New COBRA Subsidy Question: Material Negative Change in Employment Relationship under IRS Guidelines
Posted: 15 April 2009 12:02 PM   [ Ignore ]
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Okay, so we now know that an involuntary termination:

[M]eans 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.

[IRS Notice 2009-27].

Now, another question arises: What constitutes a material negative change in the employment relationship that causes an employee to resign that would be sufficient to trigger eligibility for the COBRA subsidy?  Would a paycut or reduction in holidays suffice?  What about a reduced bonus, or no bonus altogether?

I appreciate your insight.

Best,

Jonathan F. Cohen, Esq.
APRUZZESE, McDERMOTT,
MASTRO & MURPHY,P.C.
Somerset Hills Corporate Center
25 Independence Boulevard
P.O. Box 112
Liberty Corner, NJ 07938
Tele: (908) 580-1776
Fax: (908) 647-1492
email:  .(JavaScript must be enabled to view this email address)

[ Edited: 15 April 2009 12:21 PM by Jonathan F. Cohen ]
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Posted: 17 April 2009 12:08 PM   [ Ignore ]   [ # 1 ]
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Who knows??? 

This whole thing has been a mess from the beginning and the DOL letters are so badly written that it took me about three hours of reading them over and over again to realize that it would be better to write my own letters.

But, here is my thought on this. I compare the voluntary resignation to those that qualify for unemployment compensation in most states.  If there is a material change in wages or hours and the employee quits, most states allow the employee to receive unemployment compensation.  I am using this as a standard. 

As for a cut in holidays or vacation time, I do not believe this would count under ARRA COBRA because the hours and earnings have not changed. 

I hope this helps.

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Bob McKenzie
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Posted: 17 April 2009 03:39 PM   [ Ignore ]   [ # 2 ]
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Why lose sleep over it?  Remember that the point of the program is to provide benefits to employees in a time of crisis.  The program is self-enforcing and self-funding in the sense that the employer funds the subsidy by claiming an off-set against social security tax payments that would otherwise be due to the government.  So long as the employer acts in good faith, does anybody think that the IRS or the DOL is going to come in and audit the records looking for an instance of a single employee who received the subsidy after leaving employment based on a quit after a material change in terms of employment and scrutinize whether the changes were truly material enough to warrant the subsidy payments?  It’s not going to happen.  Since it really doesn’t “cost” the Company anything to provide the subsidy, why not just pay it.  The flip side is that if you deny the subsidy, you’ll have a former employee with a vested interest in shaking the tree to make sure he gets benefits and won’t hesitate to call the DOL or the IRS claiming that you screwed him out of his subsidy.  Where is the risk lower?

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Posted: 17 April 2009 03:46 PM   [ Ignore ]   [ # 3 ]
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Kevin G. Chapman - 17 April 2009 07:39 PM

Why lose sleep over it?  Remember that the point of the program is to provide benefits to employees in a time of crisis.  The program is self-enforcing and self-funding in the sense that the employer funds the subsidy by claiming an off-set against social security tax payments that would otherwise be due to the government.  So long as the employer acts in good faith, does anybody think that the IRS or the DOL is going to come in and audit the records looking for an instance of a single employee who received the subsidy after leaving employment based on a quit after a material change in terms of employment and scrutinize whether the changes were truly material enough to warrant the subsidy payments?  It’s not going to happen.  Since it really doesn’t “cost” the Company anything to provide the subsidy, why not just pay it.  The flip side is that if you deny the subsidy, you’ll have a former employee with a vested interest in shaking the tree to make sure he gets benefits and won’t hesitate to call the DOL or the IRS claiming that you screwed him out of his subsidy.  Where is the risk lower?

True enough.  Of course, if a client comes to us seeking legal advice as to whether a former employee is entitled to the subsidy, I have to be able to give them some kind of answer besides throwing up my hands and say, “Why not?”

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Posted: 17 April 2009 03:56 PM   [ Ignore ]   [ # 4 ]
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Good Points Kevin. 

So, I guess the answer to the original question is to be as conservative as possible - this is the reason for us using the unemployment comp scenario as a basis for the definition of a material negative change in the employment relationship. As far as I know, this is all we have to go on.  Until I find out differently, we will use this as our guideline.

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Posted: 17 April 2009 04:32 PM   [ Ignore ]   [ # 5 ]
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There is a potential downside to letting everyone have the subsidy if their claims experience exceed the premium receive by the insurance carrier (insurance plan) then the negative experience will costs the employer and employees down the road.  Could potentially be a significant negative impact on plan costs due to this special adverse selection opportunity that terminated employees will have.

Fred

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