IRS Guidance Clarifies “Involuntary Termination” for the COBRA Subsidy

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In Notice 2021-31, the Internal Revenue Service (IRS) provides broad guidance in a question-and-answer format on the application of the American Rescue Plan Act of 2021 (ARP) regarding premium assistance under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) continuation coverage provisions. Perhaps most critical for group health plan administrators and insurers, the IRS has defined and illustrated the use of the term “involuntary termination of employment,” which is the primary trigger (the other is a reduction in hours) for premium assistance obligations under the ARP.

Background

Section 9501 of the ARP provides for a temporary 100%reduction in the premium otherwise payable by certain individuals and their families who elect continuation coverage due to a loss of coverage as the result of a reduction in hours or an involuntary termination of employment under COBRA (and, in certain cases, under state “mini-COBRA” laws). Such persons may be “Assistance Eligible Individuals” for whom group health plan administrators and insurers must provide certain notices and facilitate a premium reduction, if elected. For more background regarding the premium subsidy under the ARP, see our prior article.

What is an involuntary termination of employment?

The notice generally defines an involuntary termination of employment as follows:

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

Ultimately, however, the determination of whether a termination is involuntary is based on the facts and circumstances.

What are some examples of an involuntary termination of employment?

  • Good Reason - An employee-initiated termination of employment is involuntary if it occurred for good reason due to employer action that results in a material negative change in the employment relationship for the employee analogous to a constructive discharge.
  • Impending Termination - An employee-initiated termination of employment is involuntary if the employee was willing and able to continue performing services, but the employee initiated termination having knowledge that the employee would have otherwise been terminated by the employer.
  • Illness or Disability - An employer-initiated termination resulting from the employee’s absence from work due to an illness or disability is an involuntary termination if before the action there is a reasonable expectation that the employee would have returned to work after the illness or disability has subsided. However, mere absence from work due to illness or disability before the employer has taken action to end the individual’s employment is not an involuntary termination.
  • Cause - An employer-initiated termination of employment for cause is involuntary. However, if the termination is due to gross misconduct, the termination is not a qualifying event under COBRA and will not result in premium assistance.
  • Change of Work Location - An employee-initiated termination as the result of a material change in the geographic location of employment for the employee is involuntary.
  • Window Program - An employee-initiated termination of employment through a window program that is offered in connection with an impending termination and that meets the requirements of Treas. Reg. § 31.3121(v)(2)-1(b)(4)(v) is involuntary. Such a window program is generally one that provides an early retirement benefit, retirement-type subsidy, Social Security supplement, or other form of benefit for a limited period of time (no greater than one year) to employees who terminate employment during that period or to employees who terminate employment during that period under specified circumstances.
  • Nonrenewal - An employer’s decision not to renew an employee’s contract if the employee was otherwise willing and able to continue the employment relationship and was willing either to execute a contract with terms similar to those of the expiring contract or to continue employment without a contract is generally an involuntary termination. However, if the parties understood at the time they entered into the expiring contract, and at all times when services were being performed, that the contract was for specified services over a set term and would not be renewed, the completion of the contract without it being renewed is not an involuntary termination.

What are some examples of terminations of employment that are not involuntary?

  • Retirement - An employee’s retirement generally is not an involuntary termination. However, if the facts and circumstances indicate that, absent retirement, the employer would have terminated the employee’s employment, that the employee was willing and able to continue employment, and that the employee had knowledge that the employee would be terminated absent the retirement, the retirement is an involuntary termination.
  • Workplace Safety - An employee-initiated termination due to general concerns about workplace safety typically is not involuntary. However, if the employee can demonstrate that the employer’s actions (or inactions) resulted in a material negative change in the employment relationship analogous to a constructive discharge, the termination is involuntary.
  • Childcare - An employee-initiated termination resulting from the employee’s child being unable to attend school or because a childcare facility is closed due to COVID-19 generally is not involuntary.
  • Death - The death of an employee is not an involuntary termination of employment.

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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