On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021. Among other things, the $1.9 trillion bill is designed to provide economic relief and stimulus, as well as more resources to combat the pandemic. It also includes two big changes to key employer-sponsored benefits. There is now a 100 percent COBRA subsidy for qualified participants and the bill also gives employers the option to raise the contribution limit for Dependent Care Flexible Spending Accounts to $10,500 in 2021.
Maximizing dependent care flexibility
For the 2021 tax year only, employers have the option to increase the annual contribution limit for Dependent Care Flexible Spending Accounts (DFCSA) $10,500 (or $5,250 for married taxpayers filing separately). This change could be welcome relief to many families struggling to manage the soaring cost of childcare, especially in and around coastal cities where daycare can cost more than $2,000 monthly. DCFSA contribution limits have stayed at $5,000 since 1986. Note the legislation only applies to the 2021 tax year—it is not clear if or when Congress may make this change permanent.
Assuming a 35 percent effective tax rate, maxing out the DCFSA at $10,500 could yield more than $3,500 in tax savings this year.
Let’s talk COBRA
Originally passed in 1985, COBRA requires group health plans to offer qualified beneficiaries who would otherwise lose their coverage as a result of a qualifying event (such as employment termination or changes in family status) the opportunity to continue their group coverage for a set period of time at applicable group rates (generally 102 percent of the cost to the plan). Note that COBRA participants must pay out of pocket for the premiums to continue their health plan coverage.
The 100% COBRA subsidy
The new legislation provides a federal subsidy, offering 100 percent of COBRA continuation coverage premiums for individuals who are qualified beneficiaries due to either:
- Involuntary termination of employment (except in cases of gross misconduct)
- Reduction of hours
This subsidy has a limited time window and will apply to premiums between April 1, 2021 and September 30, 2021.
The definition of a qualified beneficiary includes the covered employee, the covered employee’s federally-recognized spouse, and the covered employee’s dependent child(ren) (as defined by the terms of the group health plan). Qualified beneficiaries have independent election rights under COBRA. Therefore, even if the covered employee does not elect COBRA, a covered spouse or covered child of the involuntarily terminated covered employee are still entitled to elect COBRA.
The subsidy applies to all COBRA-eligible group health plans sponsored by an employer with the exception of healthcare flexible spending accounts under a cafeteria plan. The legislation also allows – but does not require – employers to offer qualified beneficiaries the option to change their health insurance coverage when making a COBRA election under the employer’s plan. This new coverage option must have the same or lower premiums and must be available to similarly situated non-COBRA employees under the plan.
Special second election period
The new legislation also provides a second 60-day election period to certain qualified beneficiaries who:
- Experienced an involuntary termination of employment or reduction of hours prior to the start of the Subsidy Period but did not elect COBRA during their initial 60-day election period
- Elected coverage but then subsequently lost that coverage prior to the start of the subsidy period (e.g., due to non-payment of premiums)
If these qualified persons elect COBRA continuation coverage through this second election period, their COBRA coverage will begin as of April 1, 2021. However, the maximum COBRA eligibility period is measured from the original qualifying event date (i.e., the date of the involuntary termination of employment or reduction of hours).
New notice requirements
These changes to COBRA will also require either modification to COBRA election notices or supplemental notices. Notices must be sent to all individuals entitled to elect COBRA continuation coverage during the subsidy period until September 2021.
Get the full picture
Clearly, these COBRA changes are complex and involve a lot of moving parts. Along with detailed notice requirements, employers should begin reviewing their records to identify eligible participants.
We’re here to help you make sense of it all.
To start please read our full compliance alert. It contains all the key details from our Legislative Affairs team. They provide some helpful tips and guidance, but please note that HealthEquity offers neither tax advice nor legal advice. Be sure to consult tax professionals and legal counsel before implementing any changes.
Next, register for our upcoming webinar. The Legislative Affairs team will walk you through the relevant legislative provisions step by step. Plus, there will be a live Q&A immediately following the presentation.
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