ARRA 2009 generally provides for 35% of the COBRA continuation premium to be paid by the involuntarily terminated employee and 65% to be paid by the former employer during the applicable period. In a recently released series of questions and answers, the Internal Revenue Service provides detailed guidance concerning what “involuntary termination” means with respect to eligibility for the premium subsidy.
According to the Service, an “involuntary termination” means:
o a severance from employment;
o due to the independent exercise of the unilateral authority of the employer to terminate the employment;
o other than due to the employee’s implicit or explicit request;
o where the employee was willing and able to continue performing services.
The Service makes clear that “involuntary termination” is the involuntary termination of employment, not of health coverage. Consequently, qualifying events other than an involuntary termination–for example, divorce or a dependent child ceasing to be a dependent child under the generally applicable requirements of the plan (such as loss of dependent status due to aging out of eligibility)–are not involuntary terminations qualifying an individual for the premium reduction.
The determination of whether a termination is involuntary is based on all the facts and circumstances. So, 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.
Involuntary termination includes the following:
o A lay-off period with a right of recall or a temporary furlough period. An involuntary reduction to zero hours (such as a lay-off, furlough, or other suspension of employment) resulting in a loss of health coverage is an involuntary termination for purposes of the premium reduction.
o An involuntary termination for cause generally qualifies. However, for purposes of federal COBRA, if the termination of employment is due to gross misconduct of the employee, the termination is not a qualifying event and the employee is therefore not eligible for COBRA continuation coverage.
o A “buy-out” (i.e., 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.
o The employer’s failure to renew a contract at the time the contract expires. This action qualifies if the employee was willing and able to execute a new contract providing terms and conditions similar to those in the expiring contract and to continue providing the services.
o An employee-initiated termination from employment constitutes an involuntary termination from employment for purposes of the premium reduction if the termination from employment constitutes a termination for good reason due to employer action that causes a material negative change in the employment relationship for the employee.
o A resignation as the result of a material change in the geographic location of employment for the employee.
o Retirement. If the facts and circumstances indicate that, absent retirement, the employer would have terminated the employee’s services, and the employee had knowledge that he or she would be terminated, the retirement is considered an involuntary termination.
Involuntary termination does not include the following:
o The death of an employee or absence from work due to illness or disability.
o A mere reduction in hours is generally not considered an involuntary termination. But a reduction to zero hours may constitute an involuntary termination. Also, 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.
o A work stoppage as the result of a strike initiated by employees or their representatives generally does not qualify. However, a lockout initiated by the employer is an involuntary termination.
Sonya E. King, J.D., LL.M., is an associate editor of Tax Facts, a National Underwriter Company publication. She can be reached via email at [email protected]