The American Economic Recovery and Reinvestment Act: Latest IRS COBRA Guidance on “Involuntary Termination”
The American Economic Recovery and Reinvestment Act (the Act) provides for premium reductions for health benefits under the Consolidated Omnibus Budget Reconciliation Act of 1985, commonly referred to as COBRA. Under the Act, assistance eligible individuals, who are persons eligible for COBRA as a result of an involuntary termination between September 1, 2008 and December 31, 2009, pay only a percentage of their COBRA premiums. The IRS recently issued Notice 2009-27, which defines involuntary termination for purposes of the Act.
IRS Notice 2009-27
Under IRS Notice 2009-27 (the Notice), involuntary termination is defined 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.” While this definition provides additional insight into the Act, the ultimate determination of whether a termination is involuntary depends on the circumstances of each individual case.
Facts Constituting Involuntary Termination
The Notice provides several examples of situations involving involuntary termination. Of particular importance, the Notice emphasizes even an employee-initiated termination can be considered involuntary if the termination is for good reason due to employer action that causes a “material negative change in the employment relationship.” For example, an employee-initiated termination, in response to an employer-imposed reduction in hours, can be an involuntary termination under the Act.
Other examples of involuntary termination may include:
- Termination for cause, absent gross misconduct by the employee;
- Involuntary reduction to zero hours, such as lay-off, furlough, or other suspension of employment, which results in a loss of health coverage;
- Retirement, if the employer would have terminated the employee absent the retirement, and the employee knew of the threatened termination;
- Resignation due to material change in geographic location of employment;
- Lockouts; and
- Employee-elected termination in exchange for a severance package when the employer threatens termination of a certain number of employees.
Facts Not Constituting Involuntary Termination
The Notice also clarifies what does not constitute an involuntary termination under the Act. For instance, involuntary termination is the involuntary termination of employment, not the involuntary termination of health coverage. Thus, other qualifying events such as divorce or a child ceasing to be a dependent under the applicable requirement of a health plan are not involuntary terminations for purposes of the Act.
In addition, an involuntary termination may not occur in situations where:
- An employer takes action to end the employee’s employment status due to the employee’s death or his or her absence from work due to illness or disability;
- An employer reduces the number of hours, but not a reduction to zero hours. However, if an employee voluntarily terminates in response to the employer-imposed reduction in hours, this may be an involuntary termination if it constitutes a “material negative change” in the employment relationship for the employee; and
- An employee-initiated strike causes a work stoppage.
In our March 2009 News Alert, titled “The American Economic Recovery and Reinvestment Act: Critical COBRA Changes Retroactive to September 2008,” we emphasized employers must send new COBRA notices to assistance-eligible individuals by April 18, 2009. IRS Notice 2009-27 aids employers in identifying who is entitled to receive these notices. We recognize each employment situation is unique and, as a result, compliance with the Act may require close legal analysis. As the April 18, 2009 deadline rapidly approaches, please do not hesitate to contact us with any questions or concerns.