COBRA Premium Subsidies and the Stimulus Package

COBRA Premium Subsidies and the Stimulus Package —What does it mean for employers?

Effective February 17, 2009, the American Recovery and Reinvestment Act of 2009 provides that certain individuals who are eligible for COBRA continuation of health coverage may receive a subsidy for 65% of the premium.  That means that these covered individuals will only have to pay 35% of the premium, with the employer paying 65%.  Once the individual has paid the employer 35% of the premium, the employer may, in turn, recover the 65% subsidy provided to these covered individuals by taking the subsidy amount as a credit against employment tax deposits on quarterly 941 reports.  This assistance applies to COBRA qualifying events on or before December 31, 2009, and the COBRA subsidy may apply for up to nine months.

Employers with group health insurance plans subject to the federal COBRA requirements are required to provide the new COBRA subsidy.  If an eligible individual makes a 35% payment to an employer, the employer is required to make the remaining 65% payment.  The subsidy requirements apply to all plans subject to COBRA regulations, even if the employer’s group health plan is self-insured.  In the case of self-insured plans, the individual pays the employer 35% of the premium, and the employer’s 65% of the premium is treated as the employer’s payment of payroll taxes.

Form 941 has been revised to allow for the COBRA subsidy credit.  Reportable on line 12a is COBRA Premium Assistance Payments, and line 12b handles Number Of Individuals Provided COBRA Premium Assistance reported on 12a.  No other information is required to be submitted with Form 941, however employers claiming the credit must keep records and supporting documentation for credits claimed.  Supporting documentation should include:

  • Dates and amounts of individuals’ 35% premium payments
  • Copies of insurance plan invoices and timely payments to carriers
  • For self-insured plans, proof of the premium and proof of the coverage provided to the individuals
  • Proof of involuntary termination (dates between September 1, 2008 and December 31, 2009) for individuals participating in the subsidy provision
  • SSN of all covered employees, amounts of subsidies reimbursed for each employee, and how many individuals the subsidy was for (employee, employee + one, family of 4, etc)
  • Any other documents used to prove the correct amount of reimbursement

The employer may choose to offset individual payroll tax deposits throughout the quarter, or may choose to claim the subsidy as an overpayment at the end of the quarter.  Because the tax credit is allowed only after the eligible individual has paid 35% of the premium to the employer, it should never be necessary to adjust a credit claimed in a previous quarter.

Any COBRA-qualified employee, or beneficiary of the employee, is eligible for the premium subsidy, as long as the qualifying event is involuntary termination during the period from September 1, 2008 through December 31, 2009.  The premium subsidy is not included in the individual’s taxable income, but there is a phase-out of eligibility for the subsidy that affects individuals whose adjusted gross income exceeds $125,000 ($250,000 for joint filers).  Tax liability is increased to achieve repayment of a portion of the subsidy for those taxpayers whose AGI is between $125,000 and $145,000 ($250,000 and $290,000 for joint filers).  If a taxpayer’s AGI exceeds $145,000 ($290,000 for joint filers), the full amount of the subsidy must be repaid as an additional tax.  There is no additional tax for individuals with AGI less than these income levels.

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