On Tuesday, March 31, 2009, the IRS issued its Notice 2009-27 providing additional guidance under the American Recovery & Reinvestment Act of 2009 (“ARRA”) relating to premium subsidies for COBRA coverage. The Notice addresses a number of issues, including the question of who is eligible for the subsidy, the method for calculating the premium reduction, and the length of the entitlement to the subsidy. [View the notice here.]

Of particular interest to employers is the guidance concerning what will be considered an “involuntary termination” entitling persons to the premium subsidy. The IRS gives this broad definition: “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.” Although it is a mouthful, that sounds simple enough. But, further language in the guidance and some of the specific examples show that there is plenty of room for disagreement about what is an involuntary termination. Of particular interest is language saying that the government will consider a resignation to be an involuntary termination if the resignation is “due to employer action that causes a material negative change in the employment relationship for the employee.”

This opens the door for some interesting possible disputes. Consider an employee who claims to have quit because of sex harassment. In some cases, an employee who resigns in response to severe harassment can sue the employer just as if she or he was terminated. It is called “constructive discharge.” The employer might argue either that the harassment did not occur or that what did occur was not sufficiently severe to support a “constructive discharge” claim. This sort of dispute sometimes is the subject of litigation that lasts for months or even years. Yet, under the COBRA subsidy provisions, the Department of Labor may end up making a decision on the dispute within the 15-day period set up to appeal disputes over what is an “involuntary termination.” The IRS guidance states that determinations of involuntary termination for purposes of ARRA are “not for any other purposes under the Code or any other law.” Nevertheless, employers should use a great deal of caution in characterizing any termination as “involuntary” unless the employer is convinced that it is an actual termination as a result of employer-initiated actions.


Here are a few other examples of involuntary termination issues:

1.         An employee with performance problems is confronted by the employer with an option: either quit or we will terminate you. 

  • The IRS guidance says this is considered an involuntary termination, regardless of whether it is called “resignation.” The same is true even if the resignation comes with a severance agreement.

2.         An employee fails to report to work for three or more consecutive days. The company’s policy states that, in that circumstance, the employee will be considered to have voluntarily resigned. Is this an involuntary termination?

  • This specific example is not addressed in the guidance. The best advice to an employer in this circumstance is to characterize the separation as a voluntary quit. However, if the employee appeals that characterization to the Department of Labor claiming he did not intend to quit, the Department of Labor might rule that the termination was instituted by the employer for violation of the work rule and was, therefore, involuntary.

3.         The employer has a policy to terminate employees after six months absence, regardless of the reason. The employer terminates an employee after six months on medical leave. (Of course, after properly considering whether the person is “disabled” under federal and state law and whether additional leave is necessary as a reasonable accommodation).

  • Under the IRS guidance, this would be considered an involuntary termination. Involuntary termination is said to occur whenever an employer terminates an employee due to ongoing absence for illness or disability.

4.         An employer institutes a voluntary retirement incentive program. 

  • The guidance states that an involuntary termination includes a resignation in return for a severance package (a “buy-out”) where the employer indicates that after the offer period for the severance package a certain number of persons will be terminated.

5.         For economic reasons, an employer reduces an employee’s hours so that he becomes part-time and loses medical coverage. Is this an “involuntary termination” triggering the premium subsidy?

  • In a somewhat ironic result, the guidance makes clear that a reduction in hours that does not take an employee to zero hours is not an involuntary termination, even if it results in loss of coverage. Therefore, the employee in this example will have a COBRA-qualifying event, but will not be entitled to the subsidy. In another twist, if the employee quits because of having been reduced to part-time, that might be considered a sufficient “negative material change” in employment conditions that the resignation will be treated as an involuntary termination.

Here are a few other specific examples characterized in the guidance as involuntary terminations: 

  • a lay-off for economic reasons, regardless of whether a right-to-recall is stated;
  • a retirement, if the employer would have terminated the employee if he had not retired and the employee was aware of that fact;
  • a termination for cause, so long as it does not arise to the level of gross misconduct; and
  • a lock-out initiated by a company, but not a strike by employees.

One issue that was not addressed in the guidance is the obligation under ARRA that employers or plan administrators seeking reimbursement of the 65 percent premium share maintain records of involuntary terminations, referred to in the statutory language as an “attestation” of involuntary termination. Absent further guidance as to what will suffice for this record-keeping, employers and plan administrators should be certain to maintain copies of the form with the model COBRA notices called “Request for Treatment As An Assistance-Eligible Individual,” because that form requires the person electing the subsidy to indicate his/her belief that the termination was involuntary and requires the employer to indicate its position as to whether the termination was involuntary. Maintaining a log reflecting how each termination was characterized by the employer, whether an appeal was filed, and the ultimate determination is another good idea.