For potentially millions of Americans who lost their healthcare coverage due to unemployment or reduced work hours last year, the American Rescue Plan Act might come as a welcome relief. While these unemployed or under-employed workers were eligible for COBRA coverage, many did not enroll due to the cost of premiums. The American Rescue Plan provides subsidies for these premiums, which will be repaid to employers as a tax credit, so that those who need coverage can enroll free of charge to them.

But because the rules differentiate between voluntary and involuntary unemployment, businesses are left to answer a big question: Which employees are actually eligible for the subsidized COBRA coverage?

The rules state that only those who experienced involuntary unemployment, or reduction in work hours that led to loss of healthcare coverage, are eligible for the new program. But with the IRS still determining what types of situations count as “involuntary”, we must look to past rules in order to make our best guess at which situations will lead to coverage.

In 2009, the IRS clarified “involuntary termination” with regard to COBRA as situations that meet the following rules:

  1. There was a severance from employment
  2. The severance was due to the independent exercise of the unilateral authority of the employer, and not due to the employee’s implicit or explicit request
  3. The employee was willing and able to continue working

Situations likely to count as involuntary include layoffs, severance deals and buyouts, military call-ups, seasonal employment, and non-renewal of contracts. However, in some cases, “good reason quits” and certain retirement situations might also qualify as involuntary.

As for those who lost healthcare coverage due to reduced working hours, the new law makes it clear that those who experienced both voluntary and involuntary reductions in hours will be eligible for the subsidized COBRA coverage. So, in those cases, it does not matter whether the reduction in hours was due to the employer’s or the employee’s decision.

We will continue to update business owners as more clarification regarding these rules is reached. If you need help navigating the rules for COBRA coverage, give us a call and we’ll be happy to help.