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IRS Releases Information to Help Employers Claim COBRA
Medical Coverage Credit on Payroll Tax Form
IR-2009-15, Feb. 26, 2009
WASHINGTON — The Internal Revenue Service today released
new detailed information that will help employers claim credit for
the COBRA medical premiums they pay for their former employees.
The IRS unveiled
new information on this Web site, IRS.gov, that includes an
extensive set of questions
and answers for employers. In addition, the Web site contains
a revised version of the quarterly payroll tax return that employers
will use to claim credit for the COBRA medical premiums they pay
for their former employees.
Form
941, Employer’s Quarterly Federal Tax Return, will also be sent
to about 2 million employers in mid-March. The form is used to claim
the new COBRA premium assistance payments credit, beginning with
the first quarter of 2009.
“This is the first step in our effort to provide
employers with information on this important health benefit for
people who have lost their jobs,” said IRS Commissioner Doug Shulman.
“We will continue our work in the weeks ahead to help employers
implement this crucial change for the nation’s unemployed.”
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
former employees and their families, employers and others involved
in providing 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 other 65 percent of the COBRA cost on their payroll tax return.
Employers must maintain supporting documentation for
the credit claimed. This includes:
- Documentation of receipt of the employee’s 35 percent share
of the premium.
- In the case of insured plans: A copy of invoice or other supporting
statement from the insurance carrier and proof of timely payment
of the full premium to the insurance carrier.
- Declaration of the former employee’s involuntary termination.
COBRA provides 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 new COBRA
subsidy provisions also apply to insurers required to offer continuation
coverage under state law similar to the federal COBRA.
Due to New Jersey Continuation, the new Cobra regulations
apply to all companies of 2 or more employees offering healthcare
benefits.
More information about COBRA payments and the new
law is available on www.dol.gov
COBRA: Answers for
Employers
Under the American Recovery and Reinvestment Act of
2009, certain individuals who are eligible for COBRA continuation
health coverage, or similar coverage under State law, may receive
a subsidy for 65 percent of the premium. These individuals are required
to pay only 35 percent of the premium. The employer may recover
the subsidy provided to assistance-eligible individuals by taking
the subsidy amount as a credit on its quarterly employment tax return.
The employer may provide the subsidy — and take the credit on its
employment tax return — only after it has received the 35 percent
premium payment from the individual.
Q: How will an
employer be reimbursed for the COBRA subsidy that it has provided
to eligible individuals?
A: The COBRA subsidy amount is reimbursed by being
claimed as a credit on the Form 941. The Form 941 has been revised
to allow for this credit.
Q: How does an employer
claim the credit for the COBRA subsidy?
A: The credit is claimed on Line 12a of the January
2009 revision of the Form 941, which was posted on the IRS website
on Feb. 20. In addition, the Form 941 filer also needs to include
the number of individuals provided COBRA premium assistance on Line
12b.
Q: What other information
relating to the COBRA subsidy must be submitted with the Form 941
besides the entries on Lines 12a and 12b?
A: No additional information relating to the COBRA
subsidy is to be submitted with the Form 941, either electronically
or in paper form. However, those claiming the credit must maintain
supporting documentation for the credit claimed. Such documentation
includes, but is not limited to:
- Information on the receipt, including dates and amounts, of
the assistance eligible individuals’ 35% share of the premium.
- In the case of 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.
- In the case of 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 of
the involuntary termination (which must be during the period from
September 1, 2008, to December 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 September
1, 2008, to December 31, 2009, and election of COBRA coverage.
- A record of the SSN’s of all covered employees, the amount of
the subsidy reimbursed with respect to each covered employee,
and whether the subsidy was for 1 individual or 2 or more individuals.
- Other documents necessary to verify the correct amount of reimbursement.
Q: The employer
paid the bill and took the credit for March. In April the employer
finds out that the employee did not continue his/her coverage (i.e.,
did not pay the 35 percent). The credit element must be allowed
to be a negative, which would increase the deposit due.
