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COBRA Question & Answers
:: 1. What health plans are subject to the new subsidy and special enrollment provisions?
:: 2. What is the "premium amount" for subsidy purposes?
:: 3. What is the taxability of the subsidy to the recipient?
:: 4. So, the subsidy lasts 9 months, right?
:: 5. What is "involuntary termination of employment"?
:: 6. What is "gross misconduct"?
:: 7. What backup does the employer need in order to get the subsidy?
:: IRS Q1. How will an employer be reimbursed for the COBRA subsidy?
:: IRS Q2. 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.
:: IRS Q3. When more than one entity may be responsible for receiving COBRA premiums, who should claim the credit?
:: IRS Q4. What if the employer&rsqu;s group health plan is self-insured? Do the subsidy requirements apply?
:: IRS Q5. What supporting documentation do employers need?
:: Form 941 Allows Employers To Take Credit For Subsidy Payments
1. What health plans are subject to the new subsidy and special enrollment provisions?
Answer:
The applicable coverage is group health coverage under COBRA, similar state continuation laws (e.g., those applying to small employer plans), and continuation laws that apply to Federal or State governmental health plans.
With respect to COBRA, it includes all COBRA benefits (e.g., major medical, dental, vision, and drug plans; some wellness programs and employee assistance programs ("EAPs"); and health reimbursement arrangements ("HRAs")), but does not include health FSAs.
With respect to non-COBRA coverage, it includes whatever health benefits can be continued. For example, for insured Texas plans, only major medical benefits may be continued. Therefore, only major medical benefits are subject to the subsidy and special enrollment provisions.
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2. What is the "premium amount" for subsidy purposes?
Answer:
It appears that the premium amount is whatever is actually charged to the COBRA continuee. Most COBRA continuees pay 102% of the cost of coverage (the premium for insured plans and the premium equivalent for self-funded plans). The employee will pay 35% and the employer will pay 65% of that 102% amount.
It appears that arrangements made by the employer to pay a portion of the COBRA premium (e.g., certain severance agreements) are not considered for purposes of the subsidy. Therefore, if the employer agrees to pay a portion of the COBRA premiums, the subsidy is based only on the COBRA continuee&rsqu;s portion of the premium and not the employer&rsqu;s contribution or the total premium. Employers paying the entire COBRA premium are not eligible for any reimbursement.
Example 1. Assume COBRA continuees pay 102% of the applicable premium which is $800. Under the new law, the individual must be entitled to continue coverage upon a payment of 35% of that amount ($280). This means the employer must pay $520 and is entitled to a payroll tax credit of $520.
Example 2. Same facts as above except that the employer subsidizes 70% of the $800 premium as part of a severance agreement. So, the employer pays $560 and the individual pays the remaining $240. Under the new law, the individual must be entitled to COBRA coverage upon a payment of 35% of the $240 amount ($84). This means the employer must pay a total of $716 ($800 minus $84) and is entitled to a payroll tax credit of $156 ($240 minus $84). This result significantly punishes the employer for having subsidized COBRA premiums.
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3. What is the taxability of the subsidy to the recipient?
Answer:
The subsidy is not taxable to the individual receiving it unless the individual is a high income individual. If premium assistance is provided to individuals with a modified gross income of $125,000 ($250,000 in the case of a joint return) for the taxable year in which the subsidy is received (2009 or 2010), the individual&rsqu;s taxes will be increased by the amount of the subsidy. However, if the individual&rsqu;s modified adjusted gross income is between $125,000 and $145,000 ($250,000 and $290,000 in the case of a joint return), the increase in tax will be limited to a ratio of such increase obtained by dividing the amount over the modified gross income limit by $20,000 ($40,000 in the case of a joint return).
The technical reach of this recapture is broader than it might seem initially. The recapture applies to a taxpayer if the subsidy is provided to the taxpayer, the taxpayer's spouse, or to any tax dependent for health coverage purposes of the taxpayer - a fairly broad definition. So, for example, assume that a former employee who is a high income individual has a dependent who is age 24, continued separate COBRA coverage, and relies on the former employee for his support. The former employee must generally "repay" any subsidy provided to such dependent.
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4. So, the subsidy lasts 9 months, right?
Answer:
Not necessarily. 9 months is the maximum.
