IRS Issues Guidance on an Employee’s Reduction in Hours and Involuntary Termination of Employment to Qualify for the 100 Percent COBRA Premium Subsidy
The American Rescue Plan Act of 2021 enacted on March 11, 2021 (the “Act”) provides a federally-funded, 100 percent subsidy for the premiums for COBRA continuation coverage from April 1, 2021 to September 30, 2021 for assistance eligible individuals. On May 18, 2021, the IRS issued Notice 2021-31, which provides comprehensive guidance on all aspects of the subsidy. The Notice is in the form of 86 questions and answers and spans 41 single-spaced pages. This news alert focuses on the guidance dealing with the two events that trigger entitlement to the subsidy: a reduction in hours and an involuntary termination of employment. The guidance on reduction in hours is found at Q&A 21 to 23, and on involuntary termination of employment at Q&A 24 to 34.
Definition of Assistance Eligible Individual
The Act defines an assistance eligible individual as an individual who:
- Is a qualified beneficiary for a period of COBRA continuation coverage that includes the months between April 1, 2021 and September 30, 2021;
- Is eligible for COBRA continuation coverage due to a reduction in hours or an involuntary termination of employment other than for gross misconduct; and
- Elects COBRA continuation coverage.
Other COBRA qualifying events, such as a voluntary termination of employment, a child’s aging out of dependent status, or divorce, do not qualify for the subsidy. Furthermore, if COBRA continuation coverage for a qualified beneficiary is based on a qualifying event other than a reduction in hours or an involuntary termination, and a later reduction in hours or involuntary termination does not cause a loss of group health plan coverage, the qualified beneficiary does not become a potential assistance eligible individual.
For example, an employee is divorced, and the divorce results in a loss of group health plan coverage for the spouse on November 1, 2020. The spouse is eligible for and timely elects COBRA continuation coverage. On December 1, 2020, the employee’s employment is involuntarily terminated, and the employee loses health coverage. The employee elects COBRA continuation coverage that begins on December 1, 2020. The spouse is not an assistance eligible individual because the spouse’s qualifying event is the divorce, and not the employee’s involuntary termination. The employee is an assistance eligible individual because his or her qualifying event is the involuntary termination.
An individual is not an assistance eligible individual if, as of April 1, 2021 or thereafter, he or she is eligible for coverage under another group health plan or Medicare. A group health plan does not include a dental, vision, or employee assistance plan, health flexible spending account, or qualified small employer health reimbursement arrangement. An individual eligible for retiree health coverage under a plan separate from the plan providing the COBRA continuation coverage is not an assistance eligible individual. However, if the retiree coverage is part of the same plan that provides the COBRA continuation coverage, the individual is an assistance eligible individual.
If an individual receiving the subsidy becomes eligible for coverage under any other group health plan or Medicare, the subsidy period ends. The individual must notify the group health plan of his or her eligibility for the other coverage. If the individual fails to notify the group health plan, the individual is subject to a penalty of $250 for each failure. If the individual fraudulently fails to notify the group health plan, the individual is subject to a penalty equal to the greater of $250 and 110 percent of the subsidy improperly received after the end of eligibility for the subsidy. The Summary of the COBRA Premium Assistance Provisions under the American Rescue Plan Act of 2021, issued by the Department of Labor, contains a form of Participant Notification for plans to distribute to recipients of the subsidy, so that they can notify the plan if they become eligible for other group health plan coverage or Medicare.
An individual who is a qualified beneficiary due to a reduction in hours or involuntary termination and is enrolled in individual health insurance coverage through a health insurance exchange is eligible to elect COBRA continuation coverage and receive the subsidy. However, that individual is not eligible for a premium tax credit to help pay for the cost of exchange coverage during any month that the individual has COBRA continuation coverage. An individual who elects COBRA continuation coverage, whether with or without the subsidy, and who has coverage through a health insurance exchange with advance payments of the premium tax credit may be required to repay the credit for the overlap months.
Extended Election Period
The Act provides an extended election period for certain individuals who do not have a COBRA election in effect on April 1, 2021. The extended election period is available for an individual who would be an assistance eligible individual if the individual had a COBRA election in effect on April 1, 2021, or for an individual who previously elected COBRA continuation coverage and discontinued that coverage before April 1, 2021. The extended election period continues for 60 days after these individuals are provided notice of the extended election period. The deadline for distribution of this notice was May 31, 2021. The resulting COBRA continuation coverage does not extend beyond the maximum period of coverage that would have been required if the individual had elected coverage initially as required by the COBRA rules or had not discontinued that elected coverage.
