March 16, 2009
IRS Answers Questions on the COBRA Premium Assistance Subsidy and Form 941
The Internal Revenue Service (IRS) has published additional information1 for group health plan sponsors that will be filing for reimbursement under the Consolidated Omnibus Budget Reconciliation Act (COBRA) premium assistance subsidy program that was enacted in the American Recovery and Reinvestment Act of 2009.2 After an eligible COBRA qualified beneficiary pays 35 percent of his or her COBRA premium, an employer or multiemployer plan can receive the remaining 65 percent from the federal government under the new premium assistance subsidy program.
The reimbursement applies to both federal COBRA and to small employers that are subject to similar state mini-COBRA laws.3 If the COBRA continuation coverage is provided under a similar state mini-COBRA law through an insurer, then the insurer is eligible to offset its payroll taxes for the reimbursement. Otherwise, the payroll tax offset is only available to employers and multiemployer plans.
The new guidance addresses how employers and multiemployer plans file for reimbursement of the subsidy using Form 941. Previous guidance regarding Form 941 is discussed in The Segal Company's March 2, 2009 Capital Checkups: "COBRA Subsidy Now Reflected in Quarterly Federal Tax Return Form for Employers" and "IRS Revises Employer Quarterly Federal Tax Reporting Form, But Does Not Yet Address Multiemployer Plan Reimbursement for COBRA Subsidy." The guidance does not address how Multiple Employer Welfare Arrangements (MEWAs) or other types of association plans would file for reimbursement of the subsidy.
All Entities Seeking Reimbursement Must Use Form 941
Of particular importance for those employers and multiemployer plans that do not have a payroll tax liability, the guidance states that all entities claiming reimbursement of the subsidy should use the Form 941. Consequently, those entities that do not currently file a Form 941 should become familiar with it and be prepared to file it. Employers must file Form 941 on a quarterly basis. The first quarter 2009 form is due on April 30, 2009. However, the COBRA reimbursement request can be made in the quarter after the subsidy is provided to the qualified beneficiary. COBRA subsidy reporting must be completed in the same calendar year that the subsidy is provided. Annual reporting forms are also available in certain cases.
Documentation of Subsidy Eligibility
The guidance requires all entities that receive reimbursement of the subsidy to maintain supporting documentation. While the employer or multiemployer plan must maintain this documentation, it does not submit the documentation with the Form 941.
Supporting documentation includes:
- Information on the receipt, including dates and amounts of the 35 percent payment from qualified beneficiaries,
- For an insured plan, proof of payment of the insurance premium to the carrier,
- For a self-insured plan, proof of the premium amount and proof of the coverage provided to the qualified beneficiaries,
- Attestation of involuntary termination, including date of the involuntary termination for each covered employee whose involuntary termination is the basis for eligibility for the subsidy, provided the date of the qualifying event is between September 1, 2008 and December 31, 2009,
- Proof of the individual's eligibility for COBRA coverage at any time during the period from September 1, 2008 to December 31, 2009,
- Proof of election of COBRA continuation coverage,
- A record of the Social Security Numbers of all covered employees, the amount of the subsidy reimbursed with respect to each one, and whether the subsidy was for one individual or two or more individuals, and
- Other documents necessary to verify the correct amount of reimbursement.
The IRS has informally stated that it will issue guidance addressing when the subsidy period dates apply for plans that determine the length of the COBRA period based on loss of coverage instead of termination of employment.
Additional Information on the Form 941 Filing
The latest guidance adds some new information, including the following:
- All COBRA qualified beneficiaries are eligible for the subsidy if the qualifying event is involuntary termination that occurs within the subsidy period (September 1, 2008-December 31, 2009). This includes the employee, spouse and dependent children. Informally, the IRS has also said that any children born during the COBRA continuation period, who are qualified beneficiaries by law, are also eligible for the subsidy. However, COBRA continuation coverage provided to domestic partners is not eligible for the subsidy.
- The amount of the subsidy and number of eligible individuals must be reported each quarter.
- An employer may claim the credit by either offsetting its payroll tax deposits or by claiming the subsidy as an overpayment at the end of the quarter.
- If the amount of the COBRA premium subsidy exceeds the employer's tax liabilities for the quarter, the employer can choose to have the excess refunded or applied to the next quarter. It is expected that refunds will be issued in a couple of weeks after Form 941 is filed.
- The employer or multiemployer plan is required to provide the COBRA subsidy if it is subject to the law. The subsidy is not voluntary. (However, there is no requirement to request reimbursement of the subsidy.)
- A payroll tax return is the only means to be reimbursed for the COBRA subsidy. This could include the quarterly Form 941 or an annual tax reporting form.
- If the employer completes a Schedule B, used to report an employer's payroll tax liability for each payroll period, it must continue to be completed and should continue to reflect the total liability for wages and payroll taxes.
- The due date for the first quarter Form 941, April 30, 2009, will not be extended, but employers may claim the subsidy in the following (or later) quarters in 2009.
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As with all issues involving the interpretation or application of laws, plan sponsors should rely on their legal counsel for authoritative advice on the interpretation and application of the American Recovery and Reinvestment Act of 2009. The Segal Company can be retained to work with plan sponsors and their attorneys to comply with the COBRA premium assistance program, including providing assistance in developing policies and procedures to handle this new program, designing notices and evaluating COBRA premium methodology.
- The new guidance, which is in a question-and-answer format, is on the following page of the IRS Web site: http://www.irs.gov/newsroom/article/0,,id=204708,00.html (Click on the following text to return to the Capital Checkup.)
- The Act's COBRA provisions are discussed in The Segal Company's February 2008 Bulletin, "The Stimulus Law's Temporary Subsidy for COBRA Premiums." (Click on the following text to return to the Capital Checkup.)
- Many states have laws that are similar to COBRA. These are informally known as mini-COBRA laws, and generally only apply to small employers with fewer than 20 employees and with fully insured health plans. The law must be substantially similar to federal COBRA in order for the subsidy to be available. (Click on the following text to return to the Capital Checkup.)
Capital Checkup is The Segal Company's periodic electronic newsletter summarizing activity with respect to health care and related subjects. Capital Checkup is for informational purposes only. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.