Employee Benefits & Executive Compensation Blog

The View from Proskauer on Developments in the World of Employee Benefits, Executive Compensation & ERISA Litigation

DOL Releases COBRA Premium Subsidy Model Notices – With a Few Surprises

Immediate Action Required

As discussed in our prior posts, the American Rescue Plan Act of 2021 (“ARP”) requires that plan administrators distribute new COBRA notices advising individuals of their possible rights to a COBRA premium subsidy.  Yesterday, the U.S. Department of Labor released new COBRA premium subsidy model notices and FAQs explaining how that is to be done.

New COBRA election notices must now be used for all qualifying events. Also, special COBRA election notices explaining ARP rights to individuals who terminated before April 1, 2021 must be provided by May 31, 2021. Notice of termination of the availability of the subsidy might have to be provided within the next few days (depending on when an individual’s COBRA premium subsidy expires).

Plan administrators and employers have to act swiftly to ensure compliance with ARP’s COBRA notice obligations.  Read below for more details about the notices and next steps.

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DOL Issues Notices and Guidance on ARPA COBRA Premium Subsidy

As we previously explained in prior blogs, the American Rescue Plan Act of 2021 (“ARPA”) includes a 100% COBRA premium subsidy for periods of coverage occurring between April 1 and September 30, 2021 for certain eligible individuals. Today, the U. S Department of Labor issued model notices and guidance in the form of Frequently Asked Questions (FAQs) to assist employers and plan administrators in fulfilling their notice obligations under the law and administering the COBRA subsidy. A link to the DOL notices and guidance is here.

Sixth Circuit Rules Retiree Healthcare Benefits Claim Is Not Arbitrable

The Sixth Circuit, in a split decision, held that a dispute between a union and an employer regarding retiree healthcare benefits was not arbitrable because the issue of retiree healthcare benefits was not encompassed within the collective bargaining agreement’s (CBA’s) grievance procedures.

The United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial and Service Workers International Union (the “Union”) commenced suit against LLFlex, LLC, (“Employer”), arguing that the Employer violated the CBA by refusing to arbitrate the Union’s grievance related to the Employer’s unilateral change requiring individuals who retired to pay a share of the premium cost of their healthcare benefits.  The CBA contained a grievance procedure with the last step being arbitration.  The Union utilized the CBA’s grievance procedure, but when the time came for arbitration, the Employer refused to engage in arbitration.

Before reaching the merits, the Sixth Circuit first concluded, contrary to the district court’s ruling, that the Union had Article III standing because a CBA is a contract and a party to the contract has a judicially cognizable interest for Article III purposes regardless of the merits of the claim.

Two of the three judges on the Sixth Circuit panel nevertheless concluded that the case was properly dismissed by the district court because the Union’s dispute over the change in retiree healthcare benefits was not arbitrable.  The Court identified three reasons for its decision.  First, the four-step grievance procedure clause applied only in limited circumstances, such as “working conditions, discharges, seniority rights, layoff and re-employment.”  Second, the retiree health benefits at issue were not mentioned in the CBA and therefore the grievance procedure clause was not susceptible to an interpretation that it covered a dispute regarding such benefits.  Finally, the CBA’s “Purpose of Agreement” article explained that the CBA only concerned conditions of employment for “employees” and retirees are not “employees.”

The dissenting judge reached the opposite conclusion for three reasons:  (i) the arbitration clause was available to “any employee who feels that he/she has a just grievance” and nothing in the grievance procedure clause prohibited the grievance committee from considering other “just grievances” not expressly listed in the clause; (ii) the grievance procedure had been used by the parties and there was no reason to prohibit the use of the final arbitration step; and (iii) the CBA expressly incorporated by reference the pension plan and that plan contained a clause about retiree health benefits.

The case is United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial and Service Workers International Union, AFL-CIO-CLC v. LLFlex, LLC,No. 19-5464, 2021 WL 1123301 (6th Cir. March 24, 2021).