Employer’s Premium Assistance Tax Credit
An employer recoups the cost of the COBRA premium through a premium assistance tax credit. An employer reports the credit and the number of individuals receiving the subsidy on IRS Form 941 (Employer’s Quarterly Federal Tax Return). In anticipation of receiving the credit, the employer may reduce the deposits of federal employment taxes, including withheld taxes, that it would otherwise be required to deposit, up to the amount of the anticipated credit. The employer may also request an advance of the anticipated credit that exceeds the federal employment tax deposits by filing IRS Form 7200 (Advance Payment of Employer Credits Due to COVID-19). An employer cannot reduce its deposits or request advances for a period of coverage that has not begun. If an individual fails to provide notice that he or she is no longer eligible for the subsidy due to other available coverage, the employer can still claim the credit as long as it does not have knowledge of the disqualifying coverage.
If the employer contributes to the COBRA premium cost, the amount of the credit is the premium that would have been charged to an assistance eligible individual without the subsidy, and does not include any amount of the contribution that the employer would have provided. Thus, absent the subsidy, if the premium that the employer would have charged to an assistance eligible individual is less than the maximum COBRA premium, the credit is equal to the amount that the employer actually would have charged that individual.
For example, assume that the maximum COBRA premium is $1,000 per month, and absent the subsidy, the employer requires individuals to pay $500 per month. The premium assistance tax credit is $500 per month.
If a plan that previously charged less than the maximum COBRA premium increases the premium for similarly situated covered employees and their qualified beneficiaries, the subsidy applies to the increased premium amount. For example, assume that the maximum COBRA premium is $1,000 per month. For periods of coverage before April 1, 2021, the plan charges $500 per month for COBRA continuation coverage. Beginning April 1, 2021, the plan charges $1,000 per month for all covered employees and their qualified beneficiaries. The subsidy and the premium assistance tax credit are $1,000 per assistance eligible individual per month for the coverage beginning on April 1, 2021.
The employer includes the premium assistance tax credit in gross income and should have an offsetting deduction for its payment of the premiums. An assistance eligible individual does not include the subsidy in gross income. The employer is not eligible for the credit if it claims a credit for qualified health plan expenses under the Families First Coronavirus Response Act or for qualified wages under the Coronavirus Aid, Relief, and Economic Security Act.
Reduction in Hours
An employee’s reduction in hours will cause a qualified beneficiary to be a potential assistance eligible individual regardless of whether the reduction in hours is voluntary or involuntary.
In addition, a furlough would also cause a qualified beneficiary to be a potential assistance eligible individual. A furlough means a temporary loss of employment or complete reduction in hours with a reasonable expectation of return to employment or resumption of hours such that the employer and employee intend to maintain the employment relationship. An example of a reasonable expectation is one due to an expected business recovery of the employer. 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. A window program provides benefits in connection with an impending termination of employment, which may be an early retirement benefit, retirement-type subsidy, social security supplement, or other form of benefit made available for a limited period of time of not more than one year to employees who terminate employment during that period or to employees who terminate employment during that period under specified circumstances.
Finally, a reduction in hours includes a work stoppage, whether due to a lawful strike initiated by employees or their representatives or a lockout initiated by the employer. At the time that the work stoppage or lawful strike commences, the employer and employee must intend to maintain the employment relationship.
Involuntary Termination of Employment
An involuntary termination of employment means 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, when the employee was willing and able to continue to perform services. An employee-initiated termination of employment is an involuntary termination if the termination is 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.
The determination of whether a termination is involuntary is based on the facts and circumstances. For example, assume that a termination is designated as voluntary or a resignation, but the facts and circumstances indicate that the employee was willing and able to continue to perform services. Absent the voluntary termination, if the employer would have terminated the employee and the employee had knowledge that he or she would be terminated, the termination is involuntary.
