Yes, pursuant to IRS guidance (Notice 2009-27), a buy-out constitutes an involuntary termination for purposes of the COBRA premium subsidy. The guidance defines “involuntary termination” and also provides examples of circumstances that constitute an involuntary termination.

Background. The American Recovery and Reinvestment Act of 2009 (ARRA) provides for a 65-percent reduction in the premium otherwise payable by certain involuntarily terminated individuals and their families who elect COBRA. Under the new provision, an assistance eligible individual is generally an individual who:

1. is a qualified beneficiary as the result of an involuntary termination during the period from September 1, 2008, through December 31, 2009;
2. is eligible for COBRA coverage at any time during that period; and
3. elects the coverage.

Involuntary termination. The IRS guidance defines “involuntary termination” for purposes of the definition of an assistance eligible individual as:

• 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.

An employee-initiated termination from employment constitutes an involuntary termination if the termination is for good reason due to employer action that causes a material negative change in the employment relationship for the employee. For example, a reduction in hours is not an involuntary termination, but an employee's voluntary termination in response to an employer-imposed reduction in hours may be one if the reduction in hours is a material negative change in the employment relationship.

Examples. The following circumstances constitute an involuntary termination:

• a lay-off period with a right of recall or a temporary furlough period;
• an employer's action to end an individual's employment while the individual is absent from work due to illness or disability;
• retirement, if the facts and circumstances indicate that, absent retirement, the employer would have terminated the employee's services, and the employee had knowledge he or she would be terminated;
• involuntary termination for cause except due to gross misconduct;
• resignation as the result of a material change in the geographic location of employment;
• a lockout initiated by the employer; and
• a buy-out where the employer indicates that, after the severance package offer period, a certain number of remaining employees in the employee's group will be terminated.

The guidance states that involuntary termination does not include the death of an employee or absence from work due to illness or disability.

Source: IRS Notice 2009-27, I.R.B. 2009-16, April 20, 2009.