These Boots Are Made For Walking…But If You Quit, You Might Not Get the COBRA Subsidy

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by Brenda Berg

April 8 UPDATE: The COBRA subsidy model notices referenced in this article are now available: https://www.dol.gov/agencies/ebsa/laws-and-regulations/laws/cobra/premium-subsidy. Employers should be working with their COBRA administrator on how to notify eligible individuals about the subsidy.

The COBRA subsidy from the most recent COVID-19 stimulus bill – The American Rescue Plan Act of 2021 (ARPA) – is now in effect. An assistance-eligible individual can have 100% of COBRA premiums subsidized for the periods beginning April 1, 2021 through September 30, 2021. All plan sponsors must offer the subsidy – it is not optional.

Eligible former employees and spouses/dependents (qualified beneficiaries) can receive the subsidy if they are already on COBRA. In addition, individuals who declined or dropped COBRA coverage can elect into COBRA under a “second bite at the apple” election process, if they are still in the remaining period of COBRA coverage that would have applied originally.

The next steps for employers are to (1) identify any individuals who are assistance-eligible, and (2) provide those individuals a notice of their eligibility for the subsidy no later than May 31, 2021. The DOL is required to issue a model notice by April 10; at this point, plan sponsors should probably wait and use the model notice.

Plan sponsors should not wait to start identifying any individuals who are potentially assistance-eligible – but should be working on that now. Assistance-eligible individuals are any employees who lost group health plan coverage due to involuntary termination or reduction of hours as far back as October 1, 2019 (because their COBRA periods could still be in effect) – plus any of their qualified beneficiaries who were also covered.

So what does involuntary termination or reduction of hours mean for this purpose? ARPA doesn’t define these terms. Therefore, until the regulatory agencies issue some guidance – if they do – employers should apply a reasonable interpretation of the terms and identify anybody who could potentially be eligible.

Congress provided a similar COBRA subsidy in 2009 in the American Recovery and Reinvestment Act of 2009 (ARRA), and may adopt a similar definition of “involuntary termination” here. For ARRA, Notice 2009-27 (03/31/2009) defined “involuntary termination” as “a severance from employment 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…The determination of whether a termination is involuntary is based on all the facts and circumstances….”

Here are some questions that we’ve been seeing come up about the eligibility:

  • Does the subsidy only apply to somebody who was terminated or had hours reduced due to COVID-19?
    • No, unlike other COVID-19 relief, there is no requirement that the action be due to an impact from COVID-19.
  • Does the subsidy apply to any reduction in hours that causes loss of health plan eligibility, or only an involuntary reduction in hours? For example, if an employee decides to lower his hours to below full-time employment where the health plan eligibility requires full-time employment and he loses coverage, does that reduction trigger the subsidy?
    • Unless we see guidance otherwise, it appears any reduction in hours could qualify, thus the voluntary reduction in hours could be eligible. This does not seem like the right result so at this time, we suggest identifying these individuals as potentially eligible and waiting for guidance. (Note that under the 2009 COBRA subsidy, reduction in hours was not a triggering event for the subsidy so past guidance is not helpful on this one.)
  • Does the subsidy apply to an involuntary termination even if the termination was for “cause” for a clear performance issue?
    • Yes, there is no exception for the reason of involuntary termination. The 2009 guidance specifically stated that involuntary termination included a termination for cause. However, note that if the termination rises to the level of “gross misconduct,” COBRA coverage may not be required at all (though that is a rare situation, and a position employers are reluctant to take).
  • Do we need to look at any voluntary terminations for eligibility?
    • Yes, probably. Under the 2009 guidance, an employee-initiated termination from employment could be considered an involuntary termination for purposes of the subsidy if the termination constitutes termination for good reason due to employer action that causes a material negative change in the employment relationship for the employee. “For example, if a termination is designated as voluntary or as a resignation, but the facts and circumstances indicate that, absent such voluntary termination, the employer would have terminated the employee’s services, and that the employee had knowledge that the employee would be terminated, the termination is involuntary.”
  • Is an employee who loses coverage after a certain number of months on disability or leave of absence, or due to termination after a period of disability or leave, eligible for the subsidy?
    • She could be. The loss in coverage is probably due to termination of employment or reduction in hours, even though the employer extended coverage for some time during the leave of absence. The 2009 guidance treated this type of termination as an eligible termination, and it appears that other losses of coverage (where the individual isn’t terminated) would be eligible for the subsidy as well.