Executive Compensation

Taking a short break from what seems to be our new format of All-TARP-All-The-Time, today I want to highlight a different provision in the recently signed American Recovery and Reinvestment Act (ARRA), which affects the severance plans and agreements of all employers—not just financial institutions under TARP. (I promise you that this is not our new format and that we will get back to executive compensation issues outside of the financial institution area as soon as this activity subsides.)

As you probably have read, the ARRA contains new COBRA provisions for the benefit of both employees and employers, but may require fast action by employers to amend their severance benefit plan or other negotiated severance. We expect additional guidance from both the DOL and the IRS in the upcoming weeks, which should address some of the many unanswered questions regarding these new requirements.

The key provision that may benefit both employees and employers is as follows: Individuals who have or will become eligible for COBRA due to an involuntary termination of employment during the period from September 1, 2008 through December 31, 2009, are generally eligible to receive a COBRA subsidy for up to nine months, under which they are only required to pay 35 percent of the COBRA premium. The employer subsidizes the other 65 percent of the premium, which the employer then may recoup by claiming a credit against its required payroll taxes. The subsidy is subject to phase-outs and recapture for individuals above certain income thresholds.

An employer that already subsidized COBRA coverage to some employees under a severance benefit plan or other negotiated severance can shift the cost of this subsidy to the government. An employer that does not provide a subsidy for COBRA coverage now has an opportunity to do something very positive for its employees/former employees without increasing its costs.