IRS Guides Employers on COBRA Rule Change

New guidance clarifies for employers the key question of when an employee has been involuntarily terminated and thus is entitled to new federal subsidies to pay for COBRA health care premiums.

Last week, the Internal Revenue Service in Notice 2009-27 [] provided broad definitions and specific, real-world examples of involuntary terminations.

In addition, the IRS’ 27-page notice resolves numerous other questions raised by employers about the new subsidies, which Congress created—at a $25 billion cost—as part of a massive economic stimulus bill legislators passed in February.

The subsidies, through which the federal government pays 65 percent of eligible beneficiaries’ COBRA premiums, are available to employees who are involuntarily terminated, except in cases of gross misconduct, from September 1, 2008, through December 31, 2009.

Beneficiaries are entitled to the subsidies for up to nine months or until they become eligible for new group coverage or Medicare. In all, lawmakers estimate that about 7 million people and their families will be able to retain health insurance coverage because of the subsidies.

Benefits experts welcomed the guidance for formalizing the IRS’ positions and for providing needed details.

“It is good to have this in black and white,” said Rich Stover, a principal with Buck Consultants in Secaucus, New Jersey.

“It is surprising in its breadth. A fair amount of detail was provided in various forums. But it really was impossible to keep track of everything,” said Andy Anderson, of counsel with Morgan, Lewis & Bockius in Chicago.

The key aspect of the guidance is clarification about what constitutes an involuntary termination—the trigger that makes an individual eligible for the subsidy.

Clarity on involuntary termination “is the big one here for employers,” said Sharon Cohen, an attorney with Watson Wyatt Worldwide in Arlington, Virginia.

The IRS’ definition of an involuntary termination is when an employer invokes its authority to terminate employment “where the employee was willing and able to continue performing services.”

The guidance also makes clear that there can be situations in which the involuntary termination standard would be met even though the employee initiated a termination. That could occur if the termination was due to employer action that results in a “material negative change in the employment relationship for the employee.”

The guidance provides several examples of how a material negative change could entitle a COBRA beneficiary to the subsidy.

Under one example, an employee elected to retire because he knew he would be terminated. That employee would be considered to have been involuntarily terminated.

Under the IRS guidance, an involuntary termination “is far more than an employer letting an employee go,” said Tim Stanton, a shareholder with Ogletree, Deakins, Nash, Smoak & Stewart in Chicago.

The guidance clarifies several other issues.

For example, employers do not have the right to deny the subsidy to higher-paid individuals who are not eligible for the subsidy because of their incomes. Unless those individuals sign a waiver revoking their right to the subsidy, they could take it, though they later would have to return it to the government.

In addition, beneficiaries can be eligible for the COBRA premium subsidy multiple times.

Take the example of an employee who is let go on March 1, 2009, opts for COBRA and receives the 65 percent premium subsidy.

Then, on October 1, 2009, he starts a new job, enrolls in the new employer’s health care plan, ending his COBRA coverage. On November 1, 2009, he is terminated and again takes COBRA. That individual would have a new right to nine months of federally subsidized COBRA coverage.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.