October 23, 2021

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Health Simplified

IRS Issues Guidance On An Employee’s Reduction In Hours And Involuntary Termination Of Employment To Qualify For The 100 Percent COBRA Premium Subsidy – Employment and HR


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The American Rescue Plan Act of 2021 enacted on March 11, 2021
(the “Act”) provides a federally-funded, 100 percent
subsidy for the premiums for COBRA continuation coverage from April
1, 2021 to September 30, 2021 for assistance eligible individuals.
On May 18, 2021, the IRS issued Notice 2021-31, which provides
comprehensive guidance on all aspects of the subsidy. The Notice is
in the form of 86 questions and answers and spans 41 single-spaced
pages. This news alert focuses on the guidance dealing with the two
events that trigger entitlement to the subsidy: a reduction in
hours and an involuntary termination of employment. The guidance on
reduction in hours is found at Q&A 21 to 23, and on involuntary
termination of employment at Q&A 24 to 34.

Definition of Assistance Eligible Individual

The Act defines an assistance eligible individual as an
individual who:

  1. Is a qualified beneficiary for a period of COBRA continuation
    coverage that includes the months between April 1, 2021 and
    September 30, 2021;

  2. Is eligible for COBRA continuation coverage due to a reduction
    in hours or an involuntary termination of employment other than for
    gross misconduct; and

  3. Elects COBRA continuation coverage.

Other COBRA qualifying events, such as a voluntary termination
of employment, a child’s aging out of dependent status, or
divorce, do not qualify for the subsidy. Furthermore, if COBRA
continuation coverage for a qualified beneficiary is based on a
qualifying event other than a reduction in hours or an involuntary
termination, and a later reduction in hours or involuntary
termination does not cause a loss of group health plan coverage,
the qualified beneficiary does not become a potential assistance
eligible individual.

For example, an employee is divorced, and the divorce results in
a loss of group health plan coverage for the spouse on November 1,
2020. The spouse is eligible for and timely elects COBRA
continuation coverage. On December 1, 2020, the employee’s
employment is involuntarily terminated, and the employee loses
health coverage. The employee elects COBRA continuation coverage
that begins on December 1, 2020. The spouse is not an assistance
eligible individual because the spouse’s qualifying event is
the divorce, and not the employee’s involuntary termination.
The employee is an assistance eligible individual because his or
her qualifying event is the involuntary termination.

An individual is not an assistance eligible individual if, as of
April 1, 2021 or thereafter, he or she is eligible for coverage
under another group health plan or Medicare. A group health plan
does not include a dental, vision, or employee assistance plan,
health flexible spending account, or qualified small employer
health reimbursement arrangement. An individual eligible for
retiree health coverage under a plan separate from the plan
providing the COBRA continuation coverage is not an assistance
eligible individual. However, if the retiree coverage is part of
the same plan that provides the COBRA continuation coverage, the
individual is an assistance eligible individual.

If an individual receiving the subsidy becomes eligible for
coverage under any other group health plan or Medicare, the subsidy
period ends. The individual must notify the group health plan of
his or her eligibility for the other coverage. If the individual
fails to notify the group health plan, the individual is subject to
a penalty of $250 for each failure. If the individual fraudulently
fails to notify the group health plan, the individual is subject to
a penalty equal to the greater of $250 and 110 percent of the
subsidy improperly received after the end of eligibility for the
subsidy. The Summary of the COBRA Premium Assistance Provisions
under the American Rescue Plan Act of 2021, issued by the
Department of Labor, contains a form of Participant Notification
for plans to distribute to recipients of the subsidy, so that they
can notify the plan if they become eligible for other group health
plan coverage or Medicare.

An individual who is a qualified beneficiary due to a reduction
in hours or involuntary termination and is enrolled in individual
health insurance coverage through a health insurance exchange is
eligible to elect COBRA continuation coverage and receive the
subsidy. However, that individual is not eligible for a premium tax
credit to help pay for the cost of exchange coverage during any
month that the individual has COBRA continuation coverage. An
individual who elects COBRA continuation coverage, whether with or
without the subsidy, and who has coverage through a health
insurance exchange with advance payments of the premium tax credit
may be required to repay the credit for the overlap months.

Extended Election Period

The Act provides an extended election period for certain
individuals who do not have a COBRA election in effect on April 1,
2021. The extended election period is available for an individual
who would be an assistance eligible individual if the individual
had a COBRA election in effect on April 1, 2021, or for an
individual who previously elected COBRA continuation coverage and
discontinued that coverage before April 1, 2021. The extended
election period continues for 60 days after these individuals are
provided notice of the extended election period. The deadline for
distribution of this notice was May 31, 2021. The resulting COBRA
continuation coverage does not extend beyond the maximum period of
coverage that would have been required if the individual had
elected coverage initially as required by the COBRA rules or had
not discontinued that elected coverage.

