Employment Law Blog

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

Chris…

I am an insurance agent in Wisconsin.  We are trying to understand ARRA and have a few questions that seem to have no answers. Hopefully you may be able to shed some light.  Does the subsidy apply to non-medical plans like dental, vision, and HRA? Looks like it does. Can someone just take non-medical plans and have the subsidy?

What if an employee has her hours involuntarily reduced during the said window, with an employment end date of 12/31/09?  Is the employee granted an extended election period as well as established eligibility for the subsidy, since the company has expressed a future end date?

Thanks

Good questions. As to the reduction in hours followed by termination, the individual may be eligible for “regular” COBRA if the reduction in hours renders her ineligible for group health benefits. But the subsidized ARRA/COBRA right does not apply until the date of the involuntary termination. If the “end date” is 12/31/09, then the individual would qualifiy for the subsidy (for up to nine months) begining on 1/1/10.

As to which plans qualify for the subsidy, the types of plans covered by COBRA are also subject to the ARRRA subsidy. This would include medical, dental vision, prescription, or other group plan. And yes, the beneficiary can pick and choose to continue any or all of the plans.

I should add, with respect to the individual who first experiences a reduction in hours, followed later by a termination, that at the time of the termination the employee may not be eligible for an ARRA subsidy because she was not otherwise eligible for employee group benefits and the termination is probably not a second qualifying event. I’d like to hear from the DOL on this issue.

Our policy states you must be able to return to work with complete clearance to do your job from a doctor, no limited duties.
For qualifications under ARRA reduction premium…..Help! If an individual has exhausted a leave of abscence and does not return to work, is that consider involutary or voluntary?
Voluntary term- if the doctor releases them to work?
and Involuntary if the doctor does not release to work????

According to the IRS, terminations due to illness or disability are considered involuntary.

See: http://www.irs.gov/pub/irs-drop/n-09-27.pdf
Look at page six.

I would like to know if me and my family are eligible for the discount on COBRA.  My husband completed his General Surgery residency from a hospital who didn’t offer his a job so my husband decided to go into private practice.  I ask the hospital what they would say when ask about termination and they said that they would state that he resigned due to completion of his residency.  I have looked into other insurance which is very costly and the discount would really help us at this time.

Though I can’t give you specific legal advice, on the topic of “involuntary termination” under ARRA, the IRS states:

Q-1. What circumstances constitute an involuntary termination for purposes of the definition of an assistance eligible individual?
A-1. An involuntary termination 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, where the employee was willing and able to continue performing services. An involuntary termination may include the employer’s failure to renew a contract at the time the contract expires, if the employee was willing and able to execute a new contract providing terms and conditions similar to those in the expiring contract and to continue providing the services. In addition, an employee-initiated termination from employment constitutes an involuntary termination from employment for purposes of the premium reduction if the termination from employment constitutes a termination for good reason due to employer action that causes a material negative change in the employment relationship for the employee.

See: http://www.irs.gov/pub/irs-drop/n-09-27.pdf