Employee’s Absence from Work Due to Illness or Disability
If an individual is absent from work due to illness or disability, and there is a reasonable expectation that the individual will return to work after the illness or disability has subsided, an employer’s action to terminate his or her employment is an involuntary termination. A 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. Whether the absence from work is a reduction in hours potentially resulting in COBRA continuation coverage depends on whether the absence from work results in a loss of coverage under the group health plan.
Generally, a retirement is a voluntary termination of employment. However, if the facts and circumstances indicate that, absent retirement, the employer would have terminated the employee, that the employee was willing and able to continue employment, and that the employee had knowledge that he or she would be terminated absent the retirement, the retirement is an involuntary termination.
Employer’s Involuntary Termination of Employee for Cause
An employer’s involuntary termination of the employee for cause is an involuntary termination eligible for the subsidy. However, since a termination for gross misconduct is not a qualifying event for COBRA continuation coverage, it is not a termination eligible for the subsidy.
Change in Geographic Location
An employee’s resignation due to a material change in his or her geographic location of employment is an involuntary termination.
Employee’s Participation in a Window Program
An employee’s participation in a window program, under which employees with impending terminations of employment are offered severance arrangements to terminate employment within specified periods of time, results in an involuntary termination. The benefits in a window program may be an early retirement benefit, retirement-type subsidy, social security supplement, or other form of benefit made available for a limited period of time of not more than one year to employees who terminate employment during that period, or to employees who terminate employment during that period under specified circumstances.
Termination Due to Concerns About Workplace Safety
An employee-initiated termination due to general concerns about workplace safety is not an involuntary termination. A termination would be involuntary if the employee could demonstrate that the employer’s actions or inactions resulted in a material negative change in the employment relationship analogous to a constructive discharge. A departure due to the personal circumstances of the employee unrelated to an action or inaction of the employer, such as a health condition of the employee or a family member, inability to locate daycare, or other similar issues, generally will not rise to being analogous to a constructive discharge absent the employer’s failure to take a required action or provide a reasonable accommodation.
Termination Due to Child’s Inability to Attend School
An employee-initiated termination because a child is unable to attend school, or another childcare facility is closed due to the COVID-19 National Emergency, is not an involuntary termination. However, if the employee maintains the ability to return to work, and the facts and circumstances indicate that the COBRA qualifying event is a temporary leave of absence such that the employer and employee intend to maintain the employment relationship, the qualifying event is a voluntary reduction in hours, and the employee would be a potential assistance eligible individual.
Termination Due to Material Reduction in Hours
An employee-initiated termination in response to an involuntary material reduction in hours that did not result in a loss of group health plan coverage is a termination for good reason and an involuntary termination.
An employee’s death is not a reduction in hours or an involuntary termination so that a loss of health coverage due to the employee’s death would not result in the spouse and dependent children being potential assistance eligible individuals.
Employer’s Nonrenewal of Employee’s Contract
An employer’s decision not to renew an employee’s contract is an involuntary termination if the employee was willing and able to continue the employment relationship and was willing to sign a contract with terms similar to those of the expiring contract or to work without a contract. However, if the parties understood at the time they entered into the expiring contract and at all times when services were performed that the contract was for specified services over a set term and would not be renewed, the completion of the contract without its renewal is not an involuntary termination. These rules also apply to an employee whose employer is a staffing agency.
Employee’s Certification of Eligibility for the Subsidy
Employers may require individuals to provide a self-certification or attestation regarding their eligibility status as to reduction in hours or involuntary termination, and for other disqualifying group health plan coverage or Medicare. Employers that claim the premium assistance tax credit must retain in their records either a self-certification or attestation from the individual regarding his or her eligibility status, or other documentation to substantiate that the individual was eligible for the subsidy. An employer may rely on other evidence to substantiate eligibility, such as records concerning a reduction in hours or involuntary termination.
An employer can rely on an individual’s attestation as to a reduction in hours or involuntary termination, and eligibility for other disqualifying coverage, to substantiate the employer’s eligibility for the premium assistance tax credit, unless the employer has actual knowledge that the attestation is incorrect. Furthermore, as a matter of prudence, if the employer has reason to believe that the attestation is incorrect, it should look into the factual basis for the attestation.
The Summary of the COBRA Premium Assistance Provisions under the American Rescue Plan Act of 2021 issued by the Department of Labor contains a Request for Treatment as an Assistance Eligible Individual that has the employee attestations.