Ninth Circuit Enforces Forum Selection Clause in 401(k) Plan

On April 1, 2021, the Ninth Circuit became the third circuit court to conclude that a forum-selection clause in an ERISA 401(k) plan is enforceable.  The Ninth Circuit thus denied a petition for mandamus seeking to overturn a district court decision transferring an ERISA action from the Northern District of California to the District of Minnesota.  In re Becker v. United States Dist. Court, No. 20-72805, __F.3d__ (9th Cir. Apr. 1, 2021).

The plaintiff in the Becker case is a former Wells Fargo employee and participant in the company’s 401(k) plan who brought a putative class action against Wells Fargo and others, alleging that defendants’ inclusion of certain Wells Fargo-affiliated plan investment alternatives breached their fiduciary duties of prudence and loyalty and violated ERISA’s prohibited transaction rules.  Despite the plan’s forum-selection clause, which specifies the District of Minnesota as the exclusive venue for plan-related disputes, the plaintiff filed her complaint in the Northern District of California.

Proskauer moved to transfer the case to the District of Minnesota pursuant to the plan’s forum-selection clause.  The district court granted the motion, reasoning that forum-selection clauses are presumptively valid and plaintiff did not meet her “heavy burden” to challenge this one.  After the district court denied plaintiff’s request to stay the order, she petitioned the Ninth Circuit for a writ of mandamus compelling the district court to rescind its transfer order.

The Ninth Circuit denied the “extraordinary remedy” of mandamus, holding that the plan’s forum-selection clause was enforceable.  The Court emphasized the presumptive validity of forum-selection clauses and reasoned that nothing in ERISA prohibits plans and participants from agreeing on a forum for litigating their disputes.  The plaintiff had argued that, because ERISA’s venue provision enumerates three locations where a suit “may be brought,” any agreement to limit venue violates the text of ERISA and the statute’s express purpose of providing plan participants with “ready access to federal courts.”  The Court rejected plaintiff’s argument and explained that while ERISA’s venue provision provides that an action “may be brought” in three specified locations, it did not prevent Wells Fargo and Becker from agreeing in advance to litigate in just one—the place where the plan is administered.  Furthermore, the forum-selection clause promoted, rather than hindered, ERISA’s goal of providing ready access to the federal courts by encouraging uniformity and guaranteeing a federal forum.  The Court also cited its recent decision enforcing an arbitration provision in a 401(k) plan in Dorman v. Schwab as demonstrating that plan participants can agree to a preferred forum through participation in a 401(k) plan.  The plan’s forum-selection clause was therefore enforceable, and the district court did not clearly err in transferring the case.

The Proskauer team representing Wells Fargo includes partners Russell L. Hirschhorn, John E. Roberts, and Myron D. Rumeld, senior counsel Joseph Clark, and associates Tulio Chirinos and Kyle Hansen.

ARPA COBRA Subsidy – Special Second Election Period (Two Bites at the Apple and Some Additional Food for Thought)

The American Rescue Plan Act of 2021 (“ARPA”) provides a 100% COBRA premium subsidy for “assistance eligible individuals” for periods of coverage occurring between April 1, 2021 and September 30, 2021, as summarized here.  An “assistance eligible individual” includes any qualified beneficiary who is eligible for COBRA coverage as a direct result of a covered employee’s reduction in hours or involuntary termination of employment.

A key feature of ARPA is that it provides for a special second election period for a qualified beneficiary who either: (1) does not have an election of COBRA coverage in effect on April 1, 2021, but who would be an assistance eligible individual if such election were in effect, or (2) elected COBRA coverage and discontinued that coverage before April 1, 2021.  The special election period begins on April 1, 2021 and ends 60 days after the date on which notice is provided to the individual.  Plan administrators must provide notice by May 31, 2021.