A: The premium subsidy and the related credit for
the employer apply only after the individual has paid his or her
35 percent of the premium, so this situation should not occur.
Q: I haven't seen
the legislation, but why does this belong on the Form 941?
A: The legislation as passed provides for reimbursement
of the subsidy through the employment tax process, so Form 941 is
the applicable form.
Q: What will happen
if Line 12a ends up being larger than Line 10 on a 941 return? Will
this result in a net negative of taxes for a company?
A: If Line 12a is larger than Line 10, Line 13 would
also be larger than Line 10, resulting in an overpayment that could
be applied to the next return, or requested as a refund.
Q: Is the IRS considering
any other form changes (e.g., 941X)?
A: Yes. All appropriate forms are being revised and
will be updated on the IRS.gov web site as soon as possible.
Q. Will the due
date for the first-quarter Form 941 be extended?
A: No, the due date for the first quarter 2009 Form
941 is not being extended.
Q: Would the number
of beneficiaries need to be reported each quarter, whether or not
there was a tax credit amount to apply?
A: Line 12b of the revised Form 941 must indicate
the number of individuals who received the total COBRA subsidy reported
on Line 12a of the Form 941. If there is no tax credit amount because
no subsidy was provided, then the entry on Line 12b would be zero.
Q: Now that the
legislation has passed, how is this going to be communicated to
the employer/payroll community?
A: The IRS will continue to provide updated information
through this Web site as it becomes available.
Q: Can an employer
decide only to claim the credit at the end of the quarter rather
than reducing its tax deposits during the quarter?
A: Yes. The employer can decide either to offset its
payroll tax deposits or claim the subsidy as an overpayment at the
end of the quarter.
Q: When does
the law become effective?
A: The law became effective on the date of enactment,
Feb. 17, 2009. However, under a transition rule, the regular premium
amount may continue to be paid for up to two months after enactment
(e.g., for March and April), and the subsidy can be provided retroactively.
Q: It was mentioned
that this would be a temporary statute. How long is this change
expected to be in effect?
A: For assistance-eligible individuals, the qualifying
event must occur on or before Dec. 31, 2009, and the COBRA subsidy
may apply for up to nine months.
Q: What individuals
are eligible for the COBRA subsidy?
A: An assistance-eligible individual can be any COBRA
qualified beneficiary associated with the related covered employee,
such as a dependent child of an employee, who is covered immediately
prior to the qualifying event. The qualifying event for purposes
of eligibility for the subsidy is involuntary termination of the
covered employee’s employment that occurs during the period beginning
Sept. 1, 2008, and ending Dec. 31, 2009. The individual must also
be eligible for COBRA coverage, or similar state coverage, during
this period.
Q: Is this provision
for employees who involuntarily lose their jobs — or will it apply
to all employees even if they leave voluntarily?
A: The credit applies only to involuntarily terminated
employees and their family members who are qualified beneficiaries.
Q: Will the COBRA
premium subsidy be taxable income for the individual?
A: 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.
Q: When more
than one entity may be responsible for receiving COBRA premiums,
who should claim the credit?
A: The law as enacted clarifies that 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). Only this person is eligible
to offset its payroll taxes by the amount of the subsidy.
Q: Is the employer
required to provide the COBRA subsidy?
A: 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. If you
are an employer with such a plan and you receive a 35 percent payment
from an assistance-eligible individual, you are required to make
the remaining 65 percent payment.
Q: What if
the employer’s group health plan is self-insured? Do the subsidy
requirements apply?
A: Yes, 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
assistance eligible individual pays 35 percent of the otherwise
required premium. The remaining 65 percent is treated as a payment
of payroll taxes by the employer maintaining the plan.
Q: What other
agencies will provide information about the COBRA subsidy?
A: Information about the COBRA subsidy will also be
available through the Department of Labor and the Department of
Health and Human Services, which, along with the IRS, share responsibility
for the COBRA requirements.
Visit the Department
of Labor Web site for information related to COBRA eligibility
and the subsidy. Benefits Advisors are also available to assist
you at 1-866-444-3272.
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