Employers May Need to Update Their Severance Agreement Templates by April 1

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Acronyms make us do things. AWOL makes us go looking for someone, BOGO makes us buy two of something we didn’t need one of, and NSFW makes us cover our screen and hope no one has already walked by.

The new COVID-19 relief bill requires acronym-based action too. ARPA made changes to COBRA, so employers will need to edit their template severance agreements ASAP. Here’s what that means, FYI.

Under the American Rescue Plan Act (ARPA), involuntarily separated employees will receive a 100% subsidy to cover their Consolidated Omnibus Budget Reconciliation Act (COBRA) premiums from April 1 through Sept. 30, 2021. Employers will pay the full cost of the premiums, then obtain reimbursement through payroll tax credits.

With this change in the law, employers may need to make two changes to their template severance agreements.

First, severance agreements usually warn that benefit coverage ends on the last day of employment (or the last day of the month) and that the employee may then continue coverage under COBRA at the employee’s sole expense. Under ARPA, benefit continuation is no longer at the employee’s sole expense. From April 1 through Sept. 30, involuntarily terminated employees can sign up for COBRA coverage and pay no premiums for up to six months.

Second, in severance packages, employers often pay for a few months of the employee’s COBRA premiums. Under ARPA, that’s no longer going to be a benefit for many exiting employees. In most cases, terminated employees will get six months of subsidized COBRA premiums whether or not they sign a severance agreement.

There are some eligibility limitations, so not all separated employees will get the full six months of subsidized COBRA premiums. Here are a few of the limitations:

  • No quitters: The subsidy is available only to employees who are terminated involuntarily or who become COBRA-eligible due to a reduction in hours. Employees who resign are not eligible.
  • No double dippers: The subsidies stop when an employee becomes eligible for other group health plan coverage or Medicare. You don’t get both.

Because of that last point, there are circumstances when an employer’s offer to pay COBRA premiums in a severance package can still be a benefit. A terminated employee who becomes Medicare-eligible is allowed to choose COBRA coverage and can stay on the employer’s plan for additional coverage, but that individual would not be eligible for the ARPA subsidy.

Employers that make severance payments over multiple payroll periods and allow employees to continue benefit coverage during that time might wish to reconsider. When employers allow terminated employees to stay on the plan during the severance period, premiums are typically paid through payroll deduction, and the cost is shared by employers and employees. But under the ARPA subsidy program, once COBRA eligibility starts, the federal government will pay 100%. It’s free money. In most cases, therefore, ending coverage immediately upon termination will create a better result for both the employer and the employee – at least through Sept. 30.

The new law also requires employers to take new steps regarding COBRA notices. So, take notice.

First, employers must begin using updated COBRA notices that describe the subsidy. The Department of Labor will issue new model notices by April 10.

Second, employers must send notices to individuals who were involuntarily terminated (or who became COBRA-eligible due to a reduction in hours) within the past 18 months but did not choose coverage at the time. Under ARPA, they get a second chance to sign up. They can take advantage of the subsidized premiums from April through September unless their 18-month COBRA eligibility period ends earlier or they become ineligible for another reason. Employers must send this notice by May 31.

Third, employers must remember to send notices when an individual’s subsidies are about to end. These warning notices must be sent between 15 and 45 days before the subsidy expires.

So, FWIW, whether you’re an employer or an employee, the ARPA COBRA subsidies should be A-OK. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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