IRS Releases Guidance on COBRA Subsidies

The Internal Revenue Service has released eagerly anticipated guidance on the new federal COBRA premium subsidies available to employees who lose their jobs.

The guidance, released Tuesday, March 31, resolves numerous questions—such as clarification of situations when laid-off employees are entitled to the subsidy—that employers have been asking for since the subsidy legislation was signed into law in February.

The subsidy, included in a broad economic stimulus measure, is available to employees who are involuntarily terminated between September 1, 2008, and December 31, 2009. A 65 percent federal premium subsidy is provided to eligible beneficiaries for up to nine months, until they become eligible for coverage from a new employer or a spouse’s employer, or until they become eligible for Medicare.

Lawmakers put the cost of the federal subsidy at about $25 billion, enabling as many as 7 million jobless people and their families to retain health care coverage.

Congress, eager to pass the legislation quickly, left the role of providing detailed guidance on the subsidy to the regulatory agencies, with the first major batch provided by the IRS in a question-and-answer format spanning 27 pages.

The most significant guidance—crucial for helping employers determine who is eligible for the subsidy and who is not—is defining what constitutes an “involuntary termination of employment” and then providing numerous examples of involuntary termination.

In the guidance, the IRS defines an involuntary termination as the independent exercise of an employer’s authority to terminate employment when the employee was willing and able to work. The determination of whether a termination is involuntary is based on all the facts and circumstances, not on whether a termination is designated as voluntary or a resignation.

For example, the IRS says, retirement could be considered an involuntary termination if the employee knew he or she would be terminated unless the individual retired.

In addition, the resignation of an employee who left due to a “material change” in the geographic location of the employer would be considered an involuntary termination.

The IRS guidance extends to many other areas as well, including how the premium subsidy is to be calculated when the employer pays part of the COBRA premium, whether the subsidy is available to those who continue only dental coverage, and the length of the subsidy for employees who are involuntarily terminated several times while the subsidy law is in effect.

The IRS guidance can be viewed here: Notice 2009-27. (Link opens an Acrobat document.)

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