, millions more found themselves unemployed and dealing with the consequent challenges of being so.
Once such challenge of unemployment has always been the issue of health insurance, especially for those whose insurance was tied to their former employer’s group health insurance plan. To deal with this in the past, the Consolidated Omnibus Budget Reconciliation Act, or COBRA, was put into law giving former employees and their families the right to continue their coverage under group health insurance plans for a period of time post-employment if coverage is lost due to certain events such as divorce, death of the primary plan member, or job loss.
That’s a nice safety net to have, but the problem is, as anyone who has ever had to deal with COBRA knows, the continued coverage is usually quite expensive, since it is not typically subsidized by the former employer as it would be for a current employee. This is always a potentially damaging financial problem for someone no longer working, made even more so because we are still in a time of medical crisis when having medical insurance benefits are as important as ever.
To help ease the burden of the employed in trying to maintain this important coverage, the recently enacted American Rescue Plan Act (ARPA) contains a provision that has received relatively little attention in which “assistance eligible individuals (AEIs) can receive a 100 percent subsidy of COBRA continuation coverage premiums. This subsidy program began on April 1, 2021 and runs through September 30, 2021 as things stand currently.
As a little icing on the cake, this subsidy is tax-free to the recipient, and can be continued until the program’s termination date, or until the AEI qualifies for another group health plan or reaches the end of the maximum COBRA continuation coverage period.
Just how does the subsidy work?
Normally, to maintain COBRA coverage a former employee must make premium payments to the taxpayer entity that maintains the coverage, such as a sponsoring employer (SE for short). The ARPA subsidy is provided by NOT requiring the AEI to make the required premium payments, while at the same time requiring the SE to whom the premiums would normally be paid to still treat them as if paid.
The SE, fortunately, does not have to bear the burden of this payment. Instead, the SE is made whole in this arrangement through the receipt of payroll tax credits. These credits are applied by the SE to its own payroll tax liability, thus reducing what it owes the government, effectively getting reimbursed for its out-of-pocket premium. Further, the credits are “refundable”, meaning if the SE is entitled to COBRA premium assistance credits in amounts that exceed its payroll tax, the IRS will refund the excess amount to the SE. It is even possible for the SE to receive advance payments of the credit from the IRS by filing Form 7200.
Call this a win/win. The COBRA premium subsidy can help individuals whether the storm of unemployment without losing critical health care coverage. Employers, on the other hand, can demonstrate a culture of caring for employees and former employees, building goodwill along the way, at no cost to itself, by making sure its former employees are aware of the subsidy and actively participating in the program.
Lane Keeter, CPA, is Office Managing Partner of the Heber Springs office of EGP, PLLC, CPAs & Consultants (a full-service financial firm with offices in Heber Springs, North Little Rock and Bryant) and past winner of The Sun-Times Reader’s Choice Award for Best Accountant.