Employee Benefits Alert
This morning, the IRS released guidance on the new COBRA subsidy provisions following an address by President Obama during which he commented on the importance of this recent COBRA legislation. Under the legislation, employees who were involuntarily terminated between September 1, 2008 and December 31, 2009, are eligible for a subsidy equal to 65% of the premiums for COBRA continuation health coverage. As explained in our February 13 alert, the subsidy is provided to responsible entities through a refundable federal payroll tax credit. This alert summarizes the more important items covered in the guidance
Quarterly Form 941
The COBRA subsidy is claimed as a credit on line 12a of Form 941 (Employer’s Quarterly Federal Tax Return). The Form 941 must also include the number of individuals provided with COBRA premium assistance on line 12b. In the event the COBRA subsidy exceeds the payroll taxes set forth on the Form 941, the excess can be applied as a credit to the next return or requested as a refund. Filers will provide no other information directly to the IRS with the Form 941 or with their federal tax deposits.
Posting Date of COBRA Subsidy to Employer 941 Accounts
Although not mentioned in the guidance, the IRS has made it known that the COBRA subsidy reported on line 12a of Form 941 will be posted to the employer’s account as of the first day of the quarter. This was a logical and expected move following the release of the 2009 Form 941 and Instructions on February 20, 2009. By taking this approach, the IRS curtails the possibility that it will generate automatic late deposit penalty notices related to the timing of the COBRA subsidy.
Those parties claiming credit for the COBRA subsidy must maintain documentation in their files to support the credit. The following information should not be submitted with the Form 941, but must be maintained in the responsible entity’s Form 941 files:
- Documentation of the receipt, including dates and amounts, of the 35% premium from assistance eligible individuals.
- For insured plans, a copy of the 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 self-insured plans, proof of the premium amount and proof of the coverage provided to the assistance eligible individuals.
- Attestations of involuntary terminations, including the date of the termination (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 the election of COBRA coverage.
- The SSNs 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.
Responsible Entities Should Take COBRA Subsidy in the Appropriate Quarter
Employers have questioned whether they may choose to claim the credit entirely in the fourth quarter of each year rather than on a quarterly basis. Based upon the Q&As, the IRS appears to expect employers to claim the COBRA subsidy in the quarter in which the subsidy arises. The IRS is updating all appropriate forms necessary to facilitate the COBRA subsidy, including the new Form 941-X (used to file an amended Form 941). Presumably, the Form 941-X can be used if filing errors are made with respect to the COBRA subsidy. These forms will all be available on the IRS website once they are updated for the changes.
Eligible Individuals for the COBRA Subsidy
As previously reported, assistance eligible individuals can be any COBRA qualified beneficiaries associated with a related covered employee (e.g., a dependent child, spouse) who is covered immediately prior to the involuntary termination of the employee. To qualify for the subsidy, the covered employees must be involuntarily terminated between September 1, 2008, and December 31, 2009. The individual must also be eligible for COBRA coverage (or similar state continuation coverage) during this period.
No Details Yet Regarding Information Reporting
The guidance contains no information regarding whether the IRS will require responsible entities to issue information reporting documents (e.g., Form W-2, Form 1099) to report the COBRA subsidy to assistance eligible individuals. The subsidy is not included in the individual’s income, but certain individuals whose modified gross income (as defined in the legislation) falls within or exceeds specified amounts will be required to report subsidy payments on their Form 1040 and repay those subsidy amounts to the U.S. Treasury by the original due date of their individual income tax return for the year in which the subsidy arose. Presumably, employers will need to provide individuals with the amount of the subsidy paid on their behalf to encourage repayment of the subsidy. This reporting could be accomplished on either a Form W-2 or an alternatively on a Form 1099. The IRS will likely address this issue later in the year.
Guidance regarding the COBRA subsidy is a work in progress. It is expected that the IRS, Department of Labor, and the Department of Health and Human Services will provide additional guidance regarding the COBRA subsidy.
For more information, please contact any of the following lawyers:
Michael Lloyd, firstname.lastname@example.org, 202-626-1589
Marianna Dyson, email@example.com, 202-626-5867