COBRA Rights for the Voluntarily Resigned

During the current recession, many employers are offering severance packages to their laid-off employees. The employers offer the employees several weeks or months of pay if the employee agrees to release the employer from almost every imaginable claim. Under these severance agreements, the parties agree that the employee voluntarily resigned and was not laid-off or involuntarily terminated.

Under the American Recovery and Reinvestment Act of 2009 (ARRA) that President Obama signed on February 17, 2009, involuntarily terminated employees may be eligible for premium assistance for their COBRA continuation coverage. (The end result of this premium assistance is that the former employee pays 35% of the premium and the federal government picks up the remaining 65%.) But the term "involuntarily terminated" raises a question regarding former employees who accepted a severance package for their voluntary resignation - Are these former employees eligible for the ARRA premium assistance for COBRA coverage?

The answer to this question is - it depends on the circumstances. While the statements of voluntary resignation in severance packages usually prevent employees from receiving unemployment compensation benefits, the employee would still most likely be eligible for COBRA continuation coverage if the employee pays the entire premium. Under COBRA, an employee may be eligible for continuation coverage for any termination that was not the result of the employee's "gross misconduct". 29 U.S.C. §1163. Because a voluntary resignation is a termination, most of the voluntarily resigned would be eligible to participate in COBRA coverage.

Unlike COBRA, the ARRA premium assistance does not apply to all employees terminated for any reason besides gross misconduct. To be eligible for this premium assistance, the employee must have been involuntarily terminated. An involuntary termination and a voluntary resignation may appear to be terms that are mutually exclusive of each other. But the United States Department of Labor (DOL) recently provided guidance to employers and employees in Notice 2009-27 regarding premium assistance for COBRA benefits under ARRA.

According to the DOL's Notice, an involuntary termination is a termination due to the employer's unilateral authority to terminate the employment where the employee was willing and able to continue his or her employment. Most severance agreements that indicate the employee voluntarily resigned are usually offered by an employer to protect the employer from wrongful termination claims. If the employer would have terminated the employee without the employee's voluntary resignation, and the employee knew he or she would be terminated if the employee did not agree to resign, then, according to the Notice, the termination is involuntary and the employee would be eligible for premium assistance.

Nevertheless, the employee would not be eligible if the employer's termination of the employment was the result of the employee's gross misconduct. "Gross misconduct" is not the equivalent of "terminated for cause". Gross misconduct usually involves behavior that is criminal or highly unethical, such as stealing from the employer or providing the employer's trade secrets to a competitor. An employer could terminate an employee for cause, such as the result of excessive absenteeism or insubordination, but such causes usually do not rise to the level of gross misconduct. Therefore, the employee would most likely still be eligible for COBRA continuation coverage and for the premium assistance.

For many loyal employees, being laid-off jeopardizes their health coverage and the coverage of their families. If an employer wants to allow these employees to maintain health coverage for a relatively reasonable premium payment during the current recession, the employer should contact an employment attorney to prepare severance agreements that would allow these employees to receive premium assistance for their COBRA continuation coverage.