March 2, 2009

COBRA Subsidy Now Reflected in Quarterly Federal Tax Return Form for Employers

The Internal Revenue Service (IRS) has revised this year's Form 941, which is used for an employer's quarterly federal tax return,1 to reflect the new temporary program to provide a subsidy for premiums payments for continued health coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). The temporary COBRA premium assistance subsidy program was introduced as part of the American Recovery and Reinvestment Act of 2009.2 The instructions for Form 941 have also been updated.3

About Form 941

Form 941 is used to report federal taxes that an employer has withheld from its employees' paychecks. Withholding includes amounts for federal income tax, Social Security tax and Medicare tax (both the employer and employee portions). Form 941 is filed quarterly—for the first quarter of 2009 the Form 941 is due on April 30, 2009.

The COBRA Subsidy Additions

The Form 941 now includes lines 12a and 12b for reporting COBRA subsidy information. Line 12a is a report of the COBRA premium assistance payments made by the employer. This amount will be 65 percent of the total COBRA premium for eligible individuals. The amount can only be reported if the individual has paid his or her portion of the COBRA premium (35 percent). Line 12b requires entry of the total number of individuals provided COBRA premium assistance payments reported on line 12a.

The amounts reported on Line 12a will be added to the employer's total deposits for the quarter. The amounts deposited, including the COBRA subsidy, will be compared to the total taxes. Amounts still due on taxes must be paid, but if the amount of the COBRA subsidy and the deposits is greater than the taxes payable, the excess is treated as an overpayment. The employer can choose to have the IRS either refund the overpayment or apply it to the next return.

Additional Guidance on the COBRA Subsidy Expected

The Form 941 change is the first in a series of guidance that is expected from the Treasury Department, the Department of Labor and the Department of Health and Human Services. By March 17, 2009, the agencies are required to issue a sample notice for the notice that must be provided to certain qualified beneficiaries by April 18, 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.

1
The revised form is on the following page of the IRS Web site: http://www.irs.gov/pub/irs-pdf/f941.pdf. (Click on the following text to return to the Capital Checkup.)
2
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.)
3
The instructions for Form 941 are on the following page of the IRS Web site: http://www.irs.gov/pub/irs-pdf/i941.pdf. (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.

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