The subsidy terminates with the first month beginning on or after the earlier of:
- the date which is 9 months after the first day for which the subsidy applies;
- the end of the maximum continuation period for the qualified beneficiary under the COBRA rules or the relevant State or Federal law; or
- the date that the assistance eligible individual becomes eligible for Medicare or health coverage under another group health plan (including, for example, a group health plan maintained by the new employer of the individual or a plan maintained by the employer of the individual&rsqu;s spouse).
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5. What is "involuntary termination of employment"?
Answer:
The term "involuntary termination" is not defined in the new law. This determination can be complicated by questions such as constructive discharge, participation in voluntary termination programs, and mutual agreement of the employer and employee to terminate employment. A determination that an employee was involuntarily terminated can impact eligibility for other benefits, including severance benefits and unemployment benefits. If an individual terminates employment to avoid being laid off, is that voluntary or involuntary? Unfortunately, there is no clear "conservative" path to take on this issue. If an employer incorrectly treats a termination as voluntary, it would be violating COBRA by overcharging for COBRA coverage. On the other hand, if an employer incorrectly treats a termination as involuntary and charges a reduced premium, any payroll tax credit claimed by the employer would be invalid, resulting in a failure to pay payroll taxes.
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6. What is "gross misconduct"?
Answer:
COBRA contains no definition of gross misconduct and no consistent standard has been articulated by the courts or regulators. Based solely on the legislative history, it is clear that termination for gross misconduct is not the same as termination simply "for cause." Except for the most flagrant conduct that clearly constitutes a substantial and willful disregard of the employer&rsqu;s interests, denying COBRA coverage and the subsidy on account of gross misconduct should be avoided.
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7. What backup does the employer need in order to get the subsidy?
Answer:
Employers entitled to reimbursement may be required to submit a report confirming individual eligibility, the amount of payroll taxes offset and an estimate of future offsets, the tax identification numbers of covered employees, amounts reimbursed with respect to each qualified beneficiary.
A report must be submitted at such time and in such manner as the IRS requires. Guidance on this timing and form issue is needed quickly. There is not a current mechanism to submit such information under the current payroll tax deposit rules, nor under the quarterly employment tax returns.
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IRS Issues Guidance on the New COBRA Law
IRS Q1. How will an employer be reimbursed for the COBRA subsidy?
Answer:
An employer can decide either to offset its payroll tax deposits or claim the subsidy as an overpayment at the end of the quarter.
The COBRA subsidy amount is claimed as a credit on line 12a of Form 941.
Line 12b 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.
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.
See revised Form 941 at: http://www.irs.gov/pub/irs-pdf/f941.pdf
and the revised form 941 instructions on page 6 at: http://www.irs.gov/pub/irs-pdf/i941.pdf
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IRS Q2. 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.
Answer:
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.
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IRS Q3. When more than one entity may be responsible for receiving COBRA premiums, who should claim the credit?
Answer:
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.
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IRS Q4. What if the employer&rsqu;s group health plan is self-insured? Do the subsidy requirements apply?
Answer:
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.
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IRS Q5. What supporting documentation do employers need?
Answer:
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&rsqu; 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&rsqu;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&rsqu;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.
For more information, visit:
http://www.irs.gov/newsroom/article/0,,id=204708,00.html
DOL Creates Website Addressing the New COBRA Law
The DOL has created a website addressing the new COBRA law. There is no additional guidance posted at this point, but keep an eye out.
Visit: http://www.dol.gov/ebsa/COBRA.html
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Form 941 Allows Employers To Take Credit For Subsidy Payments
The IRS has just posted the new 2009 Form 941 (the quarterly form used by employers to reconcile payroll withholdings). It now contains a place to show the COBRA subsidy paid by an employer for the quarter and to take credit for it in reducing otherwise required deposits.
The revisions to the Form will allow employers to take credits (i.e., reduce otherwise required deposits) as they make their deposits and then reconcile on the quarterly return. This has been confirmed by just released guidance (in Q & A form) that has been posted to the IRS website. That guidance does stress, however, that credits can only be taken for any given premium only after the COBRA beneficiary has paid his or her 35%. Employers will retain the option of claiming the credit as an overpayment at the time they file the quarterly return.
Here are links to the Form, the accompanying instructions and the IRS Q & As.
Form:
http://www.irs.gov/pub/irs-pdf/f941.pdf
Instructions:
http://www.irs.gov/pub/irs-pdf/i941.pdf
IRS Q & As:
http://www.irs.gov/newsroom/article/0,,id=204708,00.html
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