For individuals who elect COBRA coverage during this special election period, COBRA coverage commences with the first period of coverage beginning on or after April 1, 2021, and does not extend beyond the end of the original period of COBRA coverage that would have applied had the individual elected coverage (and not discontinued such coverage, if applicable).  For example, if a qualified beneficiary’s COBRA coverage would have started on December 1, 2019 and the individual elects COBRA coverage during the special second election period, the person’s subsidized COBRA coverage may last from April 1, 2021 through May 31, 2021.

As we have pointed out in our previous blog posts, there are a number of questions that arise in the interpretation of ARPA and administration of the COBRA subsidy.  The following are a few interesting quirks about the special second election period:

Spoiled for Choice: Retroactive and Prospective COBRA Coverage Options

Under general COBRA rules, a qualified beneficiary must elect and pay for COBRA coverage retroactively to the date of the loss of coverage.  Because COBRA election and payment deadlines are temporarily tolled under COVID-19 relief, as explained here, many individuals who lost coverage several months ago are still within their original COBRA election periods and may elect and pay for COBRA coverage retroactive to their loss of coverage.

Under ARPA, however, qualified beneficiaries may instead elect prospective COBRA coverage, starting April 1, 2021, through the end of the COBRA subsidy period.  This creates a planning opportunity, as individuals making an election will have an opportunity to elect COBRA coverage on a retroactive basis (back to their loss of coverage) or on a prospective basis (starting April 1, 2021), depending on their healthcare needs.  Regardless of which option such an individual elects, COBRA coverage will only be 100% subsidized from April 1, 2021 through September 30, 2021.

Two Bites at the Apple

Qualified beneficiaries eligible for the special election period described above include individuals who elected COBRA coverage and discontinued that coverage before April 1, 2021, as well as individuals who did not elect COBRA coverage before April 1, 2021—provided that the individual is still within the individual’s maximum COBRA period and lost coverage as a direct result of a covered employee’s reduction in hours of employment or involuntary termination of employment.

Open Issue: The statutory language of ARPA creates some ambiguity as to whether any qualified beneficiary (i.e., an individual who lost coverage due to a qualifying event other than reduction in hours or involuntary termination of employment) and who discontinued coverage before April 1, 2021 but is still within that individual’s maximum COBRA period—may reenroll in COBRA during the special election period, albeit without the COBRA subsidy.  Stakeholders have asked the agencies to confirm whether this is the case, as the broader interpretation does not seem consistent with the statutory intent underlying ARPA.

Special Second Election Period May Not Apply to State Law Continuation Coverage

While the COBRA subsidy is available for state law continuation coverage comparable to federal COBRA, the special second election period described above may be limited to periods of continuation coverage provided under federal COBRA.  This is because the section of ARPA that provides for the second election period references ERISA, the Internal Revenue Code, and the Public Health Service Act—but does not explicitly address state law programs.  This suggests that the special election period might not apply to state law continuation coverage.  We note that under the American Recovery and Reinvestment Act of 2009, subsequent agency guidance clarified that state law programs may choose to offer, but were not required to provide, a special second election period.  We expect similar clarification with respect to ARPA.

These are some of the issues relating to the special second election period under the ARPA COBRA subsidy.  We expect the government agencies to issue guidance soon.  Stay tuned for additional coverage and insight.

Fifth Circuit Rules that Project Completion Bonus is Not an ERISA Severance Plan

Whether a one-time payment of benefits constitutes an employee benefit plan under ERISA has been the source of some consternation in the courts for many years.  The Fifth Circuit, in Atkins v. CB&I, LLC, recently had occasion to consider the issue and held that a bonus conditioned on completing a project was not an ERISA severance plan.  2021 WL 1085807 (5th Cir. Mar. 22, 2021).

In Atkins, the employer’s “Project Completion Incentive Plan” offered a bonus to employees who worked until completing their roles on a project.  The bonus was styled as a “retention” bonus, but it was payable upon being laid off in a reduction-in-force or transfer to a different project site.  The plaintiffs were five former employees who quit mid-project.  They sued the employer in Louisiana state court alleging that the plan violated state wage law by denying bonuses to employees who quit prior to the project’s completion.  The employer removed the case to federal court on the ground that the plan was an ERISA-governed severance plan.

