An entertainment production services client downsized its workforce due to lack of revenue. It terminated the employment of an employee whose sales performance was poor. Through counsel, the employee threatened to sue our client to recover damages based upon alleged breach of contract, interference with prospective business relations, and defamation, among other claims. We disputed the claims and negotiated a settlement whereby the employer would pay a few months of the COBRA premiums in exchange for a general release. For this client, it was more prudent to “buy” a release for a nominal amount than to be “right” and spend large amounts in litigation.

As background, the American Recovery and Reinvestment Act of 2009 (ARRA), commonly known as the federal economic stimulus bill, includes a requirement that, for up to 9 months, employers pay 65% of the group health care insurance plan premiums for COBRA eligible employees and their dependents that elect COBRA, where the employee was involuntarily terminated from employment between September 1, 2008 and December 31, 2009. Eligible individuals pay only 35% of their COBRA premiums. The employer may recover the 65% of the premium by taking a credit on its quarterly federal employment tax return. Certain high-income individuals may have to repay all or part of the premium subsidy through an increase in their income tax liability for the year. Subsidy eligibility ends when the individuals are eligible for coverage under another group medical insurance plan or Medicare, or the normal period for COBRA eligibility ends.

Our client will be able to recover 65% of the full COBRA premiums it pays in the settlement from payroll tax credits. This effectively reduces the cost of the settlement. Of course, our client will obtain the same credit for the remainder of up to 9 months premium subsidy eligibility. Employees fired for gross misconduct (e.g., theft, drug use at work, or sexual harassment) are not eligible for the premium subsidy. Poor sales did not seem to meet this standard.

We also counseled our client on modifying its COBRA notices required by the ARRA. Next, we turned to the retroactive COBRA eligibility provisions of the AARA and their effect on previously terminated employees. Those involuntarily terminated between September 1, 2008 and February 16, 2009, and their eligible dependents, have a second chance to consider and elect COBRA benefits - even if they previously declined or dropped out of COBRA. The earliest period the subsidy may apply is March 1, 2009 for most plans, which use a calendar month as COBRA coverage periods. By April 18, 2009, employers must provide notice to all eligible individuals of this opportunity. COBRA coverage is not retroactive to the date these individuals lost coverage and there is no credit for COBRA premiums the individuals paid earlier than February 16, 2009. We are counseling our client now on inventorying prior terminations, determining whether they were involuntary, and drafting notices to be sent to this COBRA recapture group.

Source: Report To Plan Sponsors