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A Word from the IRS on Involuntary Terminations of Employment for Purposes of the ARP COBRA Premium Subsidy

One important question that arises when determining whether an individual is eligible for the COBRA premium subsidy under the American Rescue Plan Act of 2021 (“ARP”) is whether the employee has experienced an involuntary termination of employment.  (See our prior blogs on the ARP subsidy, here.) The IRS’s recent Notice 2021-31 (the “Notice”) provides helpful guidance on this issue.

What is an Involuntary Termination?

One of the key interpretive questions under ARP is “what is an involuntary termination of employment”?  Given the various factual circumstances that could arise, it is not surprising that this is one of the most frequently asked questions. The Notice helps define an involuntary termination of employment, and in many respects follows previous IRS guidance relating to the 2009 federal COBRA subsidy.

Under the Notice, the basic principle is that an involuntary termination means:

  • a severance from employment;

  • due to the independent exercise of the unilateral authority of the employer to terminate the employee’s 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. Even if a termination is labeled as “voluntary” or is designated as a resignation, it won’t necessarily be voluntary for ARP purposes. The Notice explains that such a termination will be involuntary if the circumstances indicate that the employee was willing and able to work and, absent the employee’s termination, the employer would have terminated the employee and the employee had knowledge of that. Here are some example scenarios from the Notice.

Termination for Cause

A termination by the employer for cause is an involuntary termination. However, if the employee was terminated due to gross misconduct, there will not be a COBRA qualifying event (and, thus, no subsidy).

Employee-Initiated Terminations

An important point made in the Notice relates to employee-initiated terminations. The Notice clarifies that even an employee-initiated termination will be considered involuntary if the employee leaves their job for “good reason” due to an employer action that caused a material negative change in the employment relationship for the employee, akin to a “constructive discharge.” The Notice provides examples such as terminations in response to an involuntary material reduction in hours, and a material change in the geographic location of employment.

The Notice makes clear, however, that an involuntary termination generally does not include a termination by the employee due to: (i) concerns about workplace safety, (ii) personal circumstances such as a health condition of the employee or a family member, the inability to locate daycare, or similar issues,  or (iii) the inability of a child to attend school or because another childcare facility is closed due to the COVID-19 pandemic (though in that case the termination may qualify as a reduction in hours if the circumstances indicate that it is a temporary leave of absence and the parties intend to maintain the employment relationship. An employee’s death also does not qualify as an involuntary termination for ARP purposes.

Absence Due to Illness or Disability

According to the Notice, absence from work due to illness or disability is not an involuntary termination for ARP purposes (though the individual may qualify for the premium subsidy if they lose health coverage due to the reduction in hours of employment). However, an involuntary termination will occur if the employer takes action to terminate the individual’s employment while they  are out on disability, if, prior to the termination, there was a reasonable expectation that the employee would return to work after the illness or disability had subsided.

Participation in a Window Program

Involuntary terminations also include situations where an employee with an impending termination participates in a window program, in which the employee is offered severance in exchange for agreeing to terminate employment within a specified time period. The Notice provides that, for this purpose, the window program must meet the requirements for such programs under the relevant IRS regulations.

Limited duration contract/seasonal employees

Some employees work under a limited duration employment agreement. For example, an employee might be hired for a six-month period, or for a particular season. In these cases, the question arises as to whether reaching the end of that period means that there has been an involuntary termination of employment.

As a general rule, the IRS view is that an employer’s decision not to renew an employee’s contract will be considered an involuntary termination if the employee was willing and able to continue the employment relationship and willing to execute a new contract with similar terms or continue without a contract. However, in a slight departure from the 2009 COBRA subsidy rules, the Notice provides that if the parties understood at the time they entered into the contract, and at all times while the services were being performed, that the contract was for specified services over a set term and would not be renewed, the completion of the contract without it being renewed is not an involuntary termination.


The IRS’ general view is that a retirement is not an involuntary termination. However, if the facts and circumstances indicate that, absent retirement, (i) the employer would have terminated the employee, (ii) the employee was willing and able to continue employment, and (iii) the employee had knowledge that they would be terminated, the retirement will be considered an involuntary termination. Moreover, in many cases, to “retire” simply means that the employee has met certain age and service conditions at the time of a termination of employment. So, if the employer terminates an employee who meets the applicable age and service requirements, the employee could retire, but still was involuntarily terminated.

More to Come

Even with the issuance of IRS Notice 2021-31, there are many unanswered questions that arise in connection with the ARP COBRA premium subsidy, particularly related to eligibility for the subsidy and the tax credit.  Stay tuned for important updates on these issues.

© 2021 Proskauer Rose LLP. National Law Review, Volume XI, Number 160

About this Author

Paul Hamburger Employee Benefits Law Attorney Proskauer Rose Law Firm

Paul M. Hamburger is co-chair of the Employee Benefits & Executive Compensation Group and head of the Washington, DC office. Paul is also a leader of the Practice Center’s health and welfare subgroup and a member of Proskauer’s Health Care Reform Task Force.

Paul provides technical knowledge and advice to employers on all aspects of their employee benefit programs, and advises employee benefit plan trustees and service providers on ERISA and employee benefit plan-related matters. He has extensive experience in negotiating service provider...

Roberta K Chevlowe, Labor, Employment, Attorney, Proskauer, Law Firm
Senior Counsel

Roberta Karen Chevlowe, a Senior Counsel in the Labor & Employment Law Department, practices in the field of employee benefits law. Roberta counsels employers and other benefit plan sponsors with regard to a broad spectrum of issues relating to the establishment, administration and continued legal compliance of all types of employee benefit plans. She advises clients regularly with regard to ERISA’s reporting and disclosure requirements and fiduciary duty provisions; health care reform compliance; COBRA administration; plan qualification issues arising under the Internal Revenue Code;...

Katrina E McCann, Proskauer Rose, Tax Lawyer, ERISA Attorney, Benefits

Katrina McCann is an associate in the Tax Department and a member of the Employee Benefits, Executive Compensation & ERISA Litigation Practice Center.

Katrina previously served as Special Assistant to the Mayor’s Office of Pension and Investments, assisting New York City’s Chief Pension Administrator with projects to improve the benefits administration, board processes, investment decision-making, and governance of City plans with a combined $130 billion under management. Before that she was Special Assistant Corporation Counsel, Pensions...


Joshua Stephens is an associate in the Tax Department and a member of the Employee Benefits & Executive Compensation Group. 

Related Practices

  • Tax
  • Employee Benefits & Executive Compensation