Publication

April 17, 2009Client Alert

Government Guidance Clarifies Some COBRA Premium Subsidy Issues

On March 31, 2009, the Internal Revenue Service issued guidance to clarify certain issues arising under the American Recovery and Reinvestment Act of 2009 ("ARRA") and its COBRA premium assistance requirement. Among other items, this guidance defines an "involuntary termination.”

For purposes of COBRA administration, the IRS now defines involuntary termination as "a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate employment, other than due to the employee's implicit or explicit request, where the employee was willing and able to continue performing services." The IRS further went on to indicate when an involuntary termination has occurred and when it has not in the following situations:

Involuntary Termination

Voluntary Termination

  • Employer's failure to renew an employment contract at the time the contract expires;
  • Constructive discharge terminations provided the employee quit due to a material negative change in the employment relationship with the employer;
  • A lay-off which reduces the employee's hours to zero;
  • A reduction in hours to an amount greater than zero when it is a material negative change in the employment and this causes the employee to quit;
  • An employee's decision to quit rather than be terminated; and
  • A lockout initiated by the employer.
  • Involuntary termination of health coverage, not employment;
  • Employee's resignation;
  • Employee's death;
  • Loss of health coverage due to other qualifying events, such as divorce or the end of dependent's eligibility due to age restrictions in the plan (but not due to loss of employment);
  • Absence from work due to illness or disability (however, if the employer takes action to terminate an employment based upon the illness or disability, it may constitute involuntary termination); and
  • A Strike.

Questions remain outstanding. For example, informal comments from the Internal Revenue Service first considered a call to active military duty to be a voluntary termination of employment. The IRS representatives have since recanted and suggest that the call to active military duty might constitute involuntary termination.

Employers should remember that the Department of Labor is tasked with determining whether or not a termination is involuntary when there is a dispute between the employee and the employer. Consequently, in a close call, it may be a better practice for the employer to treat the termination as voluntary and defer to the Department of Labor to settle the dispute (assuming the employee utilizes his or her appeal rights).

The IRS guidance addresses other issues as well. For example, it explains how the premium reduction is calculated, and it clarifies when the premium reduction period begins and ends (for example, for plans which start COBRA immediately upon termination rather than through the end of the month).

In addition, since our last client alert, the Department of Labor has revised its position regarding which qualified beneficiaries receive ARRA COBRA notices. Initially, and as stated in ARRA, all qualified beneficiaries who experience(d) the COBRA qualifying event between September 1, 2008 and December 31, 2009 were to receive notice of their rights. The Department of Labor has since announced that the following distribution standards will be sufficient.

Notice

Group

Extended Election Notice

  • Employees who were involuntarily terminated and lost or discontinued COBRA between September 1, 2008 and February 16, 2009 (i.e., AEIS who were not on COBRA as of February 17, 2009.

General Notice (long form)

  • Employees who had a qualifying event other than involuntary termination (e.g., divorce, death, etc.) between September 1, 2008 and February 16, 2009 AND who were not provided COBRA notice at that time;
  • Employees who have any sort of qualifying event (involuntary termination or otherwise) between February 17, 2009 and December 31, 2009.

General Notice (short form)

  • Employees who were on COBRA coverage as of February 17, 2009 regardless of the qualifying event which created the COBRA entitlement.

This client alert is one of a series designed to provide summaries of the American Recovery and Reinvestment Act of 2009 ("The Act") and information and guidance regarding opportunities and relief made available through The Act. All of The Act client alerts are available on Michael Best's Stimulus and Economic Recovery Team publications page. For additional information on this topic, please feel free to contact one of the authors of this alert or your Michael Best attorney.

If you are interested in learning about other provisions included in The Act, the Michael Best Stimulus and Economic Recovery Team is prepared to assist you in understanding the implications and in developing and implementing a strategy to secure the benefits of this unprecedented legislation. Specifically, we will assist you to identify opportunities, prepare appropriate proposals and make targeted contacts to secure funds. We will also work with you to ensure that your applications are tailored to meet your needs and that your funded projects proceed in compliance with award requirements and applicable laws.

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