IRS Issues Guidance on COBRA Premium Subsidy

The IRS has issued Notice 2009-27, which provides guidance on some of the issues which have arisen in connection with the new COBRA premium subsidy provided under the American Recovery and Reinvestment Act of 2009 (“ARRA”), enacted on February 17, 2009 (the “Enactment Date”). Under ARRA, individuals who become eligible for COBRA coverage due to an involuntary termination of employment (other than for gross misconduct) occurring from September 1, 2008 through December 31, 2009 may pay a reduced premium for COBRA coverage for up to 9 months, starting March 1, 2009. Such individuals include the terminated employee and his or her spouse and dependents, and are referred to as “Assistance Eligible Individuals” or “AEIs”. This premium reduction, which equals 65% of the amount otherwise required to be paid, is referred to as the “Subsidy”.

The period during which the Subsidy is available ends if the AEI becomes eligible for coverage under any other group health plan or for Medicare benefits. To make the Subsidy available, any AEI whose COBRA entitlement is due to an involuntary  termination which preceded the Enactment Date, and who on the Enactment Date is not receiving COBRA coverage (because he or she either failed to elect to receive the coverage or elected the coverage but later dropped it), must now be given a new period of time to elect to receive COBRA coverage and thus take advantage of the Subsidy (the “Extended Election Period”).


One of the issues which has arisen is what constitutes an involuntary termination of employment. Notice 2009-27 provides a detailed answer. Borrowing from the regulations under IRC Section 409A, it indicates that an involuntary termination of employment is (1) 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, or (2) an employee-initiated termination from employment taken for good reason, due to employer action which causes a material negative change in the employment relationship for the employee (e.g., such as a change in work location). Whether (1) or (2) exists depends on all facts and circumstances.

An involuntary lay-off period with a right of recall, or an involuntary temporary furlough period, under which the employee’s work load is reduced to zero hours is generally an involuntary termination for these purposes. Similarly, an employer initiated lockout is an involuntary termination. However, a reduction in an employee’s work hours other than to zero, an employee’s death, or an employee’s absence from work due to illness or disability, is not an involuntary employment. If the facts and circumstances indicate that, absent an employee’s retirement, the employer would have terminated the employee’s services, and the employee had knowledge of this, then the employee’s retirement is an involuntary termination.

Other questions answered by Notice 2009-27 include that:

  • An individual cannot be an AEI unless the involuntary termination of employment, and the loss of coverage under the group health plan due to such termination, occur during the period from September 1, 2008 to December 31, 2009.
  • An individual cannot be an EAI unless he or she is (1) the employee covered by the group health plan, (2) recognized as the spouse or dependent of the covered employee by Federal law and covered by the group health plan on the day before the involuntary termination or (3) a child who is born to or adopted by the covered employee during the period of COBRA continuation coverage. Thus, a spouse not covered by the plan before the involuntary termination, or a spouse by a union not recognized by Federal law (e.g., a same sex marriage), cannot be an AEI.
  • Generally, eligibility for coverage under a health reimbursement arrangement ( an “HRA”) does not cause the AEI to become ineligible for the Subsidy. Also, the Subsidy can apply to coverage under an HRA.
  • The premium used to determine the 65 percent Subsidy is the amount that would be charged to the AEI  for COBRA continuation coverage, if he or she were not an AEI. If, in the Subsidy’s absence, the AEI would be required to pay a premium equal to 102 percent of the “applicable premium” for COBRA continuation coverage (i.e., generally the maximum premium allowed under the COBRA rules), the Subsidy is equal to 65 percent of 102 percent of the applicable premium. However, if the premium that would be so charged to an AEI is less than the maximum COBRA premium, for example, if the employer itself pays all or part of the cost of coverage (through tax-free reimbursement or otherwise) , the 65 percent Subsidy applies only to the amount actually charged the AEI.
  • If an AIE elects to receive COBRA during the Extended Election Period, the first premium payment is due no earlier than 45 days after the date on which the election is made.