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IRS Issues Guidance on "Involuntary Termination" and other ARRA COBRA Issues

    Client Alerts
  • April 03, 2009

The IRS issued much anticipated guidance this week on the COBRA changes made by the American Recovery and Reinvestment Act of 2009 (“ARRA”).  While the IRS has released helpful FAQs relating to many aspects of these changes on its website and in the revised instructions to the Form 941, Notice 2009-27 (the “Notice”) is the first comprehensive guidance on these changes. 

The Notice provides an overview of the COBRA premium subsidy rules, and 58 questions and answers on key issues, including, among other things:

  • What is an “involuntary termination”
  • Who is an assistance eligible employee (“AEI”)
  • How to calculate the premium reduction
  • The types of coverage eligible for premium reduction
  • When the subsidy begins and ends
  • Recapture of premium assistance
  • Special second election period


Probably the most helpful guidance in the Notice addresses what is considered an “involuntary termination” under ARRA.  Many employers and plan administrators have been wrestling with how to interpret this term since the statute does not define it.  The IRS makes clear that an “involuntary termination” for purposes of the new COBRA premium subsidy is a severance from employment due to the independent exercise of unilateral authority of the employer to terminate the employment (other than due to the employee’s explicit or implicit request) where the employee was willing and able to continue performing services.  Further, whether a termination is involuntary will be based on all of the facts and circumstances of a particular termination.  For example, if a termination is designated as voluntary or as a resignation, but the facts and circumstances indicate that, absent such voluntary termination, the employer would have terminated the employee and the employee knew this fact, then that termination is considered involuntary for purposes of the premium subsidy.  This is a very liberal interpretation of “involuntary termination” and employers should reexamine all terminations since September 1, 2008, to make sure that they treat these terminations appropriately under this new guidance.

The Notice also addresses some questions that have consistently come up since ARRA’s enactment, including:

  • Can an individual become an AEI more than once?
  • Does the premium reduction apply to portions of the premium attributable to  COBRA for individuals who are not “qualified beneficiaries” (e.g., domestic  partners)?
  • Is the premium reduction available for COBRA coverage under a health  reimbursement arrangement (“HRA”)?
  • Can a plan refuse to provide the subsidy to an individual because of the  individual’s income?

Employers and plan administrators should review the Notice and review and adjust their compliance plan accordingly.  Importantly, since no model form has been provided, employers and plan administrators will need to develop a waiver form for high-income individuals who wish to permanently waive their rights to the premium subsidy once they receive their new notice.