Payroll Briefs

Defining Involuntary Termination for the ARPA COBRA Subsidy

September 16, 2021

By now, most employers are aware of the 100% COBRA premium subsidy created under the American Rescue Plan Act (ARPA). The subsidy is available when certain employees (and their families) lose health coverage because of the employee’s reduction of hours or involuntary termination.

As you may have discovered, among the thorniest issues in assessing a qualified beneficiary’s eligibility for the subsidy is determining whether the employee was “involuntarily” terminated. The Internal Revenue Service (IRS) recently addressed the matter in Notice 2021-31.

When It is

According to the IRS, an involuntary termination is a severance from employment attributable to the employer’s exercise of unilateral authority to terminate employment where the employee was willing and able to continue performing services.

An employee-initiated termination of employment is also considered involuntary if an employer action “results in a material negative change in the employment relationship” that’s analogous to a constructive discharge. The determination of whether a termination is involuntary is based on the facts and circumstances of each case.

For example, an employee-initiated termination in response to an involuntary material reduction of hours — even if there was no loss of coverage — is generally an involuntary termination. So is an employee’s participation in a window program under which employees with impending terminations are offered a severance arrangement to terminate employment within a specified period.

A resignation because of a material change in the employee’s geographic location of employment is generally an involuntary termination. Likewise, an involuntary termination may have occurred if an employer ends an individual’s employment while he or she is absent from work because of illness or disability and, before the action, there was a reasonable expectation that the employee would return to work.

When It Isn’t

The IRS also provides examples of when an involuntary termination has likely not occurred. For instance, an employee’s death isn’t an involuntary termination that would make qualified beneficiaries, such as the spouse and dependent children, eligible for the premium subsidy.

In addition, an employee’s resignation because of general concerns about workplace safety usually isn’t an involuntary termination, nor is resignation because of a health condition or the inability to locate childcare.

Retirement usually isn’t an involuntary termination either. However, it could be considered an involuntary termination if, absent retirement:

  • The employer would have terminated a person’s employment,
  • The employee was willing and able to continue employment and
  • The employee knew of the impending termination.

Again, the specific facts and circumstances of each case will make the final determination.

Don’t Forget the Notice

While you’re grappling with the rules regarding involuntary termination, also be aware that, absent further legislative action, COBRA premium assistance ends on Sept. 30, 2021. Plans and issuers must provide eligible individuals with a notice warning that the premium assistance will soon expire, stating the expiration date and noting that other forms of coverage may be available. The notice needs to be provided 15 to 45 days before the individual’s premium assistance expires.

If you have questions about reporting your organization’s COBRA premiums, contact DM Payroll Solutions today.