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COBRA subsidy available even after ‘involuntary’ termination

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in Firing,Human Resources

Under the massive new federal economic stimulus law, the American Recovery and Reinvestment Act of 2009 (ARRA), employees who suffer an “involuntary termination” have to pay just 35% of the cost of COBRA continuation health care coverage. Employers cover the rest and then the government reimburses them. This relates to terminations between Sept. 1, 2008, and Jan. 1, 2010.

But what does “involuntary termination” mean?

Under a recent IRS ruling, an “involuntary termination” would include certain employee-initiated “good reason” terminations, layoffs with recall rights and even certain cases where employees took severance buyouts. (IRS Notice 2009-27)

The IRS notice says an involuntary termination “means 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.”

But the notice goes on to say that an “employee-initiated” termination could also be considered involuntary if it is a termination for good reason due to employer action that causes a “material negative change in the employment relationship for the employee.” No further definition of “material negative change” was included.

Moreover, the notice says that a layoff with recall rights or a temporary furlough (i.e., a reduction in hours to zero) will be considered an “involuntary termination.” 

Disability and resignations

The notice clarified two other issues. First, while an employee’s absence due to illness or disability will not constitute an involuntary termination, terminating the employee while he or she is absent due to illness or injury will be an involuntary termination.

Second, an employee’s voluntary resignation when he or she would otherwise be terminated by the employer will be treated as an involuntary termination.

Effect of severance deals

In addition, the IRS indicates that terminations under certain severance packages which employers may have characterized as “voluntary” would actually be “involuntary” for subsidy purposes.

Specifically, an involuntary termination occurs if an employee elects to be terminated in return for a severance package or buyout “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.”

Other important information

  • When an assistance-eligible individual who had employee-only coverage on his or her termination date later elects COBRA coverage for an individual who is not assistance-eligible (for example, adding a dependent), any cost of coverage for the new enrollees is not subject to the ARRA premium reduction.
  • Employers may not refuse to provide the subsidy to an individual based on the individual’s income. Even if the employee’s income is greater than the eligibility limits imposed by the ARRA—$145,000 for individuals, $290,000 for joint filers—the employer must provide COBRA coverage upon receipt of the 35% payment. The Treasury Department will handle recovery of any overpayments.

Final note: Expect more former employees to appeal if they’re denied COBRA coverage or the subsidy. The government has rolled out a special web page just to handle those cases. It’s located at www.dol.gov/ebsa/COBRA/main.html

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 Authors: Tim Stanton, a shareholder in Ogletree Deakins’ Chicago office, and Brian D. Black, a shareholder in Ogletree Deakins’ Greenville, S.C., office.

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