Friday, March 13, 2009

Does An Employee Qualify For ARRA/COBRA Subsidy After Reduction In Hours Or Resignation?

Employers are scrambling to understand and implement the COBRA provisions in the American Recovery and Reinvestment Act of 2009 (ARRA). ARRA is commonly known as the economic stimulus legislation recently passed by Congress and signed by President Obama.

In a nutshell, ARRA entitles employees involuntarily terminated between September 1, 2008 and December 31, 2009 to continue health care coverage through COBRA by paying only 35 percent of their premiums for up to nine months. The remaining 65% is paid by employers, who may deduct the cost from federal payroll taxes. Employers must immediately comply with the law by providing notice to eligible individuals, collecting 35% of the premiums from the employees, paying 65%, and filing quarterly tax returns claiming a credit for the 65% subsidized amount. See my summary here.

Question: Under “regular” COBRA, a reduction in hours such that the employee loses eligibility for benefits will trigger COBRA. What about ARRA? If a company reduces an employee’s hours to part time, must (or may) the employer offer the ARRA premium subsidy?

The text of ARRA specifies that the premium is paid as a result of an “involuntary termination.” A reduction in hours is not a termination, and therefore it would seem that ARRA does not apply.

I called a representative at the Department of Labor’s Employee Benefits Security Administration, and he stated that ARRA would not apply in such circumstances.

Certainly it would be nice if the government put this interpretation in writing. So far as I know, to date this has not happened.

Question: What if the employee quits after receiving a reduction in hours. Does she then qualify for ARRA?

Again, the ARRA premium subsidy applies where there has been an involuntary termination. Resigning would not seem to be an involuntary termination. The same EBSA representative referenced above opined that in such circumstances, ARRA would not apply. Again, no official written interpretation has been published at this time.

While I would agree with the EBSA representative, I also think about state unemployment benefits. Although in California, for example, one is generally disqualified from receiving benefits in the event of a resignation, there are exceptions where the employee had no choice but to quit (e.g., illegal treatment in the workplace, and other such unforgivable sins). So far, I am not aware of any similarly broad interpretation of the phrase “involuntary termination” when it comes to ARRA.

If you hear differently, please let me know!

Submitted by:
Christopher W. Olmsted, Esq.
Barker Olmsted & Barnier, APLC