Employer’s Premium Assistance Tax Credit

An employer recoups the cost of the COBRA premium through a
premium assistance tax credit. An employer reports the credit and
the number of individuals receiving the subsidy on IRS Form 941
(Employer’s Quarterly Federal Tax Return). In anticipation of
receiving the credit, the employer may reduce the deposits of
federal employment taxes, including withheld taxes, that it would
otherwise be required to deposit, up to the amount of the
anticipated credit. The employer may also request an advance of the
anticipated credit that exceeds the federal employment tax deposits
by filing IRS Form 7200 (Advance Payment of Employer Credits Due to
COVID-19). An employer cannot reduce its deposits or request
advances for a period of coverage that has not begun. If an
individual fails to provide notice that he or she is no longer
eligible for the subsidy due to other available coverage, the
employer can still claim the credit as long as it does not have
knowledge of the disqualifying coverage.

If the employer contributes to the COBRA premium cost, the
amount of the credit is the premium that would have been charged to
an assistance eligible individual without the subsidy, and does not
include any amount of the contribution that the employer would have
provided. Thus, absent the subsidy, if the premium that the
employer would have charged to an assistance eligible individual is
less than the maximum COBRA premium, the credit is equal to the
amount that the employer actually would have charged that
individual.

For example, assume that the maximum COBRA premium is $1,000 per
month, and absent the subsidy, the employer requires individuals to
pay $500 per month. The premium assistance tax credit is $500 per
month.

If a plan that previously charged less than the maximum COBRA
premium increases the premium for similarly situated covered
employees and their qualified beneficiaries, the subsidy applies to
the increased premium amount. For example, assume that the maximum
COBRA premium is $1,000 per month. For periods of coverage before
April 1, 2021, the plan charges $500 per month for COBRA
continuation coverage. Beginning April 1, 2021, the plan charges
$1,000 per month for all covered employees and their qualified
beneficiaries. The subsidy and the premium assistance tax credit
are $1,000 per assistance eligible individual per month for the
coverage beginning on April 1, 2021.

The employer includes the premium assistance tax credit in gross
income and should have an offsetting deduction for its payment of
the premiums. An assistance eligible individual does not include
the subsidy in gross income. The employer is not eligible for the
credit if it claims a credit for qualified health plan expenses
under the Families First Coronavirus Response Act or for qualified
wages under the Coronavirus Aid, Relief, and Economic Security
Act.

Reduction in Hours

An employee’s reduction in hours will cause a qualified
beneficiary to be a potential assistance eligible individual
regardless of whether the reduction in hours is voluntary or
involuntary.

In addition, a furlough would also cause a qualified beneficiary
to be a potential assistance eligible individual. A furlough means
a temporary loss of employment or complete reduction in hours with
a reasonable expectation of return to employment or resumption of
hours such that the employer and employee intend to maintain the
employment relationship. An example of a reasonable expectation is
one due to an expected business recovery of the employer. A
furlough may be a reduction in hours regardless of whether the
employer initiated the furlough or the individual participated in a
furlough process analogous to a window program. A window program
provides benefits in connection with an impending termination of
employment, which may be an early retirement benefit,
retirement-type subsidy, social security supplement, or other form
of benefit made available for a limited period of time of not more
than one year to employees who terminate employment during that
period or to employees who terminate employment during that period
under specified circumstances.

Finally, a reduction in hours includes a work stoppage, whether
due to a lawful strike initiated by employees or their
representatives or a lockout initiated by the employer. At the time
that the work stoppage or lawful strike commences, the employer and
employee must intend to maintain the employment relationship.

Involuntary Termination of Employment

General Definition

An involuntary termination of employment 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, when the
employee was willing and able to continue to perform services. An
employee-initiated termination of employment is an involuntary
termination if the termination is for good reason due to employer
action that results in a material negative change in the employment
relationship for the employee analogous to a constructive
discharge.

The determination of whether a termination is involuntary is
based on the facts and circumstances. For example, assume that a
termination is designated as voluntary or a resignation, but the
facts and circumstances indicate that the employee was willing and
able to continue to perform services. Absent the voluntary
termination, if the employer would have terminated the employee and
the employee had knowledge that he or she would be terminated, the
termination is involuntary.