The district court treated the plan as a severance arrangement and held that ERISA applied because the plan’s individualized eligibility determinations required an “ongoing administrative scheme” typical of ERISA plans.  As a result, the district court concluded that the plan was governed by ERISA, which meant that ERISA preempted plaintiffs’ state law claims and the case would be adjudicated in federal court.

On appeal, the Fifth Circuit vacated the district court’s judgment and remanded the case to state court.  In its view, the plan was not subject to ERISA for several reasons.  First, the bonus was a single payment with a simple calculation: five percent of the employee’s earnings for the project.  Second, an individual’s eligibility coincided with the end of a discrete project and there was little, if any, discretion involved.  Finally, the employer lacked any special administrative procedures for handling claims and appeals, offering the plan on a large scale, or monitoring participants.  As a result, the Court concluded that the plan lacked the “complexity and longevity” typical of ERISA plans and was thus outside its scope.

Proskauer’s Perspective

The question of whether a severance plan requires an ongoing administrative scheme sufficient to be subject to ERISA is fact-specific, and the case law is not consistent from one court to the next, which makes it difficult to predict whether particular arrangements will be subject to ERISA.  This case caught our attention, because it appears that the plan could have been excluded from ERISA under 29 C.F.R. § 2510.3-2(c) by reason of being a bonus program that provided payments for work performed.  Unlike a typical severance arrangement, the plan language described the benefit as a “retention incentive” and payment was tied to completing projects, without regard to whether employment actually terminated.

What Happens Abroad, Apparently Does Not Stay Abroad – DOL Revokes Trump Administration Guidance That Provided Relief to QPAMs for Convictions Under Foreign Law

On November 3, 2020, the U.S. Department of Labor’s Office of the Solicitor of Labor (the “DOL”) issued an opinion letter (the “2020 Letter”) to the Securities Industry and Financial Markets Association (“SIFMA”) stating that it would not view a conviction under foreign law as a disqualifying event under Prohibited Transaction Class Exemption 84-14 (the “QPAM Exemption”).  The 2020 Letter represented a reversal of the DOL’s then longstanding position that a conviction under foreign law would disqualify a manager from being able to rely on the QPAM Exemption for a period of ten years.

However, on March 23, 2021, the DOL issued a follow-up opinion letter (the “2021 Letter”) to SIFMA withdrawing the Trump Administration DOL’s 2020 Letter because it was “issued through a flawed process and was based on a legal analysis that was inadequate to support abandoning the Department’s long standing position.”

The QPAM Exemption provides broad exemptive relief from the prohibited transaction restrictions of Section 406(a) of ERISA for transactions between a “party in interest” with respect to an ERISA plan and an investment fund or separate account holding “plan assets” of such ERISA plan (a “Plan Asset Account”), where the Plan Asset Account is managed by a “qualified professional asset manager” (a “QPAM”) and the other conditions of the QPAM Exemption are met.

At issue in the DOL’s guidance is the condition set forth in Section I(g) of the QPAM Exemption that prohibits a QPAM from relying on the exemption for a period of ten years if the QPAM (or a five percent or more owner or affiliate of the QPAM) is convicted of certain enumerated crimes that involve abuse or misuse of a position of trust or felonies described in Section 411 of ERISA[1], and whether or not a conviction under foreign law would prevent the QPAM from being able to satisfy such condition.

In the 2020 Letter, the DOL cited the plain language of Section 411 of ERISA, applicable legislative history, and persuasive Supreme Court case law, in stating its view that a conviction under foreign law would not prohibit a QPAM from relying on the QPAM Exemption if the other conditions of the exemption were satisfied.  In particular, the DOL noted that Section 411 of ERISA refers to Federal, State and local offenses, courts and prosecuting officials, but that nothing therein indicates that its listed crimes include foreign equivalents.  The DOL further noted that neither the language of the QPAM Exemption nor any associated guidance indicates that Section I(g) was intended to include foreign equivalents; in fact, the plain language of the QPAM Exemption expressly references concepts (e.g., “felonies,” “judgments” and “appeals”) that are generally only applicable to U.S. court systems.  The DOL was also not deterred by the fact that it previously took the position that convictions under foreign law would be a disqualifying event and, in light thereof, had granted administrative exemptions to Plan Asset Account managers allowing the QPAM Exemption to be available notwithstanding a conviction under foreign law.

