Under the American Recovery and Reinvestment Act of 2009 (ARRA), Congress provided premium assistance by the government to individuals classified as “assistance eligible individuals” (AEIs) to help make COBRA more affordable to employees who have recently lost their jobs during the economic crisis. AEIs include those employees who are “involuntarily terminated” between September 1, 2008 and December 31, 2009 and their COBRA qualified beneficiaries who are covered immediately prior to such action.
COBRA Subsidy Overview
Under ARRA, AEIs are eligible to pay a reduced COBRA premium of 35%, with the government subsidizing the remaining 65% (the “COBRA subsidy”), for a period of up to nine months. However, ARRA generally requires employers to pay the government’s portion of the COBRA premium up front (the “ARRA COBRA premium payment”) and then request reimbursement of the COBRA subsidy from the government through a corresponding payroll tax credit. In some instances (e.g., multiemployer plans and fully insured plans subject to state mini-COBRA laws), an entity other than the employer may provide the ARRA COBRA premium payment and claim the payroll tax credit. These instances are beyond the scope of this article.
The information outlined below highlights recent Internal Revenue Service guidance on the reporting requirements employers must follow to obtain reimbursement of the COBRA subsidy from the government. For a detailed analysis of when and how the COBRA subsidy applies, please refer to our previous WorkCite articles, “Trial and ARRA: New COBRA Changes Require Prompt Employer Action With Little Government Guidance” and “Follow-Up On COBRA Subsidy: What To Do Now?”
Reimbursement Reporting Requirements
Line 12 Reporting on Revised Form 941:
- In response to the new COBRA subsidy reporting requirements under ARRA, the IRS has revised the 2009 Form 941, which is filed quarterly by employers to report and pay the federal taxes that the employer has withheld from its employees’ paychecks. Additionally, the IRS has updated the instructions to Form 941 and posted a series of questions and answers on its website to assist employers in complying with the new COBRA subsidy reporting requirements. The IRS has confirmed that the due date for the first quarter, 2009 Form 941 will not be extended.
- Employers who make reduced COBRA premium payments under ARRA on behalf of AEIs who are eligible for the COBRA subsidy should report and claim a payroll tax credit for these payments on Lines 12a and 12b of Form 941. Employers will report the ARRA COBRA premium payments made by the employer on behalf of each AEI on Line 12a only after the AEI has paid his or her portion of the premium. It is important to note that an employer may not report a payment it has made on behalf of an AEI until the AEI has paid his or her corresponding portion of the COBRA premium payment. Thus, the employer’s reporting of AEIs and their corresponding premium payments on Line 12 is limited by the date each AEI’s premium payment is paid in full.
- For example: An AEI who is otherwise eligible for the COBRA subsidy for health coverage in June, 2009 does not pay his required 35% of the premium for the June coverage until July 10, 2009, even though his employer paid 65% of the premium on June 1, 2009. In this situation, the employer may not report the ARRA COBRA premium payment made on behalf of the AEI for June coverage before July 10th. Thus, the earliest the employer would be able to report the ARRA COBRA premium payment would be on its 3rd quarter Form 941, not its 2nd quarter Form 941. This is the case regardless of the fact that the premium relates to health coverage for June 2009.
- Employers will also report the total number of AEIs who were provided ARRA COBRA premium payments on Line 12b of Form 941. Employers should only report the number of individuals who received the total ARRA COBRA premium payments reported on Line 12a. If an employer does not provide any ARRA COBRA premium payments for a quarter, the employer would report a zero on Line 12b for that quarter.
Opportunity to Reduce Payroll Deposits:
- The amount of the ARRA COBRA premium payments provided by the employer on behalf of each AEI during the quarter (i.e., the AEI has paid his or her 35% premium payments during the quarter) is treated as having been deposited on the first day of the quarter and applied against the employer’s deposit requirements for such quarter. Thus, an employer will be considered to have made timely deposits during a quarter up to the amount of the ARRA COBRA premium payments without regard to the applicable due dates for deposits and, consequently, can reduce its deposits during a quarter by the amount of ARRA COBRA premium payments provided during the quarter. However, an employer may still make some or all of its required deposits during the quarter rather than reducing its total deposits by the ARRA COBRA premium payments.
