IRS Clarifies COBRA Subsidy Rules 

 

In a notice published March 31, 2009, the Internal Revenue Service addressed a range of significant issues arising from the new COBRA subsidy rules, which were introduced by the American Recovery and Reinvestment Act of 2009 (ARRA). ARRA provides that certain individuals who have the right to continue group health coverage because of an involuntary termination that occurred (or occurs) between Sept. 1, 2008, and Dec. 31, 2009, may qualify for up to nine months of assistance in paying for that coverage.

The notice provides guidance on several key subjects, including the following:
Involuntary termination of employment. The notice provides that an involuntary termination of employment includes not only situations where an employer discharges an employee who is willing and able to work, but when the employer’s material adverse actions give the employee good reason to terminate employment. For example, when an employee accepts a severance package rather than face the prospect of an announced reduction in force or when an employee quits rather than accept a position with significantly reduced hours, the termination of employment will be considered involuntary for purposes of the COBRA subsidy.

The guidance addresses a few specific situations. For example, layoffs (that reduce an employee’s work hours to zero) and lockouts initiated by the employer will be considered involuntary terminations of employment. Strikes initiated by employees or their representatives will not.

Calculation of premium reduction. The notice makes it clear that the subsidy will be based on the amount that the assistance-eligible individual would otherwise have to pay for continuation coverage. Thus, if an employer offers a severance package that requires an individual to pay only $200 for COBRA coverage for six months and the cost without that severance package would be $1,000, the individual may pay only $70 (35 percent of $200) for the first six months of continuation coverage, $350 (35 percent of $1,000) for the next three months, and $1,000 per month after that (assuming the individual continues to qualify for the subsidy throughout the nine-month period).

In light of these requirements, some employers, especially those contemplating material reductions in force, may consider how they design their severance packages.

Other topics. The notice provides additional guidance on who qualifies for the subsidy, when the subsidy begins and ends, what rules apply to those who have a second chance to elect COBRA continuation coverage, and other relevant matters.

Edward I. Leeds and Clifford J. Schoner are attorneys in Ballard Spahr’s Philadelphia office. For more information about this article, contact Brian M. Pinheiro at 215.864.8511 or pinheiro@ballardspahr.com, Edward I. Leeds at 215.864.8419 or leeds@ballardspahr.com, Clifford J. Schoner at 215.864.8626 or schonerc@ballardspahr.com, or any member of the firm’s Employee Benefits and Executive Compensation Group. © 2009 Ballard Spahr Andrews & Ingersoll, LLP. All Rights Reserved.