The Internal Revenue Service (IRS) and the United States Department of Labor (DOL) recently released additional guidance related to the COBRA subsidy provisions included in the American Recovery and Reinvestment Act of 2009 (the “Act”). Individuals eligible for the subsidy under the Act are only required to pay 35% of the COBRA premium otherwise charged. The 65% subsidy will be reimbursed by means of a payroll tax credit to the employer (or the multiemployer plan, or in the case of a small insured plan, the insurer). Click here to see our earlier Management Alert on this subject. This article summarizes the IRS and DOL guidance related to the COBRA subsidy provisions in the Act.

IRS Form 941: Receiving Credit for the COBRA Subsidy

The IRS guidance confirms that the COBRA subsidy amount will be reimbursed by being claimed as a credit on IRS Form 941, the Employer’s Quarterly Federal Tax Return, which was recently revised to allow for this credit. The updated Form 941 is now posted on the IRS website. In the new Form 941, the credit is claimed on Line 12a which reads “COBRA premium assistance payments”. Further, on Line 12b, the filer must indicate the number of individuals who were provided the COBRA premium assistance reported on Line 12a. If the amount of the credit exceeds the total payroll taxes reported on the form, then the overpayment could be applied to the next return or requested as a refund.

The IRS makes clear that the credit may be claimed only after the 35% premium payment is received from the individual. As a result, the first quarter Form 941 may not be able to reflect the full subsidy that will ultimately apply to March. The due date for the first quarter 2009 Form 941 will not be extended. This means the March credit may have to be reported and applied on a later Form 941.

The IRS guidance also provides that an employer can offset its payroll tax deposits during the quarter, as the subsidy for the reduced premium payments received from assistance eligible individuals will be treated as being deposited on the first day of the quarter and applied against the employer’s deposit requirements.

Insofar as the COBRA subsidy will apply to involuntary terminations through December 31, 2009 and continue for up to nine months in 2010, credits for the subsidy may be taken as late as the fourth quarter of 2010 given the delayed timing of receipts of the reduced premiums. However, an employer may not apply for a credit in a year other than the year the reduced premiums were received (and the corresponding subsidy was provided).

Maintaining Supporting Documentation

No additional information related to the COBRA subsidy must be submitted to the IRS with Form 941; however, the entity claiming the credit must maintain supporting documentation for the credit claimed. This documentation includes, but (the IRS specifically notes) is not limited to:

  • Documentation of the receipt (including dates and amounts) of the assistance eligible individuals’ 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 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’s election of COBRA coverage and continued eligibility for COBRA coverage at any time during the period from September 1, 2008 to December 31, 2009;
  • A record of 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; and
  • Other documentation necessary to verify the correct amount of the reimbursement.

Eligibility for the Subsidy

The IRS guidance clarifies that an assistance eligible individual can be any COBRA qualified beneficiary associated with the related employee (such as a dependent child of an employee) who is covered immediately prior to the qualifying event. Informal remarks by representatives of the Treasury and DOL indicated that they do not necessarily mean that a child born to an assistance eligible individual during the subsidy period, could not be added to the coverage at the subsidized rate. They will be considering this and issuing further guidance.

The IRS clarified that the amount of the premium subsidy is not included in the individual’s income. But, as discussed in our prior Alert, the tax liability for some high-income individuals who receive the subsidy will be increased.

DOL Guidance

The DOL has added a fact sheet to its website on the COBRA subsidy provisions of the Act. They have indicated that the page will be updated from time to time.

The DOL clarified that the Second Chance Notice for those individuals that may be eligible for the Act’s COBRA subsidy due to an involuntary termination on or after September 1, 2008 and before the Act’s effective date must be given to all individuals who have had a qualifying event in that time period—not just those who have been involuntarily terminated.

They have also indicated that they are currently working on a process and a form to allow those individuals who have been notified by their group health plan that they are not eligible for the Act’s COBRA subsidy—for example, because they were not involuntarily terminated or they are not eligible for COBRA—to appeal that determination to the DOL. The DOL has also stated that their review process is limited to those plans offering COBRA pursuant to ERISA. Individuals in other types of plans covered by the Act—government plans or plans subject to state continuation laws—will appeal to HHS.

Informal Remarks

Recent informal remarks by the Treasury and DOL have raised issues of concern to employers. The agency representatives stated their belief that individuals may have a second chance to elect COBRA under their employer's health plan even if they do not receive the subsidy. In other words, the Second Chance Notices are a new bite at the apple for COBRA coverage elections, whether or not at the government subsidized rate, resulting in a new open enrollment period for these individuals. This may be the case, for example, for those individuals with other coverage that would disqualify them from the subsidy but not from COBRA. Such an interpretation would greatly expand the understood intent of the COBRA subsidy provisions in the Act.

They also discussed the situation where an individual had a COBRA qualifying event with two different employers since September 1, 2008. In this scenario, the representatives indicated the employee would get the opportunity to elect the COBRA subsidy under either employer’s plan—not just the most recent.

These same representatives also stated their view that the subsidy must be elected by an individual separate and apart from the COBRA election and not necessarily in the same time frame as the COBRA election. In other words, an assistance eligible individual may timely elect COBRA, but wait to elect the subsidy until the following plan year when he or she may no longer be a highly compensated individual. They were unclear in this scenario when the nine-month subsidy period starts to run.