Employee’s Absence from Work Due to Illness or
Disability

If an individual is absent from work due to illness or
disability, and there is a reasonable expectation that the
individual will return to work after the illness or disability has
subsided, an employer’s action to terminate his or her
employment is an involuntary termination. A mere absence from work
due to illness or disability before the employer has taken action
to end the individual’s employment is not an involuntary
termination. Whether the absence from work is a reduction in hours
potentially resulting in COBRA continuation coverage depends on
whether the absence from work results in a loss of coverage under
the group health plan.

Retirement

Generally, a retirement is a voluntary termination of
employment. However, if the facts and circumstances indicate that,
absent retirement, the employer would have terminated the employee,
that the employee was willing and able to continue employment, and
that the employee had knowledge that he or she would be terminated
absent the retirement, the retirement is an involuntary
termination.

Employer’s Involuntary Termination of Employee for
Cause

An employer’s involuntary termination of the employee for
cause is an involuntary termination eligible for the subsidy.
However, since a termination for gross misconduct is not a
qualifying event for COBRA continuation coverage, it is not a
termination eligible for the subsidy.

Change in Geographic Location

An employee’s resignation due to a material change in his or
her geographic location of employment is an involuntary
termination.

Employee’s Participation in a Window Program

An employee’s participation in a window program, under which
employees with impending terminations of employment are offered
severance arrangements to terminate employment within specified
periods of time, results in an involuntary termination. The
benefits in a window program may be an early retirement benefit,
retirement-type subsidy, social security supplement, or other form
of benefit made available for a limited period of time of not more
than one year to employees who terminate employment during that
period, or to employees who terminate employment during that period
under specified circumstances.

Termination Due to Concerns About Workplace
Safety

An employee-initiated termination due to general concerns about
workplace safety is not an involuntary termination. A termination
would be involuntary if the employee could demonstrate that the
employer’s actions or inactions resulted in a material negative
change in the employment relationship analogous to a constructive
discharge. A departure due to the personal circumstances of the
employee unrelated to an action or inaction of the employer, such
as a health condition of the employee or a family member, inability
to locate daycare, or other similar issues, generally will not rise
to being analogous to a constructive discharge absent the
employer’s failure to take a required action or provide a
reasonable accommodation.

Termination Due to Child’s Inability to Attend
School

An employee-initiated termination because a child is unable to
attend school, or another childcare facility is closed due to the
COVID-19 National Emergency, is not an involuntary termination.
However, if the employee maintains the ability to return to work,
and the facts and circumstances indicate that the COBRA qualifying
event is a temporary leave of absence such that the employer and
employee intend to maintain the employment relationship, the
qualifying event is a voluntary reduction in hours, and the
employee would be a potential assistance eligible individual.

Termination Due to Material Reduction in Hours

An employee-initiated termination in response to an involuntary
material reduction in hours that did not result in a loss of group
health plan coverage is a termination for good reason and an
involuntary termination.

Death

An employee’s death is not a reduction in hours or an
involuntary termination so that a loss of health coverage due to
the employee’s death would not result in the spouse and
dependent children being potential assistance eligible
individuals.

Employer’s Nonrenewal of Employee’s
Contract

An employer’s decision not to renew an employee’s
contract is an involuntary termination if the employee was willing
and able to continue the employment relationship and was willing to
sign a contract with terms similar to those of the expiring
contract or to work without a contract. However, if the parties
understood at the time they entered into the expiring contract and
at all times when services were performed that the contract was for
specified services over a set term and would not be renewed, the
completion of the contract without its renewal is not an
involuntary termination. These rules also apply to an employee
whose employer is a staffing agency.

Employee’s Certification of Eligibility for the
Subsidy

Employers may require individuals to provide a
self-certification or attestation regarding their eligibility
status as to reduction in hours or involuntary termination, and for
other disqualifying group health plan coverage or Medicare.
Employers that claim the premium assistance tax credit must retain
in their records either a self-certification or attestation from
the individual regarding his or her eligibility status, or other
documentation to substantiate that the individual was eligible for
the subsidy. An employer may rely on other evidence to substantiate
eligibility, such as records concerning a reduction in hours or
involuntary termination.

An employer can rely on an individual’s attestation as to a
reduction in hours or involuntary termination, and eligibility for
other disqualifying coverage, to substantiate the employer’s
eligibility for the premium assistance tax credit, unless the
employer has actual knowledge that the attestation is incorrect.
Furthermore, as a matter of prudence, if the employer has reason to
believe that the attestation is incorrect, it should look into the
factual basis for the attestation.

The Summary of the COBRA Premium Assistance Provisions under the
American Rescue Plan Act of 2021 issued by the Department of Labor
contains a Request for Treatment as an Assistance Eligible
Individual that has the employee attestations.

Originally published June 2, 2021

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.