- In the event that an employer is required to make deposits in excess of the ARRA COBRA premium payments claimed for a quarter, the employer will be required to make timely deposits during the remainder of the quarter to make up the difference. A failure to make such deposits would be subject to a Failure to Deposit Penalty.
Timing of Claim for Payroll Tax Credit:
- Employers are not required to claim the payroll tax credit on Form 941 for the quarter during which each ARRA COBRA premium payment was provided. Instead, an employer may choose to claim the payroll tax credit on Form 941 for a later quarter in the same calendar year. However, if the employer defers claiming the payroll tax credit to a future quarter in the same calendar year, the employer cannot reduce its deposits for the quarter during which the ARRA COBRA premium payment is provided by the amount of the ARRA COBRA premium payment being deferred.
- If an employer changes its mind later, it may claim the payroll tax credit by filing a Form 941X for the applicable quarter during which the ARRA COBRA premium payment was provided. It is important to note that in all cases, if an employer reduces its deposits during a quarter as a result of ARRA COBRA premium payments made, the employer must claim the corresponding payroll tax credit for the ARRA COBRA premium payments on Form 941 for such quarter.
Overpayments on Form 941:
- In the event that an employer’s ARRA COBRA premium payments reported on Line 12a of Form 941 exceed the employer’s total taxes after adjustment for advance earned income credits reported on Line 10 for a quarter, the employer will have an overpayment that can be applied to its next Form 941 return.
- Alternatively, the employer could request a refund. However, if the employer requests a refund and has unpaid employment or income taxes: (a) the amount of the refund will be offset by these unpaid taxes before the IRS will refund the remaining balance to the employer; and (b) the employer will receive notice of the offset from the IRS.
Two Months Transition for Change in Amount of Premium Payments:
- Given that the COBRA subsidy did not become effective until February 17, 2009 and the IRS understands that employers will need some time to implement the new COBRA subsidy requirements, the IRS has provided employers with a special transition rule that permits payment by AEIs of the regular premium amount for up to two months after the enactment of ARRA, with a refund or credit to the AEI for any overpayment of premiums for this two months period.
- For plans with monthly coverage periods, this transition rule would apply to premium payments for health coverage in March and April 2009. Employers may report and claim a payroll tax credit retroactively for the ARRA COBRA premium payments made for these two months.
Deposit Frequency for Form 941:
- The payroll tax credit for ARRA COBRA premium payments will not impact an employer’s frequency of deposits or look back periods since these are computed before taking into account any credits.
Final Reporting Period on Form 941:
- Qualifying AEIs may receive the COBRA subsidy for an involuntary termination of employment that occurs between September 1, 2008 and December 31, 2009 for a period of up to nine months of COBRA coverage. Therefore, under the current provisions of ARRA, all COBRA subsidies will be exhausted by AEIs by the end of 2010. As a result, the Form 941 for the fourth quarter of 2010 will be the last time for an employer to claim a payroll tax credit for ARRA COBRA premium payments.
Additional Information to Support Claim for Payroll Tax Credit:
- No additional information relating to the ARRA COBRA premium payments made by employers should be submitted to the IRS with the Form 941, either electronically or in paper form. However, employers must maintain supporting documentation for the payroll tax credit claimed, including the following:
- Information on the receipt of each AEI’s 35% share of the premiums (including dates and amounts);
- In the case of an insured plan, copies of the invoices or other supporting statements from the insurance carrier and proof of each timely payment of the full premium to the insurance carrier required under COBRA;
- In the case of a self-insured plan, proof of each premium amount and proof of the coverage provided to the AEIs;
- Attestation of involuntary termination, including the date of the involuntary termination, for each covered employee whose involuntary termination is the basis for eligibility for the COBRA subsidy;
- Proof of each AEI’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 Social Security Numbers of all covered employees, the amount of the COBRA subsidy reimbursed with respect to each covered employee, and whether the COBRA subsidy was for one individual or two or more individuals; and
- Other documents necessary to verify the correct amount of reimbursement.
We will publish future WorkCites on the COBRA subsidy program as the government publishes more information.
For additional information, please contact any member of the McGuireWoods Employee Benefits or Labor & Employment teams, or the authors. You can also visit our Stimulus Package section for more updates on the American Reinvestment and Recovery Act.