Softening the Landing for Employees Caught in a Reduction in Force

COBRA benefits have been available to terminated employees for many years, whether they are terminated as part of a reduction in force or otherwise. Now, under ARRA, “assistance-eligible individuals” will be able to receive continuing coverage under their firm's health plan by paying just 35% of the applicable COBRA premium. The federal government will provide reimbursement of the remaining 65% through a payroll tax credit to the firm on its Form 941, or to the plan or the insurer, depending on the type of plan through which the insurance is provided. If the firm's health plan is self-insured, COBRA coverage must be provided if the assistance-eligible individual pays 35% of the otherwise required premiums. The remaining 65% will be treated as a payment of payroll tax by the firm for purposes of determining the credit.

The special premium reduction provisions of ARRA apply to periods of health coverage beginning on or after Feb. 17, 2009.

Assistance-eligible individuals are employees, their spouses, and their dependents who become eligible for COBRA continuation coverage because of an involuntary termination of employment between Sept. 1, 2008 and Dec. 31, 2009.
Employees of smaller law firms (those with two to 19 employees) and in states with “mini-COBRA” statutes are also eligible for the subsidy. Individuals with modified adjusted gross incomes of $125,000 ($250,000 for joint filers) or more for the tax year in which the subsidy would be received are not eligible for the full subsidy, but reduced subsidies are available for persons with incomes between $125,000 and $145,000 ($250,000 and $290,000 for joint filers).

The COBRA subsidy is available for a maximum of nine months. This nine-month period will not extend the maximum period for which COBRA coverage is otherwise available, and it ends when the individual becomes eligible for coverage under another group health plan or Medicare.

Individuals who would have been eligible for this new subsidy, but who previously declined COBRA continuation coverage, will have a second 60-day period within which to elect continuation coverage under the new subsidy. The 60-day period begins upon the individual's receipt of notice of the second election period. That notice must be provided to individuals by April 18, 2009.

Firms must modify existing COBRA notices to include information about the availability of the subsidy, the forms and contact information necessary to take advantage of it, and the availability of any lower cost health plan options. They must also notify individuals receiving the subsidy of their obligation to declare their eligibility for coverage under an alternative group plan, and will be subject to a penalty for failing to provide this notice. The Department of Labor has issued a model notice for this purpose.

Firms seeking more information on the new COBRA premiums, including the notice requirements under ARRA, can find it on the U.S. Department of Labor's Web site at www.dol.gov/COBRA.

Extended Unemployment Benefits

Two other provisions of ARRA may also help firm employees faced with sudden unemployment. The first allows a portion of unemployment benefits to be received tax free. The second extends the period for unemployment benefits, recognizing that it may be more difficult today for a terminated employee to find new employment.

Under current law, an individual who receives unemployment compensation benefits must include the full amount of the benefits in income and pay taxes on the benefits, just as with any other income. Under the new law, up to $2,400 of unemployment compensation benefits received in 2009 may be excluded from gross income, thereby making that amount fully available to meet other living costs.

Further, '2001(a) of ARRA provides terminated employees with up to 33 weeks (instead of 20) of unemployment benefits through Dec. 31, 2009. In addition, many workers will receive a $25 per week increase in their benefits. Employees who live in states with high unemployment rates will receive the greatest benefits.

Severance Compensation

In addition to these governmental subsidies, most law firms will want to consider providing some form of severance compensation to help their employees caught in a layoff.
Common severance programs include everything from a flat number of weeks' pay to one or more weeks of pay for each year of service, usually subject to some overall cap. To some extent, the formula chosen will depend upon the makeup of the workforce. Where most employees have short-term service, for example, a formula dependent upon years of service may come up short for most affected employees, thus favoring a flat number of weeks' pay. On the other hand, where most affected employees have longer-term employment with the firm, a cap on severance may be necessary to limit the overall cost of the program to the firm.

Whatever program a firm decides upon, any severance payments the firm makes should be subject to the execution of an appropriate release by the employee. While a firm may feel awkward asking for such a release in a layoff situation, it is strongly recommended. In order to assure the effectiveness of the release against possible age-related discrimination claims, the release should make clear that the severance payments are being made in consideration for the release of those and other claims and comply with other federal requirements such as disclosures concerning the ages and positions of other employees considered and selected for the reduction in force and written advice to consult with counsel before executing the release. Such a release also will assure that the severance payments will not prevent the employee's immediate eligibility for unemployment benefits, even if the payments are made by way of salary continuation rather than in a single lump sum at the time of termination.

