ARRA COBRA & Contracts

[Guest JavaJitterz]

Here's my subsidy dilemma of the day: An independent school hires it's teachers from August-June. The contract clearly states that the contract ends on a specific date and makes no mention of extending the contract if a position is available or giving the teacher first dibs on a comparable position. The teacher signs the contract, knowing he/she is only employed until a certain date. Would this be considered involuntary or voluntary termination at the end of the contract?

My gut says voluntary and that the subsidy would not be offered, others in the office feel it would be involuntary.

Input please!

[jpod]

Perhaps we need to know what happens to health care coverage during July and August, but putting that aside I would lean VERY heavily towards "involuntary" absent ARRA guidance from IRS or DOL to the contrary. The fact that there is a written contract, as opposed to an oral contract, is irrelevant, I think.

[Peter Gulia]

JavaJitterz, without commenting on the particular fact situation you described, here’s two thoughts that you might include in your suggestions to your client.

1) In deciding whether a continuee’s employment did or didn’t end as an involuntary termination, an ERISA-governed plan’s administrator must act as a prudent person familiar with administering employee-benefit plans would act in meeting the administrator’s duties, including the duty to administer the plan in a way that’s consistent with applicable law and the duty to administer the plan for the exclusive benefit of the plan’s participants and beneficiaries (except as otherwise required by law).

If an administrator is in doubt about whether a particular employment’s end was or wasn’t an involuntary termination within the meaning of ARRA § 3001(a)(3)© and IRC § 6432(e)(1), it must get expert advice (if a prudent person that acts according to ERISA’s standard would do so). Even in the absence of guidance from the Labor and Treasury departments, many good lawyers are ready to render that advice.

It’s tempting to give a continuee “the benefit of the doubt” and find an involuntary termination to allow him or her the Government subsidy. But doing so can harm other participants and beneficiaries. Getting the subsidy might cause someone who otherwise might not have elected continuation coverage to take it. That coverage could affect the experience of the plan, and could lead to cost increases. A cost increase could make coverage less affordable for participants and beneficiaries. In a worst case, a cost increase could move a plan sponsor to end its plan, resulting in a loss of coverage for everyone.

Although it seems a cruel choice to worry about whether allowing social subsidies for some could damage a health coverage opportunity of others, meeting fiduciary duties might at least permit (and some might say should require) an employer and plan administrator to consider these potential consequences.

2) If a claimant requests but is denied treatment as an assistance-eligible individual, he or she may choose a review by the Secretary of Labor. If the Labor department follows Congress’s Act, it would decide the review by 15 business days after it received the application for review. See ARRA § 3001(a)(5).

[Guest JavaJitterz]

The IRS finally issues guidance on contracts and I thought I had my answer: non-renewal of a teachers' contract would be an involuntary term if the teacher would execute a new contract if it were offered. I recently attended a seminar dually hosted by a prominent local brokerage and a prominent local law firm and they said that since the contract was for a particular project/term and the project/term has ended or no longer needed then they would not interpret the failure to renew as involuntary, even if the teacher was willing to continue.

I'm not a lawyer but I can't see where in the IRS guidance issued on 3/31 where it even makes mention about whether or not the employer has work. The way I read the guidance it says if the employee was WILLING to renew the contract if it was reoffered then it's involuntary term. If the employee had already accepted another teaching position out-of-state then he/she would not be willing to work and therefore would not be an AEI.

Am I missing something?

[jpod]

You are not missing anything. Also, the IRS has made it perfectly clear in their webinars that they would give the employer the benefit of the doubt in hard cases on whether a termination was "involuntary" (i.e., assuming the issue was ever spotted or raised in an employment tax audit, which I suspect would be darn near impossible).

If the employer wishes to take an aggressive approach and deny the premium subsidy, I would counsel against that, notwithstanding the employee's ability to get a quickie DOL hearing on the issue.