Tax Edge

The recently enacted economic stimulus package provides an important benefit for certain individuals who are eligible for COBRA continuation health coverage, or similar coverage under state law. These individuals may receive a subsidy from their employers for 65 percent of the premium, meaning they are responsible for payment of only 35 percent of the premium amount. The subsidy requirement applies to group health plans that are subject to the federal COBRA continuation coverage requirements or to similar state law requirements. This includes self-insured plans.

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 the tax liability of some high-income individuals 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).

In turn, an 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 payroll tax return - only after it has received the 35 percent premium payment from the individual. The program is mandatory for employers required to offer COBRA continuation health coverage. Employers use the newly revised IRS Form 941, Employer's Quarterly Federal Tax Return, to deduct the cost from their payroll tax deposits. The premium reimbursement is only provided with respect to involuntary terminations that occur on or after September 1, 2008, and before January 1, 2010.

Employers claiming the reimbursement must maintain supporting documentation for the amount claimed. Such documentation includes, but is not limited to:

• Information on the receipt, including dates and amounts, of the assistance-eligible individual's 35% share of the premium.
• In the case of an insured plan, a copy of the invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium 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.
• Documentation establishing the date of the involuntary termination (which must be between September 1, 2008 and 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 and of the COBRA coverage election.
• The Social Security numbers of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and whether the subsidy was for one individual or two or more individuals.
• Other documents necessary to verify the correct amount of reimbursement.

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Posted March 4, 2009.