The IRS recently issued Notice 2021-31 (Notice) which provides additional guidance to assist employers in implementing the COBRA premium assistance provisions of the American Rescue Plan Act of 2021 (ARP). As discussed in our prior advisory, ARP provides a temporary COBRA subsidy equal to 100% of the applicable COBRA premium to assistance eligible individuals from April 1, 2021 to September 30. The Notice provides answers to a number of questions that have arisen in regards to the COBRA premium assistance provisions of ARP, particularly with respect to what circumstances qualify as an involuntary termination for purposes of determining eligibility for the subsidy.
What constitutes an involuntary termination of employment?
The Notice defines an involuntary termination as a severance from employment due to the independent exercise of the unilateral authority of the employer, other than due to the employee's implicit or explicit request, where the employee was willing and able to continue performing services. Whether a termination is involuntary must ultimately be based on an examination of the facts and circumstances. For example, if a termination is designated as voluntary, or as a resignation, but the facts and circumstances indicate that the employee was willing and able to continue performing services, so that, absent the voluntary termination, the employer would have terminated the employee's services, and that the employee had knowledge that the employee would be terminated, the termination will be treated as involuntary.
Can an involuntary termination of employment include a termination of employment initiated by the employee?
Yes. An employee initiated termination of employment can be deemed an involuntary termination if the termination is for "good reason" in response to employer actions resulting in a material negative change in the employment relationship, similar to constructive discharge. For example, an employee-initiated termination of employment due to an involuntary material reduction in hours would qualify as an involuntary termination of employment for purposes of COBRA premium assistance, even if the reduction in hours did not result in the loss of health plan coverage. Similarly, a resignation as the result of a material change in the geographic location of employment for the employee will also qualify as an involuntary termination of employment.
What other changes to the employment relationship constitute an involuntary termination under the Notice?
The Notice identifies a number of other termination scenarios that qualify as an involuntary termination for purposes of COBRA premium assistance, including:
- Non-renewal of an employee's contract if the employee was otherwise willing to enter into a new contract or continue employment without a contract. If, however, at the time the employee entered into the expiring contract, the employee understood the contract was for a set term and would not be renewed, the completion of the contract is not an involuntary termination of employment.
- Participation in a window program that meets the requirements of Treasury Regulation § 31.3121(v)(2)-1(b)(4)(v).
- Employer initiated action to end an individual's employment while the individual is absent from work due to illness or disability if, before the action, there is a reasonable expectation that the employee will return to work after the illness or disability has subsided.
- An involuntary termination for "Cause"; provided, however, if the termination is due to gross misconduct of the employee, the loss of coverage due to a termination of employment for gross misconduct will not result in an individual becoming eligible for COBRA or COBRA premium assistance.
Which changes to the employment relationship do not equate to an involuntary termination?
The Notice also identifies a variety of termination scenarios that do not qualify as an involuntary termination for purposes of COBRA premium assistance, including:
- An employee initiated termination of employment due to the employee's child being unable to attend school or childcare facility due to COVID-19. If, however, the employee maintains the ability to return to work so that the event is a temporary leave of absence, then the employee could qualify for the premium subsidy as a voluntary reduction in hours.
- An employee initiated termination of employment due to general concerns about workplace safety. However, if the employee can demonstrate that the employer's actions resulted in a change to the employment relationship analogous to a constructive discharge, then the termination can qualify as an involuntary termination.
- A termination due to gross misconduct. Termination for gross misconduct is not a COBRA qualifying event thus the employee is not eligible for premium assistance as he/she is not eligible for COBRA.
- An employee's retirement, unless the facts indicate that the employee was willing to work and knew the employer was planning on terminating the employee.
- The death of the employee.
Is a voluntary reduction in hours a triggering event for ARP premium assistance?
Yes. A reduction in hours can create eligibility for premium assistance regardless of whether the reduction in hours is voluntary or involuntary. A reduction in hours includes work stoppage due to lawful strike initiated by employees, a lockout initiated by the employer, or a furlough. For this purpose, the Notice defines the term "furlough" as a temporary loss of employment or complete reduction in hours with a reasonable expectation of return to employment or resumption of hours (for example, due to an expected business recovery of the employer) such that the employer and employee intend to maintain the employment relationship. A furlough may be a reduction in hours regardless of whether the employer initiated the furlough, or the individual participated in a furlough process analogous to a window program.
What important steps should employers take?
In light of this new guidance, employers should continue to analyze employee termination data to ensure that all eligible employees and former employees, and qualified beneficiaries, who are entitled to the COBRA premium subsidy have been properly identified and received the required COBRA notice and election forms.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.