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Employers Claim a Credit for New COBRA Premium Subsidy

Volume 2009 / Issue 6

March 23, 2009

The Recovery Act provides a 65% premium subsidy for 9 months to assistance-eligible individuals, namely employees or members of their families who: are eligible for COBRA continuation coverage at any time between Sept. 1, 2008 and Dec. 31, 2009; elect COBRA coverage; and are eligible for COBRA as a result of the employee's involuntary termination between Sept. 1, 2008 and Dec. 31, 2009.

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.
Employers get a tax credit for 65% of the COBRA cost on their quarterly employment tax returns.  Employers use the updated Form 941, Employer's Quarterly Federal Tax Return, to report their COBRA premium assistance payments.
The following are highlights of additional guidance for employers:
COBRA subsidy treated as deposited on first day of quarter. The COBRA subsidy amount provided by the employer during a quarter (based on the 35% premium payments received from assistance eligible individuals during the quarter) is treated as having been deposited on the first day of the quarter and applied against the employer's deposit requirements. As a result, timely deposits up to the subsidy amount are treated as having been made during the quarter, regardless of the otherwise applicable due dates for deposits.
Where the subsidy amount provided during the quarter is less than the total amount of the employer's required deposits during the quarter, the employer must make timely deposits during the remainder of the quarter to make up the difference.
Which quarter to take credit. An employer isn't required to claim the credit for the COBRA premium subsidy on Form 941 (or Form 941X) for the quarter during which the subsidy is provided to assistance eligible individuals. It may generally choose to claim the credit on Form 941 for a later quarter in the same year.
Payroll tax is exclusive method of taking a credit for the subsidy. IRS makes it clear that a credit for the subsidy must be claimed on the employer's payroll tax return, whether the quarterly filed Form 941 or the annually filed Form 943 (Employer's Annual Federal Tax Return for Agricultural Employees) or 944 (Employer's Annual Federal Tax Return). A payroll tax return is the only way to claim a credit and be reimbursed for the COBRA subsidy.
Employer isn't always the party providing the subsidy and claiming a credit.  A person other than the employer may be the proper party to provide the subsidy and take the credit on its Form 941. For example, if the COBRA coverage is provided by a multi employer plan, the plan provides the subsidy and is reimbursed by taking a credit on Form 941.
Final date for claiming the credit. An individual can be eligible for the COBRA subsidy based on an involuntary termination of employment occurring as late as Dec. 31, 2009 (the qualifying event), and the subsidy can apply for up to nine months of COBRA coverage, which generally begins shortly after the qualifying event. Thus, it's expected that eligibility for the subsidy will be exhausted by the end of 2010 and Form 941 for the fourth quarter of 2010 will be the last time to take the subsidy credit.