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IRS Provides Answers to COBRA Subsidy Questions

Insights | IRS Provides Answers to COBRA Subsidy Questions

Author: Shelly Hodges-Konys, CBC, Director of Compliance

On Tuesday, the Internal Revenue Service (IRS) provided some answers to the most frequently asked questions by employers and benefits professionals over the last six weeks - including everyone’s favorite – “What is an involuntary termination of employment?!?” The IRS responded by way of Notice 2021-31. In addition to defining involuntary termination, the guidance provides answers to questions about substantiation of subsidy eligibility, the mechanics of how to claim the tax credit, the interaction between the subsidy and the outbreak period, and more. But that is a lot to attempt to cover in a single blog post. In this post, we will dive into involuntary termination.

The guidance defines an involuntary termination as one that is “due to the independent exercise of the unilateral authority of the employer to terminate employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services.” This makes things sound as simple as the difference between “you’re fired” and “I quit.” But, things are rarely that simple and whether a termination is involuntary ultimately depends on the facts and circumstances of the situation involving termination of employment. 

Examples of involuntary termination from the guidance include:

  • A resignation in which the facts and circumstances indicate that the employee was willing and able to continue performing services but, absent the voluntary termination, the employer would have terminated the employee’s services, and the employee had knowledge of that fact. (Q&A 24)
  • In the case of illness or disability, a termination of employment is involuntary if the employer takes action to terminate the individual and there was a reasonable expectation that the employee will return to work at the end of the illness or disability before the termination. (Q&A 25)
  • Terminations for cause except in instances of gross misconduct. (Q&A 27) It is recommended that employers consult legal counsel before choosing not to offer COBRA due to gross misconduct and if COBRA was initially offered, an employer cannot now decide not to offer the extended election due to gross misconduct. 
  • An employee’s resignation as the result of a material change in the geographic location of employment for the employee constitutes an involuntary termination. (Q&A 28)
  • An employee-initiated termination of employment in response to a material reduction in hours without a loss of coverage. (Q&A 32)
  • Termination of an employee’s contract if the employee was willing and able to execute a new similar contract or willing to continue without a contract. (Q&A 34) The end of a contract is voluntary only if it was understood by both parties at all times that the contract would not be renewed.

Terminations of employment or coverage due to retirement, the death of the employee, voluntary resignation due to health concerns of the employee or family member or the resignation of the employee due to lack of childcare or school closure generally do not constitute involuntary termination of employment. 

 

Employer Action

Many COBRA administrators have asked employers to provide input into whether terminations were involuntary or voluntary for purposes or providing ARPA Extended Election notices. If you have already provided this input, you should act quickly to review your list of employees to determine if any changes are necessary in light of this guidance. Remember that the Extended Election Notices must be sent by May 31.

If you have additional questions, please contact your HORAN Account Manager or Client Specialist.

 

The information contained in this document is informational only and is not intended as, nor should it be construed as, legal or accounting advice. Neither HORAN nor its consultants provide legal, tax nor accounting advice of any kind. We make no legal representation, nor do we take legal responsibility of any kind regarding regulatory compliance. Please consult your counsel for a definitive interpretation of current statutes and regulations and their impact on you and your organization.