More Guidance Concerning the COBRA Subsidy
By: DEBRA J. LINDER & JOHN H. MERKLE
April 13, 2009
The IRS has issued additional guidance concerning the new COBRA subsidy in the form of Notice 2009-27, which can viewed on the IRS website (www.irs.gov).
Among other things, the IRS helped to clarify what an “involuntary termination” is or is not for purposes of being eligible for the COBRA subsidy. Some examples include:
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Employee-initiated termination for good reason due to “employer action that causes a material negative change in the employment relationship” is an involuntary termination.
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Failing to renew a contract if the employee was willing and able to execute a new, similar contract is an involuntary termination.
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A reduction in hours alone is not an involuntary termination for COBRA subsidy purposes.
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Retirement is not an involuntary termination, unless the employee knows he or she would have been terminated if the employee had not retired.
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Termination for cause is an involuntary termination, but if the termination is for “gross misconduct,” the employee is not eligible for COBRA and, therefore, not eligible for the COBRA subsidy.
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Termination due to a work stoppage is not an involuntary termination, but a lockout is.
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A buy-out of an employee in connection with a reduction in force is an involuntary termination.
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The death of an employee is not an involuntary termination.
The IRS has also clarified the circumstances under which the subsidy ends. If an “assistance eligible individual” declines coverage in a group health plan for which he or she is eligible, the subsidy ends even though COBRA coverage may continue. Likewise, if the spouse of a terminated employee is eligible for family coverage but declines it, the subsidy ends. However, an individual is not considered eligible for other group coverage until enrollment is actually available.
We advised you earlier that there is a recapture of the subsidy for “assistance eligible individuals” if their income exceeds certain amounts. The notice reminds us that such individuals can waive the subsidy permanently by filing a signed and dated “permanent waiver” with the former employer or insurance company (whichever is being reimbursed for the subsidy).
To add confusion, if a fully-insured group health plan is subject only to state COBRA or a similar type of law, the IRS has indicated that the insurance company is the entity that must provide the subsidy and take the payroll credit; the employer cannot. Also, if a fully-insured group health plan (other than a union multiemployer plan) is subject to federal COBRA, and the employer and insurance company have agreed that the insurance company will collect the premiums directly from the qualified beneficiaries, the insurance company must provide the subsidy and take the payroll credit; the employer cannot.
The notice contains additional guidance on various COBRA subsidy issues that are not addressed here, such as how to calculate the subsidy when the employer does not charge the full COBRA premium. Employers should check the notice for more information on the administration of this new program.
For more information, contact one of the following:
Debra J. Linder
Direct Dial: 612-492-7163
Email: dlinder@fredlaw.com
John H. Merkle
Direct Dial: (612) 492-7027
Email: jmerkle@fredlaw.com