IRS Issues Q&As on the COBRA Premium Subsidy

As employers plan how to comply with the new COBRA premium subsidy provisions, an IRS guidance is helping with questions like “who qualifies” or “does this include reduction to part-time” or “does this include voluntary termination.” As so often, the answers are never quite simple and include exceptions.

On March 31 the IRS released Notice 2009-27, which discusses various issues regarding the COBRA premium subsidy under the American Recovery and Reinvestment Act of 2009 (ARRA). The discussion is in the form of 58 Q&As.

Probably the most significant Q&As address what is and isn’t an “involuntary termination of employment,” the qualifying event that triggers the premium subsidy which is available to “assistance eligible individuals” or AEIs. An AEI is a covered employee who is involuntarily terminated between September 1, 2008 and December 31, 2009. Under the ARRA an AEI is entitled to pay a reduced premium equal to 35% of the COBRA premium. The employer fronts the remaining 65% of the premium and then gets reimbursed by the federal government in the form of a tax credit applied against payroll taxes.

The Q&As define an involuntary termination of employment 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.” An involuntary reduction of hours of employment to zero, for example as a result of a lay-off or suspension of employment that results in a loss of group health plan coverage, is also deemed to be an involuntary termination of employment. However reducing hours but not to zero generally does not constitute an involuntary termination of employment.

Additionally, an employee’s voluntary termination may constitute an involuntary termination if it is in response to the employer’s reduction of hours and if the reduction of hours is a “material negative change in the employment relationship” for the employee. The Q&As go on to explain that an employee’s retirement or resignation may also constitute an involuntary termination of employment if the circumstances warrant. Such circumstances include the employee’s knowledge of an impending termination or a change in the place of employment as a condition of continued employment.

The Q&As also indicate that an involuntary termination of employment occurs when the employer ends an individual’s employment while the individual is absent due to disability or illness. It’s also an involuntary termination when an employee accepts a severance package as an incentive to elect termination of employment when the employee knows that after the offering expires a certain number of employees will be terminated.

Finally, the Q&As provide guidance on allocating premium for Non-AEIs, for example spouses or dependent children who were not covered prior to the involuntary termination of employment but who are added to the COBRA coverage subsequent to the AEI electing COBRA.

To download the complete Notice, go to: http://www.irs.gov/pub/irs-drop/n-09-27.pdf

We anticipate additional guidance from the IRS and will update you when it is available.