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Legislative Changes to Employee Benefits Law: Federal Funding for COBRA and Flexible Spending Account Relief

May 14, 2021

Petra BradburyMay 14, 2021 

In response to the coronavirus pandemic, Congress enacted several legislative changes to employee benefits law. The Consolidated Appropriations Act of 2021 (“CAA”) creates temporary special rules for health and dependent care flexible spending accounts, and the American Rescue Plan Act (“ARPA”) provides subsidized COBRA coverage for individuals and families.

Flexible Spending Accounts

The CAA, passed at the end of 2020, allows plan sponsors to make several optional amendments to flexible spending account plans, including amendments to allow post-termination reimbursements from health flexible spending accounts, plan year carryovers, and extended grace periods.

Post-Termination Reimbursements. The CAA allows plan sponsors to amend health flexible spending account plans to permit post-termination reimbursements to employees who cease to participate in the plan during calendar year 2020 or 2021. The permitted amendment would allow former participants to spend down unused benefits or contributions through the end of the plan year during which the employee ceased to participate—including through any grace period.

Under the CAA, post-termination reimbursements for health flexible spending accounts must follow rules similar to the rules that apply to dependent care flexible spending accounts. A dependent care flexible spending account plan can include a spend-down provision if:

  • The plan provides dependent care assistance;
  • The plan does not discriminate in favor of highly compensated employees;
  • 25 percent or less of amounts paid or incurred by the employer during the year are for principal shareholders or owners of the employer;
  • Eligible employees are notified;
  • Written expense statements are provided to employees; and
  • Applicable nondiscrimination testing is satisfied.

Plan Year Carryovers. For plan years ending in 2020 and 2021, the CAA allows plan sponsors to permit participants to carryover the entire unused benefit or contribution remaining in the participant’s flexible spending account to the next plan year.  Prior law only allowed carryovers for health flexible spending accounts—limited to $550 per plan year—but the CAA permits carryovers of the entire account balance for both health and dependent care flexible spending accounts.

In addition, dependent care flexible spending accounts may permit participants who elected dependent care flexible spending account coverage for the 2020 plan year during an enrollment period that ended on or before January 31, 2020, and whose dependent child reached age 13 during the 2020 plan year, to continue to use their dependent care flexible spending account funds for the child’s expenses through the end of the 2020 plan year.  Further, if a balance remains in the participant’s dependent care flexible spending account at the end of the 2020 plan year, the participant may use that balance for the child’s expenses into 2021, until the child reaches age 14.

Extended Grace Periods. Under the grace period rule, a flexible spending account plan may permit employees to use amounts remaining from the previous year—including amounts remaining in a health flexible spending account—to pay expenses incurred for qualified benefits after the end of the plan year. For plan years 2020 and 2021, the CAA allows plan sponsors to extend the grace period from two and a half months after the end of the plan year, to 12 months after the end of the plan year.

COBRA Premium Subsidy & Tax Credit

The ARPA, passed in March 2021, provides subsidized COBRA coverage of up to six months of 100 percent coverage from April 1, 2021, through September 30, 2021, for assistance-eligible individuals. An assistance-eligible individual is a COBRA qualified beneficiary who is eligible for and elects COBRA coverage due to a qualifying event of involuntary termination of employment or reduction of hours. The subsidy is available for any period of coverage between April 1, 2021, and September 30, 2021. However, eligibility may end earlier if the qualified beneficiary’s maximum period of coverage ends before September 30, 2021, or if the qualified beneficiary becomes eligible for coverage under another group health plan.

Individuals who do not have a COBRA election in effect on April 1, 2021—but who would be eligible for the subsidy if they did—are also eligible for the subsidy. Further, individuals who discontinued COBRA coverage before April 1, 2021—but who would be eligible for the subsidy if they had not discontinued coverage—are eligible if they are within their maximum period of coverage. These individuals can make a COBRA election beginning April 1, 2021, and ending 60 days after the group plan provides the individual the required notification of the extended election period.

Notices from Assistance-Eligible Individuals to Health Plan. Assistance-eligible individuals must notify the group health plan if they cease to be eligible for the subsidy, and can face penalties of $250 (or more for intentional failures) if the individual fails to provide the required notification.

Notices to Assistance-Eligible Individuals. Group health plans must provide certain notices to assistance-eligible individuals, including:

  • Notice of assistance availability;
  • Notice of extended election period; and
  • Notice of expiration of subsidy.

The Department of Labor has issued model notices that group health plans should use to notify eligible individuals and a Summary and Request for Treatment as an Assistance Eligible Individual. Copies of the model notices and the Summary are attached to this Client Alert.

Refundable Tax Credit. Under the ARPA, the employer pays the cost of subsidized COBRA coverage and can take a refundable quarterly tax credit against Medicare payroll taxes equal to the premium amounts not paid by assistance-eligible individuals. The quarterly credit may be paid in advance.

State “Mini-COBRA”

Employers who have fewer than 20 employees may have to comply with ARPA provisions described above that apply with respect to their state’s “mini-COBRA” law for extended continuation coverage.  The ARPA (i) does not require an extension of the time in which to apply for coverage under the state’s mini-COBRA law, (ii) does not require certain notices required under the ARPA for federal COBRA to be provided if notice is not required under the state’s mini-COBRA law, and (iii) does not require subsidized coverage be provided if the loss of coverage resulted from a reduction in hours if the state mini-COBRA law does not provide for continuation coverage in that circumstance.  A copy of the Department of Labor’s model notice regarding state continuation coverage and the ARPA is attached.

Severance Agreements

Severance agreements often include provisions regarding employer payment of some or all COBRA premiums for a specified time period.  Future severance agreements that will take effect during the subsidy period should be appropriately drafted to take into account the ARPA 100% subsidy.  Existing severance agreements should be reviewed to determine if any changes are needed.


The legislative changes to flexible spending account plans are permissive—not mandatory—and have administrative and financial implications. Plan sponsors with questions about adopting the permitted amendments and administering the changes should contact Walter Haverfield attorneys.

Employers with questions about how to administer the COBRA subsidy, provide the required notice, and take the new COBRA tax credit under the ARPA should contact Walter Haverfield attorneys before May 30, 2021, when the first notices are due.


Tim Jochim is a partner in the Columbus, Ohio office of Walter |Haverfield and a national authority on business succession and employee stock ownership plans (ESOPs). Tim can be reached at or at 614-246-2152.

Mike Sorice is an associate in the Columbus, Ohio office of Walter Haverfield. He assists closely-held businesses with business succession planningmergers and acquisitions, and tax planning. Mike can be reached at or at 614-246-2262.

Russell Shaw is a partner in the Cleveland, Ohio office of Walter Haverfield and focuses his practice on employee benefits, which include retirement plans, executive deferred compensation plans, welfare benefit plans, VEBAs, and 403(b) tax-deferred annuity plans. Russell can be reached at or at 216-928-2888.

Petra Bradbury is an associate in the Cleveland, Ohio office of Walter Haverfield and focuses her practice on employee benefits and deferred compensation plans. Petra can be reached at or at 216-619-7841.