However, in withdrawing the 2020 Letter, the DOL stated that the legal conclusions therein “were based on an inadequate analysis of the relevant issues and legal authorities as they pertain to prohibited transaction exemptions.”  In particular, the DOL stated that the 2020 Letter focused too heavily on an analysis of the reach of Section 411 of ERISA without acknowledging the differences between such provision and Section I(g) of the QPAM Exemption and their contexts.  Furthermore, the 2020 Letter “glossed over issues of substantial concern” and improperly bypassed and disregarded the Employee Benefits Security Administration’s (“EBSA”) role and expertise in administering the DOL’s prohibited transaction exemption program.  The 2020 Letter was issued directly to SIFMA and was not posted to the DOL’s website for over two months, which apparently bypassed a number of the DOL’s procedural requirements for issuing binding guidance, including EBSA’s advisory opinion process.

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The DOL noted that it would engage in a thorough analysis of these rules while it considers additional guidance.  In the interim, Plan Asset Account managers should assume that the DOL will treat convictions under foreign law as disqualifying events under the QPAM Exemption, and be prepared to have to rely on another exemption to the extent necessary.  The 2020 Letter and the 2021 Letter do not have any impact on QPAM-related individual exemptions previously granted by the DOL.

For ERISA plan fiduciaries, it is important to recognize that ERISA’s fiduciary duties of prudence and loyalty apply in the context of hiring, monitoring and retaining/firing a Plan Asset Account manager regardless of whether the Plan Asset Account manager may utilize the QPAM Exemption.  Accordingly, in making such decisions, ERISA plan fiduciaries should continue to diligence and take into account as appropriate whether a Plan Asset Account manager has a foreign law conviction and the possibility that Congress or the DOL could in the future revise the QPAM Exemption in a manner that would allow a Plan Asset Account manager with a foreign law conviction to utilize the QPAM Exemption.

[1] Section 411 of ERISA includes references to the following crimes: robbery, bribery, extortion, embezzlement, fraud, grand larceny, burglary, arson, murder, rape, kidnapping, perjury, and assault with intent to kill.

Some Family Members May Not Be Eligible for the ARPA COBRA Premium Subsidy

The American Rescue Plan Act of 2021 (“ARPA”) includes a 100% COBRA premium subsidy for “assistance eligible individuals,” for periods of coverage occurring between April 1, 2021 and September 30, 2021, as described in earlier blog posts.  An “assistance eligible individual” is any COBRA “qualified beneficiary” who loses group health coverage on account of a covered employee’s reduction in hours of employment or involuntary termination of employment. However, the subsidy is not available if the individual is eligible for other group health coverage or Medicare.

In general, COBRA’s definition of a “qualified beneficiary” includes only a covered employee and his or her spouse and dependent children who were covered under the health plan on the day before the COBRA qualifying event, as well as children born to or adopted by the employee during a period of COBRA coverage. Thus, other individuals who are receiving continued health coverage are not eligible for the ARPA premium subsidy. For example, some group health plans offer “COBRA-like” continuation coverage to an employee’s covered domestic partner, but domestic partners are not qualified beneficiaries under COBRA’s definition. In addition, if a former employee gets married while receiving COBRA coverage, the employee may enroll his or her new spouse in COBRA coverage in accordance with HIPAA’s special enrollment rules, but the spouse still is not a “qualified beneficiary” for COBRA purposes, because the spouse was not covered by the plan on the day before the employee’s qualifying event.

