The IRS recently issued guidance relating to the meaning of "involuntary termination" for purposes of eligibility for the COBRA Premium Subsidy provided under the American Recovery and Reinvestment Act ("ARRA"). Please see our earlier Client Advisories Client Advisory dated February 24, 2009 and Client Advisory dated March 19, 2009 regarding the basic requirements of the temporary COBRA Premium Subsidy.
As expected, the IRS provided formal guidance regarding which types of termination of employment would be treated as involuntary so that the employee and his covered dependents would qualify for the premium subsidy. In IRS Notice 2009-27, the IRS defines an involuntary termination as a severance from employment due to "the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee's implicit or explicit request, where the employee was willing and able to continue performing services." Even if a termination from employment is initiated by the employee, it will be treated as an involuntary termination from employment for purposes of the premium subsidy if the termination constitutes a termination for good reason due to employer action that causes a "material negative change" in the employment relationship for the employee. The determination of whether a termination is involuntary is based on all of the facts and circumstances.
Under this IRS guidance, the following events would be considered involuntary terminations:
- An employer's failure to renew an employment contract at the time the contract expires, if the employee was willing and able to execute a new contract providing terms and conditions similar to the expiring contract and to continue providing the services;
- An employer's action to end the individual's employment status while the individual is absent from work due to illness or disability;
- A termination designated as voluntary or as a resignation, if the facts and circumstances indicate that, absent such voluntary termination, the employer would have terminated the employee's services, and that the employee had knowledge that the employee would be terminated;
- Reduction to zero hours (including a lay-off, furlough, or other suspension of employment);
- Retirement, but only if the facts and circumstances indicate that the employer would have terminated the employee's services, and the employee had knowledge that the employee would be terminated;
- Termination of an individual's employment for cause (other than for gross misconduct in the case of employer subject to federal COBRA continuation coverage requirements);
- A material change in the geographic location of employment for the employee;
- A lockout initiated by the employer; and
- A termination elected by the employee in return for a severance package, where the employer indicates that after the offer period for the severance package, a certain number of remaining employees in the employee's group will be terminated.
The following events would be examples of voluntary terminations for these purposes:
- Termination due to death;
- Voluntary retirement;
- The employee's decision not to return to work following an absence due to illness or disability where the employer has not taken action to end the individual's employment status;
- Reduction of hours that is not a reduction to zero, unless the employee's voluntary termination is in response to an employer-imposed reduction in hours that is a material negative change in the employment relationship for the employee; and
- A work stoppage as the result of a strike initiated by the employees or their representatives.
In addition, during a recent webcast, an attorney-adviser in the Office of Tax Policy at the Department of Treasury stated that IRS will be taking the position that military reservists called up for active duty will be treated as involuntarily terminated for purposes of eligibility for the COBRA Premium Subsidy. While an involuntary termination generally must be initiated by the employer, in this specific case, the IRS will recognize eligibility for the subsidy due to the action of the federal government in calling up the reservist.
IRS Notice 2009-27 also provides clarification on the qualifications for premium assistance eligible individuals, the calculation of the premium reduction, the coverage eligible for premium reduction, how to determine the beginning of the premium reduction period and the end of the premium reduction period, the recapture of the premium assistance payments for individuals with modified adjusted gross income in excess of the ARRA limits, the extended election period, payments to insurers under federal COBRA, and how to determine whether state continuation coverage is eligible.
The IRS Notice can be found at the IRS Website
We anticipate additional guidance to be issued on a number of matters related to the COBRA Premium Subsidy requirements. In the meantime, if you have any questions regarding the new requirements, please contact a member of our Employee Benefits Team
for additional information.
Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation. This does not create an attorney-client relationship between any reader and the firm. If you want legal advice on a specific situation, you must speak with one of our lawyers and reach an express agreement for legal representation.
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©2009 Sherman & Howard April 24, 2009