Buyout Offers

Another approach used by some law firms in a downturn is an employee buyout program. Such a program usually involves a limited offer to employees who satisfy certain age and service requirements to terminate their employment voluntarily and receive supplemental benefits. The offer might be made, for example, to employees over age 50 with at least 20 years of service, or employees whose age and years of service combined, equal some aggregate number, such as 65 (e.g., age 40 with 25 years of service or age 50 with 15 years of service).

Benefits provided under a voluntary buyout program may include additional severance compensation, full benefits for some period and even a supplement to retirement benefits, such as additional credited service under a retirement plan's benefit formula or an unreduced benefit for early retirement. The downside of such programs is that the firm may not be able to control completely which employees elect to participate, and it sometimes loses those employees it least can spare in difficult business times. Firms should be certain to check with ERISA counsel before implementing a program with a subsidy for qualified plan benefits, because strict rules apply to benefits offered under those plans.

Conclusion

No firm enjoys the termination of valued employees, but these are difficult times. When economic realities beyond your control force your hand to reduce head count, there are clearly ways to soften the landing for those individuals a firm must release in tough times.

Michael E. Mooney, a member of this newsletter's Board of Editors, is the Managing Partner of Nutter McClennen & Fish, LLP, in Boston. His firm maintains an active tax and business practice, representing and advising domestic and international corporations in a broad range of tax issues, reorganizations, business combinations, and divestitures. He can be reached at [email protected]. Christa von der Luft is a partner in the Litigation Department and is the chair of the firm's Labor, Employment and Benefits practice group. She can be reached at [email protected].

As uncertainties in the economy continue, many law firms are facing the reality of excess capacity. Unfortunately, “right-sizing” a firm generally means laying off valuable employees. The loss of a job can be traumatic even in good times, when an employee can expect to quickly land a new position. But with cuts coming from businesses across the board, the next paycheck may be a long way down the road.

Two provisions included in the new American Recovery and Reinvestment Act of 2009 (“ARRA”), as well as a firm's own severance program, can help these employees bridge the gap until new employment opportunities arise.

COBRA Benefits

COBRA benefits have been available to terminated employees for many years, whether they are terminated as part of a reduction in force or otherwise. Now, under ARRA, “assistance-eligible individuals” will be able to receive continuing coverage under their firm's health plan by paying just 35% of the applicable COBRA premium. The federal government will provide reimbursement of the remaining 65% through a payroll tax credit to the firm on its Form 941, or to the plan or the insurer, depending on the type of plan through which the insurance is provided. If the firm's health plan is self-insured, COBRA coverage must be provided if the assistance-eligible individual pays 35% of the otherwise required premiums. The remaining 65% will be treated as a payment of payroll tax by the firm for purposes of determining the credit.

The special premium reduction provisions of ARRA apply to periods of health coverage beginning on or after Feb. 17, 2009.

Assistance-eligible individuals are employees, their spouses, and their dependents who become eligible for COBRA continuation coverage because of an involuntary termination of employment between Sept. 1, 2008 and Dec. 31, 2009.
Employees of smaller law firms (those with two to 19 employees) and in states with “mini-COBRA” statutes are also eligible for the subsidy. Individuals with modified adjusted gross incomes of $125,000 ($250,000 for joint filers) or more for the tax year in which the subsidy would be received are not eligible for the full subsidy, but reduced subsidies are available for persons with incomes between $125,000 and $145,000 ($250,000 and $290,000 for joint filers).

The COBRA subsidy is available for a maximum of nine months. This nine-month period will not extend the maximum period for which COBRA coverage is otherwise available, and it ends when the individual becomes eligible for coverage under another group health plan or Medicare.

Individuals who would have been eligible for this new subsidy, but who previously declined COBRA continuation coverage, will have a second 60-day period within which to elect continuation coverage under the new subsidy. The 60-day period begins upon the individual's receipt of notice of the second election period. That notice must be provided to individuals by April 18, 2009.

