The IRS has published a document clarifying the meaning of "involuntary termination" and other issues related to the new ARRA / COBRA subsidy law.
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COBRA SUBSIDY UPDATE
IRS Clarifies Law
Also:
Model Notice Forms Available
Cal-COBRA Employers Get a Break
By Christopher W. Olmsted
Last month we reported on the new COBRA obligations, and this month there is updated information to disseminate.
Employers’ obligations under COBRA have been significantly increased by the American Recovery and Reinvestment Act of 2009 (ARRA). ARRA is commonly known as the economic stimulus legislation recently passed by Congress and signed by President Obama.
In a nutshell, ARRA entitles employees involuntarily terminated between September 1, 2008 and December 31, 2009 to continue health care coverage through COBRA by paying only 35 percent of their premiums for up to nine months. The remaining 65% is paid by employers, who may deduct the cost from federal payroll taxes, or by health insurers. Employers must immediately comply with the law by providing notice to eligible individuals, collecting 35% of the premiums from the employees, paying 65%, and filing quarterly tax returns claiming a credit for the 65% subsidized amount.
For a summary of the new requirements, follow this link.
The IRS has published its interpretation of several aspects of ARRA in a question and answer format. Several of the comments are paraphrased below.
Involuntary Termination
Q: The subsidy applies only where the employee has been “involuntarily terminated.” What counts as “involuntary?”
A: More than you think. ARRA does not define “involuntary termination,” except to exclude instances where the employee was terminated for “gross misconduct.” The IRS publication is more specific. It includes circumstances where:
The employer unilaterally decides to terminate the employee where the employee was willing and able to work.
Failure to renew an employment contract at the time the contract expires, if the employee was willing sign a new contract
Where the employee quits “for good reason” due to employer action that “causes a material negative change in the employment relationship for the employee.” (e.g. a severe reduction in hours).
Generally: “The determination of whether a termination is involuntary is based on all the facts and circumstances. For example, if a termination is designated as voluntary or as a resignation, but 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, the termination is involuntary.”
Q: Does an involuntary termination include a lay-off period with a right of recall or a temporary furlough period?
A: Yes, it includes an involuntary reduction to zero hours, such as a lay-off, furlough, or other suspension of employment, resulting in a loss of health coverage.
Q: Does an involuntary termination include a reduction in hours?
A: Generally no. However, an employee’s voluntary termination in response to an employer-imposed reduction in hours may be an involuntary termination if the reduction in hours is a material negative change in the employment relationship for the employee.
Q: Does involuntary termination include an employer’s action to end an individual’s employment while the individual is absent from work due to illness or
disability?
A: Yes. Involuntary termination occurs when the employer takes action to end the individual’s employment status (but mere absence from work due to illness or
disability before the employer has taken action to end the individual’s employment status is not an involuntary termination).
Q: Does an involuntary termination include retirement?
A: Only if absent retirement, the employer would have terminated the employee’s services, and the employee had knowledge that the employee would be terminated, the retirement is an involuntary termination.
Q: Does involuntary termination include involuntary termination for cause?
A: Yes, except in instances of gross misconduct.
Q: Does an involuntary termination include a resignation as the result of relocation to another worksite?
A: Yes, if the relocation is “material.”
Q: Does an involuntary termination include a work stoppage as the result of a strike initiated by employees or their representatives?
A: No. However, a lockout initiated by the employer is an involuntary termination.
Q: Does an involuntary termination include a termination elected by the employee in return for a severance package (a “buy-out”) 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?
A: Yes.
Other FAQs:
Read the IRS publication to learn more about:
(1) When involuntary termination is a second qualifying event (e.g. if it follows a reduction in hours or divorce).
(2) How to calculate the employee’s 35% premium.
(3) Rules for FSAs and HRAs
(4) Fixing the beginning and end of the premium subsidy.
(5) Other miscellaneous issues.
Follow this link to view the IRS publication.
California Insurers
To Pay ARRA Premium
Under Cal-COBRA
California businesses employing between 2-19 employees are covered by Cal-COBRA, not federal COBRA. For the most part, the ARRA premium subsidy is nevertheless available for individuals covered by Cal-COBRA. (However, the retroactive election period for terminations between September 1, 2008 and February 16, 2009 does not apply.)
Employers covered by Cal-COBRA are not required to front the 65% premium subsidy, according to benefits brokers this author has contacted. Instead, California health insurers will pay the 65% premium and seek reimbursement from the government. This of course relieves small employers of the significant cash flow burden of paying the premiums and then waiting until quarterly tax returns to claim a tax credit.
Employers covered by Cal-COBRA who terminate employees between September 1, 2009 and December 31, 2009 should contact their benefits broker or insurance carrier to confirm that the carrier will pay the premium.
Department of Labor
Publishes Model Notice
Forms For Amended
COBRA / ARRA Premiums Subsidy
ARRA mandates that plans notify certain current and former participants and beneficiaries about the premium reduction. Employers should send notices to employees who are involuntarily terminated between September 1, 2008 and December 31, 2009.
The Department created model notices to help plans and individuals comply with these requirements. Each model notice is designed for a particular group of qualified beneficiaries and contains information to help satisfy ARRA’s notice provisions. The forms were posted on the DOL website on March 19, 2009.
The model forms can be found by following this link.
More Legal Update articles.
Download entire April 2009 Legal Update in PDF format.
This article is intended as a brief overview of the law and are not intended to substitute as legal advice. Any questions or concerns regarding any statute or case law should be addressed to a licensed attorney. Copyright © 2009 by Barker Olmsted & Barnier, APLC. San Diego, California. All rights reserved.
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