Benefits Monthly Minute

IRS Clarifies COBRA Premium Subsidy Rules | You're Safe from Partial Plan Termination | Federal Tax Treatment of DCAP Relief | A Sign of the Times: IRS Releases Adjusted HSA, HDHP and Excepted Benefit HRA Rates

IRS Clarifies COBRA Premium Subsidy Rules

On May 18, 2021, the IRS issued Notice 2021-31 providing highly anticipated guidance on the COBRA premium assistance relief available under the American Rescue Plan Act of 2021 (ARPA). The March Monthly Minute provided an overview of this relief shortly after ARPA was signed into law. While the temporary relief was welcomed news for certain qualified beneficiaries, ARPA raised a lot of unanswered questions for employers. Fortunately, the Notice addresses some of these questions, and then some.

Because much of the extensive guidance is based on facts and circumstances, we focus on four key takeaways that most employers should keep in mind to ensure compliance:

  1. An employer claiming the premium assistance credit must have records to substantiate the claim. This can be achieved by either a) requiring and retaining individuals’ self-certification or attestation that they are eligible for the premium assistance, or b) retaining employment records that demonstrate the individuals’ eligibility.
  2. Except for a health flexible spending arrangement (FSA) offered under a Section 125 plan, the premium assistance is available for COBRA continuation coverage of any group health plan. This includes vision-only or dental-only plans, as well as health reimbursement arrangements (HRAs).
  3. The definition of “involuntary” termination of employment is based on a facts and circumstances test. Notably, termination due to missing work because of illness or disability is considered involuntary if there is a reasonable expectation the employee will return to work. In addition, an employee’s voluntary termination may be deemed “involuntary” if the employer was intending to terminate the employee.
  4. While termination of employment must be “involuntary” in order for a qualified beneficiary to be eligible for the COBRA premium assistance, a reduction in hours that results in loss of coverage may be either involuntary or voluntary.

The Notice also addresses how to handle nonpayment of premiums for any coverage outside the COBRA subsidy period, explains how to calculate and claim the COBRA premium assistance credit, and clarifies that the COBRA premium assistance rules do not apply to self-funded church plans that voluntarily offer continuation coverage.

KMK Comment: While the guidance consists of over 40 pages, the IRS provides much needed clarification and helpful examples with its 86 FAQs that employers should review since much of the guidance is fact-specific. This is particularly true when it comes to determining who may be assistance eligible due to an “involuntary” termination or reduction in hours. Employers should review the guidance and then confirm all individuals who may be eligible for the extended election period receive the required notice.

You’re Safe from Partial Plan Termination

This month, the IRS released guidance clarifying how partial terminations under Section 209 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) are determined during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021. This safe harbor guidance, in the form of five FAQs provides:

  • A plan is not treated as having a partial termination during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered at the end of the period is at least 80% of the number of active participants covered at the beginning of the period.
  • A reasonable, good-faith interpretation of the term “active participant covered by the plan,” applied in a consistent manner, should be used.
  • If any part of the plan year falls between March 13, 2020, and March 31, 2021, then Section 209 of the Relief Act applies to any partial termination determination for that entire plan year. For example, if a plan has a calendar year plan year, the 80% partial termination test applies to both the January 1 to December 31, 2020, plan year and the January 1 to December 31, 2021, plan year, because both plan years include a part of the March 13, 2020-to-March 31, 2021 period.
  • The 80% test is not applied by identifying the pool of active participants covered by a plan on March 31, 2021, and determining whether at least 80% of those same individuals were active participants covered by the plan on March 13, 2020. Rather, the number of active participants covered by a plan who are counted on March 31, 2021, includes all individuals who are active participants covered on that date, regardless of whether those same individuals were active participants covered by the plan on March 13, 2020.
  • Although March 13, 2020 is the date the COVID-19 national emergency was declared, Section 209’s terms are not limited to reductions related to the COVID-19 national emergency, and this relief is not limited reductions in the number of active participants that are related to the COVID-19 national emergency. 

KMK Comment: While this new guidance bears some resemblance to the 20% turnover presumption which is regarded as an unofficial rule of thumb in determining whether a partial plan termination has occurred, it goes a step farther in providing statutory relief from partial terminations (which might have been caused by the pandemic) if the 80% test is met, thus relieving some plans from triggering 100% vesting for affected participants.

Federal Tax Treatment of DCAP Relief

As reported previously in the March 2021 Monthly Minute and February 2021 Monthly Minute, the Consolidated Appropriations Act, 2021 (CAA) and the American Rescue Plan Act of 2021 (ARPA) both provided significant relief to DCAP benefit recipients in the form of extended claims period, carry overs, and a temporary increase in the maximum DCAP exclusion. Newly released IRS Notice 2021-26  addresses the federal tax treatment of DCAP benefits that continue to be available in taxable years ending in 2021 or 2022 under this statutory relief.

Specifically, this new IRS guidance indicates that inherent in the legislation temporarily permitting carryover of unused amounts to 2021 or 2022, or extension of the claims period, is that amounts that continue to be available are excluded from income if used for dependent care benefits. Consequently, DCAP benefits that would have been excluded from income if used during 2020 or 2021, as applicable, remain eligible for gross income exclusion and are disregarded for purposes of the limits for the employee’s subsequent taxable years when they are carried over from 2020 or 2021 or permitted to be used under an extended claims period. And, in connection with non-calendar year plans, IRS Notice 2021-26 clarifies that ARPA’s exclusion increase to $10,500 applies to the individual’s 2021 taxable year (not the plan year), therefore, the increased exclusion will not apply to reimbursement of expenses incurred during the 2022 portion of the 2021-2022 non-calendar year plan year. Further, unused DCAP benefits from one taxable year of the participant (typically the calendar year) used to reimburse expenses incurred in the immediately following taxable year, where the expenses are incurred during the same non-calendar plan year spanning those two taxable years, are not carryover benefits or benefits available under an extended claims period, therefore, this new guidance does not apply to those benefits. The Notice includes several examples that lend added insight into the application of these tax consequences.

KMK Comment: IRS Notice 2021-26 provides added assurance that many DCAP participants will not be faced with unexpected tax consequences in connection with the previously released DCAP relief under the CAA and ARPA. However, Notice 2021-26 also offers a word of caution to non-calendar year DCAP participants who must be mindful that the Code’s gross income exclusion for dependent care benefits applies on a calendar year basis.

A Sign of the Times: IRS Releases Adjusted HSA, HDHP and Excepted Benefit HRA Rates

Rev. Proc. 2021-25 announces new HSA, HDHP and excepted benefit HRA inflation adjusted rates for 2022:

  2022 2021
HDHP Out-of-Pocket
$7,050/$14,100 $7,000/$14,000
HDHP Minimum Annual Deductible
$1,400/$2,800 $1,400/$2,800
HSA Annual contribution limit
$3,650/$7,300/$1,000 $3,600/$7,200/$1,000
Excepted Benefit HRA $1,800 $1,800

The KMK Law Employee Benefits & Executive Compensation Group is available to assist with these and other issues.

Lisa Wintersheimer Michel

John F. Meisenhelder

Antoinette L. Schindel

Kelly E. MacDonald

Rachel M. Pappenfus

KMK Employee Benefits and Executive Compensation email updates are intended to bring attention to benefits and executive compensation issues and developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.

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