Firms must modify existing COBRA notices to include information about the availability of the subsidy, the forms and contact information necessary to take advantage of it, and the availability of any lower cost health plan options. They must also notify individuals receiving the subsidy of their obligation to declare their eligibility for coverage under an alternative group plan, and will be subject to a penalty for failing to provide this notice. The Department of Labor has issued a model notice for this purpose.

Firms seeking more information on the new COBRA premiums, including the notice requirements under ARRA, can find it on the U.S. Department of Labor's Web site at www.dol.gov/COBRA.

Extended Unemployment Benefits

Two other provisions of ARRA may also help firm employees faced with sudden unemployment. The first allows a portion of unemployment benefits to be received tax free. The second extends the period for unemployment benefits, recognizing that it may be more difficult today for a terminated employee to find new employment.

Under current law, an individual who receives unemployment compensation benefits must include the full amount of the benefits in income and pay taxes on the benefits, just as with any other income. Under the new law, up to $2,400 of unemployment compensation benefits received in 2009 may be excluded from gross income, thereby making that amount fully available to meet other living costs.

Further, '2001(a) of ARRA provides terminated employees with up to 33 weeks (instead of 20) of unemployment benefits through Dec. 31, 2009. In addition, many workers will receive a $25 per week increase in their benefits. Employees who live in states with high unemployment rates will receive the greatest benefits.

Severance Compensation

In addition to these governmental subsidies, most law firms will want to consider providing some form of severance compensation to help their employees caught in a layoff.
Common severance programs include everything from a flat number of weeks' pay to one or more weeks of pay for each year of service, usually subject to some overall cap. To some extent, the formula chosen will depend upon the makeup of the workforce. Where most employees have short-term service, for example, a formula dependent upon years of service may come up short for most affected employees, thus favoring a flat number of weeks' pay. On the other hand, where most affected employees have longer-term employment with the firm, a cap on severance may be necessary to limit the overall cost of the program to the firm.

Whatever program a firm decides upon, any severance payments the firm makes should be subject to the execution of an appropriate release by the employee. While a firm may feel awkward asking for such a release in a layoff situation, it is strongly recommended. In order to assure the effectiveness of the release against possible age-related discrimination claims, the release should make clear that the severance payments are being made in consideration for the release of those and other claims and comply with other federal requirements such as disclosures concerning the ages and positions of other employees considered and selected for the reduction in force and written advice to consult with counsel before executing the release. Such a release also will assure that the severance payments will not prevent the employee's immediate eligibility for unemployment benefits, even if the payments are made by way of salary continuation rather than in a single lump sum at the time of termination.

Buyout Offers

Another approach used by some law firms in a downturn is an employee buyout program. Such a program usually involves a limited offer to employees who satisfy certain age and service requirements to terminate their employment voluntarily and receive supplemental benefits. The offer might be made, for example, to employees over age 50 with at least 20 years of service, or employees whose age and years of service combined, equal some aggregate number, such as 65 (e.g., age 40 with 25 years of service or age 50 with 15 years of service).

Benefits provided under a voluntary buyout program may include additional severance compensation, full benefits for some period and even a supplement to retirement benefits, such as additional credited service under a retirement plan's benefit formula or an unreduced benefit for early retirement. The downside of such programs is that the firm may not be able to control completely which employees elect to participate, and it sometimes loses those employees it least can spare in difficult business times. Firms should be certain to check with ERISA counsel before implementing a program with a subsidy for qualified plan benefits, because strict rules apply to benefits offered under those plans.

Conclusion

No firm enjoys the termination of valued employees, but these are difficult times. When economic realities beyond your control force your hand to reduce head count, there are clearly ways to soften the landing for those individuals a firm must release in tough times.

Michael E. Mooney, a member of this newsletter's Board of Editors, is the Managing Partner of Nutter McClennen & Fish, LLP, in Boston. His firm maintains an active tax and business practice, representing and advising domestic and international corporations in a broad range of tax issues, reorganizations, business combinations, and divestitures. He can be reached at [email protected]. Christa von der Luft is a partner in the Litigation Department and is the chair of the firm's Labor, Employment and Benefits practice group. She can be reached at [email protected].