Problems with the COBRA Subsidy and State Continuation

Small employers who are not subject to COBRA, but may be subject to state continuation rules, pose a number of challenges with regard to administering the COBRA subsidy. And the lack of clear guidance from the regulatory agencies doesn’t help.

To start with, it is clear that the subsidy is available to individuals currently covered under state-based continuation coverage as long as the event that triggered that coverage was a reduction in hours or an involuntary termination of employment. It is also clear that the insurance companies are principally responsible for the administration of the subsidy for those on state-based continuation and for collecting the tax credit for the premiums that are not paid by assistance eligible individuals (AEIs).

But after that, things get fuzzy pretty quickly.

Soon after the American Rescue Plan (ARP) was passed, carriers argued that they do not have to offer the second chance enrollment that is s required for COBRA eligible AEIs. The IRS addressed this in Notice 2021-31, but hardly cleared it up. In this notice, the IRS states that the second chance enrollment is not required for individuals eligible only for state-based continuation coverage, the COBRA subsidy is only required to be offered to those who are currently covered and those who become eligible between now and the end of September; however, if the carrier or state law allows it, a second chance enrollment is permitted, and those individuals would be subsidy eligible.

And don’t get me started with the notices. Carriers in different states already handled state continuation notices differently prior to the subsidy. Some took the position that it was the employer’s responsibility to send applicable notices, while in other cases the carriers notified eligible individuals of their state continuation rights.

So now with the potential for some carriers allowing a second chance enrollment and others not, what’s a small employer to do? Should they send notices out or not? I guess the answer will depend on what the carrier’s position is. An employer is putting itself at risk if second chance notices are sent out, because the carrier could refuse to allow those enrollments if people elect the coverage. On the other hand, if a second chance enrollment is available, and an employer fails to send the notice, might they be considered in violation of the COBRA subsidy notice requirement?

Unfortunately, the practical answer is: you need to check with your carrier first to determine their interpretation of the rules and what they are going to do regarding notifications before you can determine the employer’s responsibility.