COVID Relief Bill: COBRA Reform and Increases DCAP Maximum - McDermott

COVID-19 Relief Bill Offers COBRA Reform and Temporarily Increases DCAP Maximum


On March 11, 2021, President Joe Biden signed the American Rescue Plan Act of 2021 (ARPA) providing Consolidated Omnibus Budget Reconciliation Act (COBRA) reform provisions and an increase in Dependent Care Assistance Program (DCAP) maximum deferrals. While details from the agencies are forthcoming, here is an overview of these provisions of the ARPA.

In Depth

COBRA Subsidies

The legislation provides a 100% subsidy for COBRA continuation coverage for “assistance eligible individuals” (AEIs), defined as any employee along with their spouses and dependent children who lose (or lost) group health plan coverage because of an employee’s involuntary termination of employment or reduction of hours and elect (or elected) COBRA coverage. Other COBRA-qualifying events causing a loss of coverage, such as voluntary termination of employment, death of an employee or a dependent aging out, won’t qualify for a subsidy.

The subsidy will be available from April 1, 2021, through September 30, 2021, regardless of whether COBRA coverage began earlier or ends later. The subsidy will end sooner than September for qualified beneficiaries whose maximum COBRA coverage period ends earlier (as measured from the date of the original COBRA qualifying event) or for those who become eligible for another group health plan or Medicare.

AEIs electing coverage pay no portion of the premium for health coverage. For fully insured plans, employers will need to coordinate with insurers to remit the entire COBRA premiums on behalf of AEIs who elect COBRA. Employers with both self-funded and insured plans will apply for a tax credit quarterly on the company’s Form 941. The credit will be provided by the US Department of the Treasury through a reduction of Medicare payroll taxes.

Employers may (but are not required to) allow AEIs to switch to less expensive coverage other than an option that provides only “excepted benefits” (e.g., dental or vision coverage), a health flexible spending account (FSA) or an individual-coverage health reimbursement arrangement.

A 60-day special election period is available to AEIs who haven’t exhausted their original 18-month COBRA period and either did not elect COBRA when first eligible or elected COBRA but dropped it before April 1, 2021. COBRA elected during this special period, which runs for 60 days after the date AEIs receive the new required COBRA notice, will not extend beyond the individual’s normal COBRA continuation period. An AEI who didn’t initially elect COBRA, or who elected and dropped COBRA coverage prior to April 1, may receive the subsidy on a prospective basis, without having to elect and pay for COBRA retroactively for months prior to the subsidy becoming available.

Within 60 days of April 1, 2021, employers’ COBRA notices will have to include information about the availability of the subsidy and the special 60-day enrollment period. This information may be added to current COBRA notices or provided in a separate document accompanying the current notice. The DOL must publish model notices within 30 days of the legislation’s enactment. Employers will also have to provide an expiration notice before the premium subsidy ends.

Dependent Care Updates

Anyone who has a child in daycare knows that $5,000 per year, the current maximum amount of DCAP benefits that can be excluded from income, may not come close to covering the entire cost of care.  Included in ARPA, however, is a temporary increase to this limit from $5,000 to $10,500 (from $2,500 to $5,250 for taxpayers who are married filing separately) for 2021. Plans can be amended retroactively for the change, so long as the amendment is adopted by the last day of the plan year in which the amendment is effective. This may be welcome news to parents everywhere, although it remains to be seen how this will impact nondiscrimination testing. This change is not mandatory, so employers may choose to not increase the deferral amount for 2021. Even if an employer does not decide to increase the deferral amount, employers should check their plan language as the language make “bake in” any legislative increases. This would necessitate an amendment to opt out of the higher deferral amount.

Temporary changes have also been made to the dependent care tax credit (DCTC) for 2021. Among other things, the DCTC is refundable and the dollar limit on expenses that can be taken into account is increased from $3,000 to $8,000 for taxpayers with one qualifying individual and from $6,000 to $16,000 for taxpayers with two or more qualifying individuals. Changes have also been made to the child tax credit and earned income tax credit; these credits may be relevant when determining the federal tax savings from participating in a DCAP vs. claiming the DCTC.