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IRS Releases Information to Help Employers Claim COBRA Medical Coverage Credit on Payroll Tax Form
March 02, 2009
OVERVIEW
The American Recovery and Reinvestment Act of 2009, which became law last week, includes changes to the health benefit provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, commonly referred to as COBRA. The new law will affect employers, certain former employees, their families, and others involved in providing or using COBRA coverage.
Under the new law, eligible former employees, enrolled in their employer’s health plan at the time they lost their jobs, are required to pay only 35 percent of the cost of COBRA coverage. Employers must treat the 35 percent payment by eligible former employees as full payment, but the employers are entitled to a credit for the remaining 65 percent of the COBRA cost on their payroll tax return (Form 941).
The IRS has posted new detailed information on its Web site, IRS.gov, that will help employers and their former employees understand the changes. The new information includes an extensive set of questions and answers for employers, including a revised Form 941, employers’ quarterly payroll tax return. The revised Form 941 Employer’s Quarterly Federal Tax Return also will be sent to about 2 million employers in mid-March.
IN DEPTH
Background on COBRA. The health benefit provisions of COBRA provide certain former employees, retirees, spouses, former spouses and dependent children the right to temporary continuation of health coverage at group rates. COBRA generally covers health plans maintained by private-sector employers with 20 or more full- and part-time employees. It also covers employee organizations or federal, state or local governments. It does not apply to churches and certain religious organizations.
The Recovery Act provides a 65% premium subsidy for 9 months to employees involuntarily terminated Sept. 1, 2008 through Dec. 31, 2009. If an eligible employee pays 35% of the premium, the group health plan must treat that individual as having paid the full premium required for COBRA continuation coverage.
The Recovery Act also provides a mechanism for reimbursing the person to which premiums are payable—e.g., an employer—for the difference between the full premium and the amount paid by the employee. While employers must treat the 35% payment by eligible former employees as full payment, they are entitled to a credit for the remaining 65% of the COBRA cost on their quarterly employment tax return (Form 941). Employers use the updated Form 941, Employer's Quarterly Federal Tax Return, to report their COBRA premium assistance payments.
When are the COBRA subsidy provisions effective? The IRS explains that these provisions became effective on Feb. 17, 2009, but that under a transition rule the regular premium amount may continue to be paid for up to two months after Feb. 17, 2009 (e.g., for March and April), and that the subsidy can be provided retroactively. The IRS also says that the due date for the first-quarter Form 941 will not be extended. The Q&As note that under these temporary COBRA provisions, the qualifying event (involuntary termination) for assistance-eligible individuals must occur on or before Dec. 31, 2009, and the COBRA subsidy may apply for up to nine months.
Who must pay the COBRA subsidy premium? The subsidy requirement applies to group health plans that are subject to the Federal COBRA continuation coverage requirements or to similar requirements under State law. Employers with such a plan that receive a 35% payment from an assistance-eligible individual must make the remaining 65% payment.
The subsidy requirements apply to all plans subject to the COBRA requirements, including self-insured plans. In that case, the employer must provide the COBRA coverage if the eligible individual pays 35% of the otherwise required premium and the remaining 65% is treated as a payment of payroll taxes by the employer maintaining the plan.
If more than one entity may be responsible for receiving COBRA premiums, the person to whom the reimbursement is payable is: (1) the multiemployer group health plan; (2) the employer maintaining a group health plan that is subject to Federal COBRA continuation coverage requirements or that is self-insured; or (3) the insurer providing coverage under a plan not included in (1) or (2).
Claiming the COBRA subsidy credit. An employer that provides the subsidy may take the COBRA coverage credit on its employment tax return only after it has received the 35% premium payment from the individual. The IRS explains that an employer claims the COBRA subsidy credit on the newly revised Form 941, Line 12a (COBRA premium assistance payments). The number of individuals provided COBRA premium assistance must be indicated on Line 12b, and if there is no tax credit amount because no subsidy was provided, then Line 12b should be zero. If Line 12a is larger than Line 10 (Total taxes after adjustment for advance earned income credit (EIC)), Line 13 (Sum of Lines 11 and 12a) would also be larger than Line 10, resulting in an overpayment that could be applied to the next return, or requested by the employer as a refund.
The IRS notes that in addition to Form 941 all appropriate forms (e.g., 941X) are being revised and will be updated on the IRS website as soon as possible. No additional information relating to the COBRA subsidy beyond that requested on Lines 12a and 12b is to be submitted with Form 941 (either electronically or in paper form). But, those claiming the credit must maintain supporting documentation, including, but not limited to:
Information on the receipt, including dates and amounts, of the assistance eligible individuals' 35% share of the premium;
For an insured plan, copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier required under COBRA;
For a self-insured plan, proof of the premium amount and proof of the coverage provided to the assistance eligible individuals;
Attestation of involuntary termination, including the date (which must be during the period from Sept. 1, 2008, to Dec. 31, 2009), for each covered employee whose involuntary termination is the basis for eligibility for the subsidy;
Proof of each assistance eligible individual's eligibility for COBRA coverage at any time during the period from Sept. 1, 2008, to Dec. 31, 2009, and election of COBRA coverage;
A record of the Social Security Numbers (SSNs) of all covered employees, the amount of the subsidy reimbursed for each covered employee, and whether the subsidy was for one, two, or more individuals; and
Other documents necessary to verify the correct amount of reimbursement.
The IRS clarified in a question and answer section on its website that an employer can claim the credit at the end of the quarter, rather than reducing its tax deposits during the quarter, if it wishes. An employer can either offset its payroll tax deposits or claim the subsidy as an overpayment at the end of the quarter.
Recipients of the COBRA premium subsidy. Any COBRA qualified beneficiary associated with the related covered employee, such as a dependent child of an employee, who is covered immediately before the qualifying event—i.e., the involuntary termination of the covered employee's employment that occurs during the period between Sept. 1, 2008, and the period ending Dec. 31, 2009—can be an individual eligible for the COBRA subsidy. A covered employee must involuntarily lose his job; he or she can't have left voluntarily. The individual also must be eligible for COBRA coverage, or similar state coverage, during this period.
Will the COBRA premium subsidy be taxable income for the individual? The premium subsidy is not included in the individual’s income. However, there is a phase-out of eligibility for the subsidy, which will increase some high-income individuals’ tax liability if they receive the subsidy.
The phase-out impacts individuals whose modified adjusted gross income exceeds $125,000 - $250,000 for those filing joint returns. Tax liability is increased to achieve repayment of a portion of the subsidy for those taxpayers whose modified adjusted gross income is between $125,000 and $145,000, or $250,000 and $290,000 for those filing joint returns. If a taxpayer’s modified adjusted gross income exceeds $145,000, $290,000 for those filing joint returns, the full amount of the subsidy must be repaid as an additional tax. There is no additional tax for individuals with modified adjusted gross income less than these income levels.
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