If a former employee who is an assistance eligible individual elects COBRA coverage that includes a family member who is not a qualified beneficiary (e.g., a domestic partner or a new spouse to whom the employee was not married at the time of the qualifying event), how much of the premium is not subsidized? And how much is the payroll tax credit to which the employer (or multiemployer plan or insurer) is entitled?

The IRS has not yet issued guidance on the ARPA premium subsidy. However, it may be instructive to review the guidance issued in 2009 when Congress enacted a similar COBRA subsidy as part of the American Recovery and Reinvestment Act (ARRA).  Although there is no assurance that the IRS will reach the same conclusions under ARPA, it may be helpful from a planning perspective to understand how this issue was previously addressed. CAUTION: The following analysis is based on the 2009 ARRA guidance and should not be relied upon without further guidance from the government. 

In connection with the 2009 ARRA COBRA premium subsidy (which was a 65% government subsidy), the IRS took an incremental approach when determining the amount eligible for the subsidy (and payroll tax credit).  In other words, if the cost of covering a non-qualified beneficiary did not add to the cost of covering the eligible individuals, then the COBRA premium for the non-qualified beneficiary is zero for purposes of the subsidy, and the entire premium was eligible for the subsidy. If the cost of covering a non-qualified beneficiary added to the cost of coverage, then the incremental cost to cover the non-qualified beneficiary was not eligible for the COBRA premium subsidy.

Example 1: Susan, an assistance eligible individual, elects COBRA coverage due to her involuntary termination from employment. She elects coverage for herself and all of her family members (who were covered under the plan on the day before the qualifying event), which includes her two dependent children and her domestic partner.  Susan and her family members are not eligible for other group health coverage or Medicare.

Under the terms of the plan, COBRA coverage for an employee plus-two-or-more-dependents costs $800 per month.  Therefore, the additional cost to cover Susan’s domestic partner is $0 per month. As a result, Susan would be entitled to the ARPA COBRA premium subsidy for the full $800 per month, and her former employer may claim the payroll tax credit for the full $800 per month.

Example 2:  Same facts as Example 1, except that Susan has only one child.  Although Susan still would be required to pay $800 per month for COBRA coverage for herself and two or more dependents, the COBRA premium is only $600 per month for self-plus-one-dependent. Accordingly, the incremental cost of covering her domestic partner is $200 per month. Therefore, Susan would be entitled to the ARPA subsidy in the amount of $600 per month (and must pay $200 per month for COBRA coverage for her domestic partner). The employer could claim the payroll tax credit for only $600 per month for the coverage for assistance eligible individuals.

This is just one of many questions that arise under the ARPA COBRA subsidy. We expect the government agencies to issue guidance soon.  Until then, the guidance issued in connection with the 2009 ARRA premium subsidy may be instructive as plan sponsors get ready to administer the ARPA subsidy.

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Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns. We will continue to evaluate the American Rescue Plan Act, the CARES Act, the Consolidated Appropriations Act, 2021, related regulations and any subsequent legislation to provide our clients guidance in real time. Please visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take, and resources to help manage ongoing operations.

ARPA COBRA Subsidy – When is a Termination of Employment Involuntary?

As we previously explained in our prior blogs, both here and here, on the new COBRA subsidy rules, the American Rescue Plan Act of 2021 (“ARPA”), includes a 100% COBRA premium subsidy for periods of coverage occurring between April 1 and September 30, 2021.  The subsidy is available to qualified beneficiaries who are eligible for COBRA coverage due to a covered employee’s reduction in hours of employment or involuntary termination of employment.

If someone’s entitlement to COBRA coverage is due to a reduction in hours of employment (leave of absence, for example), the question of whether it is voluntary or involuntary does not apply.  ARPA’s exclusion from the subsidy only applies to voluntary terminations of employment.

One of the key interpretive questions, therefore is “what is an involuntary termination of employment”?  Given the various factual situations that could arise, it is not surprising that this is one of the most frequently asked questions on the ARPA premium subsidy.  Back in 2009, Congress enacted another version of a COBRA subsidy and, at that time, the IRS issued guidance to help define an “involuntary” termination of employment.  There is no assurance that the IRS will reach the same conclusions under ARPA; but for those of you who are planning, the following criteria were relevant in 2009 and may be relevant today.

