Post-Employment Welfare Benefit Continuation

[rocknrolls2]

Company X provides a severance plan for those employees whose employment is involuntarily terminated. Upon the execution of a release which becomes final, an employee is entitled to continue his/her medical and/or dental coverage under COBRA, with the employer providing the same subsidy that it provides for its active employees for the first 6 months. In addition, if the employee was at least age 50 and had completed at least 20 years of service, the employee would become eligible to continue coverage under the employer's post-retirement welfare plan. The severance plan was recently changed to provide that if an employee is severed and is within 6 - 12 months of satisfying the age and/or service requirements needed to obtain post-retirement welfare benefits, the employee is given the additional credit needed to become eligiible for post-retirement welfare benefits.

In analyzing this under Section 409A, it would appear that the COBRA subsidy should be excepted from Section 409A since it is provided on a nondiscriminatory basis under a self-funded medical plan. With respect to the ability of the employee becoming eligible for post-retirement welfare benefits if the employee is severed after having attained age 50 and completed at least 20 years of service, as well as being provided with 6-12 months additional credit needed to satisfy the age and/or service requirements to become eligible for post-retirement welfare benefits, does anyone have any thoughts on how this should be analyzed from the standpoint of Section 409A?

[Ron Snyder]

With respect to the ability of the employee becoming eligible for post-retirement welfare benefits if the employee is severed after having attained age 50 and completed at least 20 years of service, as well as being provided with 6-12 months additional credit needed to satisfy the age and/or service requirements to become eligible for post-retirement welfare benefits, does anyone have any thoughts on how this should be analyzed from the standpoint of Section 409A?

This is still a welfare benefit exempt from 409A. However, it may not comply with the nondiscrimination requirements applicable to welfare benefit plans under 505 (if the plan covers Key Employees) and 105 (for health benefits).

[KJohnson]

If it is discrminatory under 105(h) and lasts longer than the COBRA period then it is not exempt from 409A but the final regulations contain methods on how you could make such coverage compliant.