As a part of an executive’s severance pay agreement, a client promises to pay part or all of his or her COBRA premiums under the employer’s insured group health plan after his or her termination. Would such payment by the employer be a violation of the new Code Section 105(h) nondiscrimination rules?

Yes. If such arrangement is only made for executives and not at the termination of other employees, it is a violation of the nondiscrimination rules under Code Section 105(h). This is because it is made for a group that contains a concentration of highly compensated individuals. If the group receiving this payment included a cross-section of employees, then there would be no violation. These new nondiscrimination rules will only be effective for the plan year beginning after any new guidance is released by the IRS.

It is suggested that employers review its severance pay policies and all employment and severance pay agreements of employees and renegotiate them before the effective date of these rules.  If after the effective date of these new nondiscrimination rules,  if any arrangement are found in violation, the employer could face a penalty of $100 per day for each employee that was discriminated against.

This newsletter is being provided to our clients as a courtesy.  Please consult your tax advisor for further information.