Treasury Issues Guidance on "Involuntary Termination" for COBRA Subsidy Purposes 

The American Recovery and Reinvestment Act of 2009 (ARRA) provides involuntarily terminated individuals (and their qualifying dependents) who experience COBRA qualifying events between September 1, 2008 and December 31, 2009 with a 65 percent subsidy on their COBRA premiums.  On March 31, the Treasury Department issued eagerly awaited guidance on the definition of "involuntary termination" for this purpose. Under 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."
• The determination is based on all the facts and circumstances - an employer's designation of a termination as "voluntary" will not control for this purpose where the facts indicate otherwise.
• Involuntary terminations for purposes of the subsidy include:
• Voluntary terminations or retirements where the employee knows that the employer would have terminated the employee anyway, including severance packages accepted after the employer indicates that a certain number of remaining employees will be terminated after the offer period.
• An involuntary reduction to zero hours that results in a loss of health coverage, even if temporary or with recall rights, such as a lay-off, furlough, or other suspension of employment.
• Terminations where the employer takes action to end the individual's employment status while the employee is absent from work due to illness or disability.
• An employee's resignation in response to a material negative change in the employee's employment relationship (such as a transfer to another state or reduction of hours to part-time status).
• Failure to renew an individual's long-term contract for services, if the individual was willing and able to execute a new contract on similar terms.
• Employee lockouts initiated by the employer.
• Termination for cause, unless due to the employee's gross misconduct.
• Involuntary terminations do not include:
• Death.
• Mere absence from work due to illness or disability (before the employer takes action to end the absent individual's employment).
• Reduction in hours, but not to zero.
• Work stoppage as the result of a strike initiated by employees or their representatives.

In addition, the Notice also formalizes existing guidance and provides new information on the definition of Assistance Eligible Individual (AEI), the calculation of the premium reduction, the coverage eligible for the premium reduction, when the premium reduction period begins and ends, recapture of the subsidy from high-income individuals, the extended election period for AEIs terminated before February 16, 2009, payments to insurers under federal COBRA, and ARRA's requirements for comparable state continuation coverage. You can read the entire Notice here. While the Treasury acknowledges that the Notice does not address all of the possible issues that may arise, it does provide welcome and much-needed guidance.

Employers should also be aware of the obligation to provide updated COBRA notices to certain COBRA qualified beneficiaries and extended election options for certain AEIs. The Department of Labor issued model notices and instructions on March 19, 2009 that can be found here. Many of these notices must be provided by April 18, 2009.

Ice Miller will continue to monitor developments and will send future e-updates as guidance is issued.  Meanwhile, for more information please see our prior notices on the COBRA subsidy on Ice Miller's Stimulus Bill home page here. You may also contact Chris Sears, Tara Schulstad Sciscoe, Mary Beth Braitman, Terry Mumford, Melissa Proffitt Reese, Rebecca Sczepanski or your Ice Miller LLP employee benefits attorney.