IRS Issues New Guidance on COBRA Subsidy


The Internal Revenue Service has issued Notice 2009-27 (.pdf), providing new guidance relating to the COBRA subsidy made available under the American Recovery and Reinvestment Act of 2009. Notice 2009-27 provides guidance on the definition of involuntary termination and assistance eligible individual. It also provides more detail on calculating the subsidy and determining the election periods.

Notice 2009-27 defines “involuntary termination” as

…  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. … The determination of whether a termination is involuntary is based on all the facts and circumstances….

The notice goes into much greater detail about “involuntary termination” if you are still unsure.

Notice 2009-27 defines “assistance eligible individual.”

An individual must be an assistance eligible individual to be eligible for the premium reduction. Under ARRA, an assistance eligible individual is a qualified beneficiary as the result of an involuntary termination that occurred during the period from September 1, 2008, through December 31, 2009, is eligible for COBRA continuation coverage at any time during that period, and elects the COBRA continuation coverage. In order to be a qualified beneficiary, the individual must be covered under the group health plan on the day before the involuntary termination (except in the case of a child born to or adopted by a covered employee during a period of COBRA continuation coverage or in certain circumstances where coverage was wrongfully denied the individual (see section 54.4980B-3, Q&A-1)). For purposes of Federal COBRA, an individual who loses group health coverage in connection with the termination of a covered employee’s employment by reason of the employee’s gross misconduct is not a qualified beneficiary and thus cannot be an assistance eligible individual.

Notice 2009-27 provides some more information on calculating premium reduction (questions 20 to 26), the coverage eligible for premium reduction (questions 27 to 29), the beginning of the premium reduction period (questions 30 to 32), the end of the premium reduction period (questions 33 to 44), the recapture of premium assistance (questions 45 to 46), and the extended election period (questions 47 to 55)

Although Notice 2009-27 answers many of the open questions, there are still some unanswered questions:

  • What mechanism should Multiemployer Plans use for collection of the premium reimbursement?
  • If an assistance eligible individual has paid for individual coverage through March and April of 2009, may he re-instate his COBRA as of May 1, 2009? If so, is he entitled to nine months of premium assistance starting May 1, 2009?
  • What penalties apply to employers who provide the subsidy, intentionally or unintentionally, to qualified beneficiaries who are not Assistance Eligible Individuals?

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