The IRS recently issued a detailed notice (Notice 2021-31) providing much-needed guidance on the application of the temporary premium assistance for Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage created by the American Rescue Plan Act of 2021. The Notice provides answers to many of the questions we raised when we first wrote about the subsidy in April. As a reminder, employers must pay 100% of their eligible former employees’ COBRA premiums from April 1 through September 30, 2021.

First, the IRS has clarified what circumstances constitute a reduction in an employee’s hours for the purpose of subsidy eligibility. These circumstances include:

• An involuntary or voluntary reduction in hours that causes a loss of eligibility for coverage under the employer’s group health plan.

• A furlough (defined as “a temporary loss of employment or complete reduction in hours with a reasonable expectation of return to employment or resumption of hours … such that the employer and employee intend to maintain the employment relationship”), whether the employer initiated it or the employee chose to participate in a furlough process.

• A work stoppage due to a lawful strike or a lockout initiated by the employer, so long as the employer and employee intend to maintain the employment relationship.

Second, the IRS provided several important clarifications about what may constitute an “involuntary termination of employment.” Such a qualifying circumstance includes:

• An employee-initiated termination, if it was for “good reason,” which may include a material change in the geographic location of the employee’s employment, an involuntary and material reduction in hours (that did not otherwise qualify the employee for the premium subsidy), or any other employer action “that results in a material negative change in the employment relationship … analogous to constructive discharge.”

• A termination that is designated as “voluntary” or as a “resignation” but, under the circumstances, is clear that the employer would have terminated the employee had the employee not agreed to the “voluntary” label.

• A termination for “cause” under an employment agreement, so long as it does not rise to the level of gross misconduct.

• A separation in which the employee participates in a “window program,” that is, when an employee with an impending termination is offered a severance arrangement to terminate their employment within a specified period of time.

• A failure to renew an employment agreement, unless the parties understood when they signed the agreement that it would not be renewed and was only for a set term.

• A retirement, but only where the circumstances show that the employee knew that the employer would have terminated the employee if they had not retired.

Two additional notes:

• The Notice makes clear that a person who is eligible for the COBRA premium assistance remains eligible until they are actually permitted to enroll in coverage under another group health plan, including during any waiting period for such other plan.

• In order to help employers access the tax credit provided by the Act, employers may require individuals to provide a self-certification or attestation regarding their own eligibility status due to a reduction in hours or involuntary termination of employment, or regarding their eligibility status for other disqualifying group health plan coverage or Medicare.