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April 09, 2009

IRS Issues Guidance on Involuntary Termination for COBRA Premium Subsidy

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As reported in benefits alerts on February 17 and March 31, the American Recovery and Reinvestment Act (ARRA) created a premium subsidy for "assistance eligible individuals" continuing employer-provided health care benefits under COBRA or comparable state and governmental continuation coverage requirements.

One essential requirement to be eligible for the subsidy is that individuals must have been involuntarily terminated (other than for gross misconduct) between September 1, 2008, and December 31, 2009. Individuals who have COBRA-qualifying events other than involuntary termination, such as divorce or voluntary termination, are ineligible for the subsidy. The new law, however, failed to define "involuntary termination."

As anticipated, IRS Notice 2009-27 provided clarification on several issues regarding the COBRA subsidy, including the definition of involuntary termination.

Involuntary Termination

The IRS Notice broadly defines involuntary termination as being "a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment." Although the guidance focuses on employer action, it also recognizes certain employee-initiated terminations as being involuntary if the employee was terminated for good reason based on "employer action that causes a material negative change in the employment relationship."

The IRS further indicates that whether a termination is involuntary is based on all the facts and circumstances. Below is a list based on examples provided in the IRS guidance.

 

Involuntary Termination

Not Involuntary Termination
  • Reduction in force
  • Employee resignation (unless for good cause based on employer action)
  • Termination for cause (other than gross misconduct that makes the individual ineligible for COBRA)
  • Termination due to gross misconduct that makes the individual ineligible for COBRA
  • Severance package (buy-out) if employer gives notice that some remaining employees will be terminated after the offer period of the severance package
  • Retirement (unless in lieu of being terminated)
  • Constructive discharge
  • Death of employee
  • Voluntary resignation or retirement if the employee knew that he/she would be terminated
  • Other qualifying events—divorce, dependent ineligibility based on aging out
  • Employer's action to terminate employee during employee's absence from work due to disability or illness
  • Absence from work due to illness or disability (unless employer takes action to terminate employment)
  • Employee resignation in response to an employer-imposed reduction to zero hours
  • Reduction of hours (other than to zero)
  • Employer-initiated lockout
  • Employee or union-initiated strike
  • Lay-off with a right to recall
 
  • Temporary furlough
  • Voluntary resignation if employer requires a material change in geographic location of employment
 
  • Employer's failure to renew a contract at expiration if employee is willing and able to renew
  • End of seasonal employment, but employee is willing and able to continue work

Additional Guidance

Although the IRS has established a standard for involuntary terminations, some questions remained unanswered. For example, the IRS has acknowledged there is no official guidance on whether a call to active military duty should be considered an involuntary termination. A Department of Labor webcast on April 6 provided only informal guidance that the following situations might be considered involuntary terminations, depending on the facts and circumstances:

  • Call to active military duty (based on the unilateral action by the federal government)
  • Failure to be re-elected (applies to public employees)

Employers who have difficulty classifying a particular employee's termination would be well advised to treat such terminations as voluntary and not eligible for the subsidy. Individuals whose health plans deny them eligibility for the subsidy will have recourse through a newly created expedited 15-day appeal process through the DOL.

Next Steps

The subsidy for assistance eligible individuals generally became effective March 1. Responsible entities (multiemployer plans, employers and insurers) should now be able to finalize determinations regarding which individuals were involuntarily terminated between September 1, 2008, and February 16, 2009, and do not currently have COBRA-continuation coverage.

Such individuals are eligible for a new 60-day election period to elect COBRA-subsidized coverage effective March 1. Notices of the extended election period must be sent to assistance eligible individuals by April 18.

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