Under the 2009 rules, the basic principles are that an 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.

In the end, the determination of whether a termination is involuntary is based on all the facts and circumstances. So just because a termination of employment is labeled as “voluntary” does not mean it is voluntary for ARPA purposes. Again, here are some key scenarios from the 2009 guidance.

CAUTION: The following information is from 2009 guidance on COBRA subsidies and cannot be relied upon until the IRS and/or DOL issues ARPA guidance:


An involuntary reduction of employment to zero hours, such as a layoff, furlough or other suspension of employment, resulting in a loss of health coverage was treated as an involuntary termination. This was true even if the layoff included recall rights. Unlike the 2009 ARRA subsidy provisions, however, ARPA includes reduction in hours of employment as one of the qualifying events that trigger eligibility for the COBRA subsidy. Thus, a qualified beneficiary who loses coverage in these circumstances should be eligible for the ARPA COBRA subsidy without having to treat it as an “involuntary termination of employment,” assuming they satisfy the other eligibility requirements.


Generally, an employee-initiated strike was not treated as an “involuntary” termination of employment. However, a lockout initiated by the employer was an involuntary termination.

Severance deals/‘buy-outs’

The IRS included in the category of involuntary terminations a termination elected by the employee in return for a severance package (a “buy-out”) 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. What was less clear was how a truly voluntary buy-out would be treated.

Constructive termination/‘good reason’ quits

Another important category of “involuntary” terminations from 2009 included so-called “good reason” terminations. This refers to an employee-initiated termination from employment where the termination occurred by the employee for good reason due to employer action that caused a material negative change in the employment relationship for the employee. This could also apply if there is a significant change in the geographic location of where the services are performed.

Limited duration contract/seasonal employees

Some employees are hired through a voluntary but limited duration employment agreement. For example, an employee might be hired for six months. Or an employee might be hired for a particular season that begins in April and ends in September. In these cases, does reaching the end of the limited duration mean that there has been an involuntary termination of employment? As a general rule, the IRS view articulated in 2009 was that failure to return to work after the end of the initial contract was an involuntary termination. Specifically, an involuntary termination could include the employer’s failure to renew a contract at the time the contract expires, if the employee was willing and able to execute a new contract providing terms and conditions similar to those in the expiring contract and to continue providing the services. This was true even if the employer simply failed to offer additional work and was not limited to a case where the employer specifically terminates the employee.


If an employee retires, some might think that this means the individual was not involuntarily terminated. However, that may not necessarily be correct for purposes of ARPA. Under the 2009 guidance, if the facts and circumstances indicate that, absent retirement, the employer would have terminated the employee’s services, and the employee had knowledge that he or she would be terminated, the retirement would be treated as an involuntary termination. Moreover, in many cases, to “retire” simply means that the employee met certain age and service conditions at the time of a termination of employment. So if the employer fires an employee, if that employee met the age and service conditions, he or she could retire, but  still be considered to have involuntarily terminated employment.

Military call-up

In its 2009 guidance, the IRS indicated that an employee who was a member of a military Reserve unit or the National Guard and who was called up to active duty is to be treated as involuntarily terminated from employment. On a related note, the IRS also clarified that eligibility for coverage under TRICARE would not end entitlement to a premium subsidy.

Failure to be re-elected

The IRS indicated in its 2009 guidance that an elected official who completed his or her term of office and was not reelected was treated as involuntarily terminated. Similarly, an elected official who could not run again due to term limits was treated as involuntarily terminated at the end of his or her term of office. However, if an elected official simply failed to run for reelection when eligible, the termination was treated as voluntary.

These are just a few of the many scenarios that will arise in interpreting an “involuntary” termination of employment.  Hopefully, future IRS and/or DOL guidance will clarify the rules.