Tax News

CCH (cch.taxgroup.com) reports:

  Individuals who accept an employer's offer to retire or resign to avoid broader layoffs will be eligible for the new COBRA subsidy under the American Recovery and Reinvestment Act (2009 Recovery Act) (P.L. 111-5), IRS officials said on March 24. Declining to relocate after an office or plant closure may also be treated as an involuntary termination. The IRS officials spoke during a webcast sponsored by the Department of Labor (DOL).

Premium Assistance

  The 2009 Recovery Act provides temporary COBRA premium assistance for individuals who are involuntarily terminated between September 1, 2008, and December 31, 2009. The COBRA subsidy is generally not available to individuals who voluntarily resign. The displaced worker or family member must be eligible for COBRA continuation coverage and elect coverage. Individuals who did not initially elect COBRA coverage have a limited window to do so now.

Involuntary Termination

  Since passage of the 2009 Recovery Act in February, the IRS and DOL have posted information about involuntary termination on their websites but have not published formal guidance (TAXDAY, 2009/03/19, T.1). CCH asked the IRS when formal guidance would be issued but did not receive a response by press time. Sources have told CCH that guidance is in the pipeline but it is unclear if the guidance will be issued formally or only posted on the Service's website.

  On its website, the IRS notes that "an employer-initiated layoff is generally an involuntary termination." The DOL explains on its website that "being told not to come back to work until further notice" is involuntary termination.

  The IRS officials described several involuntary termination scenarios during the webcast. "Where an employer is soliciting volunteers to retire or resign, or else be laid off, if an individual resigns under these circumstances, it is involuntary termination."

  A "constructive involuntary termination" may occur when an employer announces that an office or plant is closing and the workers can keep their jobs by relocating to another city or state. If an employee is unwilling to move, this may be an involuntary termination for the COBRA subsidy.

  Being called to military duty, however, is not an involuntary termination for the COBRA subsidy. "Military call-up is not an employer action to terminate employment."

Offset

  The 2009 Recovery Act allows individuals to pay 35 percent of the COBRA premium and be treated as paying the full premium. The employer (or the plan, in the case of a multi-employer plan) pays 65 percent of the premium and is reimbursed by taking an employment tax credit (IR-2009-15; TAXDAY, 2009/02/27, I.1).

  The IRS has cautioned employers that it will apply the COBRA reimbursement to unpaid employment or income taxes before refunding any balance. Employers will be notified of any offset.

2009 Returns

  In related news, the IRS announced on its website that paying reduced premiums is the only way an individual can take advantage of the COBRA subsidy. Individuals cannot take it as a credit when they file their 2009 returns.

Review

  If an individual is denied the COBRA subsidy, he or she can ask the DOL to review the denial, Kathryn Wilber, senior counsel for health policy, American Benefits Council, Washington, D.C., told CCH. "DOL must make a determination within 15 business days."

  A DOL official indicated during the webcast that a form to apply for review will be posted soon on the department's website. Employers will be able to submit information about why they denied the subsidy, the official said.

  By George L. Yaksick, Jr., CCH News Staff