In Notice 2009-27, the Internal Revenue Service (IRS) answered many questions regarding the new COBRA rules under the American Recovery and Reinvestment Act of 2009. This advisory supplements our February 19, 2009, and March 19, 2009, advisories and highlights the IRS' new guidance regarding involuntary terminations, how to calculate the 65 percent COBRA premium reduction (and corresponding payroll tax credit or refund), changes to the COBRA premium and retiree, dental and vision coverages under the new rules.

Involuntary Termination

The notice explained that "involuntary termination means 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." The IRS stated that the term "involuntary termination" includes:

  • A termination for good reason due to "employer action that causes a material negative change in the employment relationship for the employee."
  • A layoff with a right of recall or a temporary furlough.
  • A retirement, but only if absent the retirement, the employee knew he or she would be involuntarily terminated.
  • A termination elected by an employee in return for a severance package "where the employer indicates that after the offer period for the severance package, a certain number of remaining employees in the employee's group will be terminated."

Calculation of Premium Reduction

Under the new rules, assistance eligible individuals (generally those who are involuntarily terminated between September 1, 2008, and December 31, 2009, and who elect COBRA coverage) receive a 65 percent subsidy toward the cost of their COBRA coverage, i.e., they will be treated as having paid the premium in full so long as they pay 35 percent of the premium. The notice explained that the "premium" to which the subsidy applies is the cost the individual would otherwise pay for the COBRA coverage. The notice offered the following examples to illustrate how the subsidy works:

  • If the employer charges the full 102 percent permitted under COBRA (which for illustration purposes is assumed to be $1,000), the employee must pay $350 for up to nine months and the employer must subsidize the remaining $650 for those nine months (for which the employer can receive a corresponding payroll tax credit or refund).
  • If the employer treats the involuntary termination as the qualifying event but pays $500 of the employee's COBRA premium for the first three months, then:
  • The employee must pay $175 for the first three months (35 percent of the employee's $500 premium) and the employer must pay its normal $500 for the three months, plus a $325 subsidy (for which it can claim a corresponding payroll tax credit or refund).
  • The employee must pay $350 for the next six months and the employer must pay a $650 subsidy for the six months (for which it can claim a corresponding payroll tax credit or refund).
  • The employee must pay $1,000 for the remaining months of COBRA eligibility.
  • If the employer treats the involuntary termination as the qualifying event but pays the full cost of the COBRA coverage for the first three months, then:
  • The employee pays nothing for the first three months and the employer must pay its normal $1,000 for the three months, but because the employee's premium is zero, the employer cannot receive a corresponding tax credit or refund for any portion of its payment.
  • The employee must pay $350 for the next six months and the employer must pay a $650 subsidy for the six months (for which it can claim a corresponding payroll tax credit or refund).
  • The employee must pay $1,000 for the remaining months of COBRA eligibility.
  • If the employer pays for the cost of coverage for three months after the involuntary termination but treats the loss of coverage at the end of that three-month period as the qualifying event, then:
  • The employer must pay its normal $1,000 for the three months of continued coverage but is not entitled to claim a payroll tax credit or refund for any portion of the payment.
  • The employee must pay $350 for the first nine months of actual COBRA coverage and the employer must pay a $650 subsidy for the nine months (for which it can claim a corresponding payroll tax credit or refund).
  • The employee must pay $1,000 for the remaining months of COBRA eligibility.

Increase in Premiums

The notice clarified that an employer that currently charges less than the maximum premium for COBRA coverage can increase the cost of the premium (up to the 102 percent limit) in order to take full advantage of the subsidy. For example, if a severance plan requires the employer to pay the full cost of COBRA coverage ($1,000) for up to three months, the employer can modify the severance plan prospectively to require that the employee pay the full cost of the COBRA coverage, and if the employee is an assistance eligible individual, then employee's actual COBRA premium will climb to $350, but the employer will be able to claim a tax credit for the $650 it pays.

Moreover, the notice explained that in this scenario, the employer also could give the employee an additional taxable severance payment to help the employee fund the employee's 35 percent. For example, if the employer treats the involuntary termination as the qualifying event, charges the employee the full COBRA premium but separately gives the employee taxable severance of $400 per month for three months, then:

  • The employee must pay $350 for the first nine months and the employer must pay a $650 subsidy for the nine months (for which it can claim a corresponding payroll tax credit).
  • The employee must pay $1,000 for the remaining months of COBRA eligibility.

Nonetheless, the notice cautioned that the employer cannot simply credit the employee with the $350 in the foregoing scenario because that would violate the rule that the employee or someone acting on the employee's behalf (other than the employer) must pay 35 percent of the COBRA premium.

Availability of Subsidy for Retiree, Vision and Dental Coverages


The notice explained that retiree health coverage may be treated as COBRA coverage to which the subsidy and tax credit apply, so long as (1) the retiree was terminated involuntarily between September 1, 2008, and December 31, 2009, and (2) the retiree coverage does not differ from the health coverage made available to similarly situated active employees.

Finally, the notice clarified that the subsidy and tax credit are available for medical, dental and/or vision coverage. In other words, an employee who has all three coverages when the employee is involuntarily terminated can elect only dental coverage, in which case the 35 percent/65 percent split (and corresponding tax credit) apply only to the cost of the dental coverage. Nonetheless, the subsidy is not available for health flexible spending accounts.