American Rescue Plan’s Health and Welfare Benefit Provisions: COBRA and DCFSA Action Items

March 15, 2021

The American Rescue Plan Act of 2021 includes a COBRA premium subsidy and increases the dependent care flexible spending account (DCFSA) limits. While the availability of the COBRA premium subsidy is a requirement, the increase in the DCFSA limit is optional.

Increased DCFSA Limits

Under Section 129 of the Internal Revenue Code of 1986, as amended (Code), DCFSA limits are capped at a $5,000 tax-free reimbursement to participants for eligible expenses ($2,500 for a participant who files married filing separately). This amount has never increased over the years, much to the dismay of participants, despite the increased cost of childcare and/or children’s summer camps.

The American Rescue Plan Act of 2021 (ARPA) increases the DCFSA limit from $5,000 to $10,500 for the 2021 tax year only ($2,500 to $5,250 for a participant who files married filing separately). Plan sponsors are not required to offer this increase under their DCFSAs. However, if plan sponsors want to offer this opportunity to participants, they will need to communicate the change to participants and offer an opportunity for participants to make an increase to their annual election. The plan sponsor must also amend its plan to permit the increase no later than the last day of the plan year (e.g., December 31, 2021, for calendar year plans).

While the ARPA does not make this increase permanent, it still presents a significant increased tax savings for participants (and a payroll tax savings to employers). Plan sponsors that want to offer this one-time opportunity to employees may offer it in conjunction with any additional enrollment opportunities already being offered under the Consolidated Appropriations Act of 2021 (CAA). Under the CAA, plan sponsors can permit employees and participants to make a new election and increase or decrease an existing election absent a change in status opportunity. Additionally, plan sponsors can permit any eligible expenses to be reimbursed retroactive to January 1, 2021.

Last, while the ARPA’s DCFSA changes may seem like a simple solution for an individual with additional DCFSA expenses for 2021, note that the longstanding comparison between whether the DCFSA or the Dependent Care Credit is the better deal for employees is now back on the table—and complicated by related APRA changes to the Dependent Care Credit. Low- and middle-income employees should be advised to consult their tax advisors to determine, under the revised rules, whether the DCFSA or the Dependent Care Credit makes the most economic sense for their situation.


The ARPA includes a 100% COBRA premium subsidy for any employee or dependent who is a COBRA qualified beneficiary (or will become one) resulting from an involuntary termination of employment or a reduction of hours (referred to as an Eligible Individual). Employees who voluntarily terminate employment and dependents who lose coverage under the plan for any other reason are not eligible for the COBRA premium subsidy. The COBRA premium subsidy is effective on April 1, 2021, and ends on September 30, 2021.

Specifically, the COBRA premium subsidy will be available to any Eligible Individual who is enrolled in COBRA (or will enroll in COBRA) on or after April 1, 2021, and before the subsidy ends on September 30, 2021. In addition, any former employee (who is otherwise an Eligible Individual) who did not elect COBRA coverage or dropped COBRA coverage prior to April 1 but would otherwise be within his/her 18-month COBRA coverage period between April 1 and September 30, 2021, is eligible for the COBRA premium subsidy. These individuals are required to be notified of an extended opportunity to prospectively elect COBRA coverage.

As noted, the COBRA premium subsidy is effective for the six-month period between April 1 and September 30, 2021, during which an Eligible Individual is covered under COBRA. The subsidy terminates if the Eligible Individual becomes eligible for other group health plan coverage (other than an excepted benefit) or Medicare. Eligible Individuals are required to notify the plan if they become eligible for other group health plan coverage.

The legislation requires plan sponsors to update COBRA notices describing the premium subsidy to all Eligible Individuals. There are specific requirements in the legislation that must be incorporated into either an updated COBRA notice or, more likely, a separate notification to Eligible Individuals. Failure to provide such notice that complies with these requirements will be treated as a failure of the COBRA notice requirements. The secretary of the Department of Labor, in consultation with the secretary of the Department of the Treasury and the secretary of the Department of Health and Human Services (collectively, agencies), is required to provide model notices within 30 days of enactment. Given the notice requirements, plan sponsors will likely want to wait until such model notices are issued.

Employers must also provide notification of any early termination of the premium subsidy prior to September 30, 2021. This notice is not required if the premium subsidy would terminate because the Eligible Individual becomes eligible for other group health plan coverage or Medicare. The agencies are required to provide a model notice for this circumstance within 45 days of enactment. Notification of the end of the subsidy must be provided at least 15 days before the subsidy expires, but not more than 45 days before the subsidy expires.

The ARPA provides that employers will receive a credit for the COBRA premium subsidy through a payroll tax credit against the employer’s quarterly taxes. If the credit exceeds the amount of payroll taxes due, the credit will be refundable when the employer submits its quarterly federal tax return (i.e., IRS Form 941). We expect additional guidance on how the credit will work, particularly as it relates to both insured plans and multiemployer plans.

The COBRA premium subsidy requirements present some administrative hurdles for plan sponsors and COBRA administrators as they try to identify which employees have been involuntary terminated (versus a voluntary termination). As we wait for the agencies to issue model notices, employers should take swift action and work closely with their COBRA administrators to identify any Eligible Individuals who will need to be notified of the COBRA premium subsidy.


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