Employers claim the tax credit by reporting the credit on its federal quarterly employment tax returns (usually Form 941). If an employer’s anticipated quarterly tax credit exceeds their quarterly Medicare tax obligations, then they can use Form 7200 to request an advance of the tax credit (see discussion below).
- Under the new COBRA premium subsidies, employers front the full cost of the premium, plus administrative fees, and receive reimbursement in the form of a Medicare payroll tax credit by filing Form 941.
Who pays for ARPA COBRA subsidy?
The COBRA subsidy applies to plans sponsored by State or local governments, including small governmental employers (i.e., < 20 employees) that are exempt from federal COBRA but subject to Cal-COBRA. Employers must pay the subsidy but can subsequently recover the subsidy via federal tax credits.
How do I get COBRA reimbursement?
To receive COBRA premium assistance, an individual must be an “Assistance Eligible Individual,” which is defined in Notice 2021-31 as any individual who: (1) is a qualified beneficiary as the result of the covered employee’s reduction of hours or involuntary termination of employment; (2) is eligible for COBRA coverage
How do I report a 941 COBRA subsidy?
The credit will generally be claimed using Form 941, Lines 11e, 11f and 13f along with Worksheet 5. Credits may be claimed on returns for the second, third or fourth quarter of 2021.
How do I claim the COBRA subsidy tax credit?
How Is the Tax Credit Claimed? The tax credit is generally claimed by reporting the COBRA premium assistance provided to qualifying individuals on the quarterly employment tax return (IRS Form 941).
Can COBRA premiums be refunded?
Request a Refund for Amounts Paid in COBRA Premiums Exceeding Federal Employment Tax Liability: The employer may claim the Credit through an employment tax refund on the applicable employment tax return, generally Form 941, Employer’s Quarterly Federal Tax Return.
Will COBRA subsidy be extended beyond September 2021?
Will The COBRA Subsidy be Extended? The COBRA subsidy has been extended until September 30, 2021. Currently this is the final date for subsidy assistance.
Do employers have to pay COBRA?
Employers may require individuals to pay for COBRA continuation coverage. Premiums cannot exceed the full cost of coverage, plus a 2 percent administration charge.
What is COBRA premium subsidy?
The state law is called Cal-COBRA (sometimes also called “supplemental COBRA”). The law is sometimes referred to as ARPA. ARPA provides premium assistance equal to 100% of the amount of the premium for eligible individuals to continue their employer-provided health care coverage after a job loss or reduction in hours.
Is the government paying for COBRA?
The government will cover 100% of your COBRA premiums. You could still be on the hook for any copays and deductibles.
Are COBRA payments tax deductible 2021?
Premiums for company health insurance are not tax deductible. COBRA insurance is a health plan that allows you to continue employer-sponsored insurance coverage even if you no longer work for that company. Premiums for COBRA insurance are tax deductible, as they are paid entirely by you on an after-tax basis.
How do I get credit for COBRA subsidy 2021?
Employers can claim the COBRA Premium Assistance Credit in advance of filing Form 941. To do this, the employer reduces the federal employment taxes it would normally be required to deposit (including portions withheld from employees), up to the amount of the anticipated credit.
How do I electronically file Form 7200?
How to File Form 7200 Electronically with TaxBandits?
- 1 Enter Your Employer Details.
- 2 Choose Applicable calendar quarter.
- 3 Choose your Employment Tax Return Type.
- 4 Enter your Credits and Advance Requested.
- 5 Send it to the IRS by FAX.
Is the COBRA subsidy taxable to the employee?
Is the COBRA premium subsidy taxable income for the individual? (updated February 26, 2009) A4. 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 some high-income individuals’ tax liability if they receive the subsidy.
Does COBRA qualify for premium tax credit?
No, having COBRA doesn’t affect your eligibility for premium tax credits. However, you can only drop COBRA and sign up for a Marketplace plan and premium tax credits during Open Enrollment. You will have to drop your COBRA coverage effective on the date your new Marketplace plan coverage begins.
Who pays for COBRA after termination?
How much will I have to pay for continuation coverage? Under COBRA, the administrator is allowed to charge the terminated worker for the full cost to the employer of the monthly coverage plus a 2% administration fee.
[Updated] How Employers Can Claim ARPA COBRA Subsidy Tax Credits – Sequoia
UPDATED 7/6/21: The final versions of IRS Form 941 and IRS Form 941 instructions have been included in the text of the following article. THE ORIGINAL PUBLICATION DATE WAS 6/11/21. The Internal Revenue Service (IRS) has produced a Form 941 (the “Employer’s Quarterly Federal Tax Return”) and related instructions that include sections for the American Rescue Plan Act (ARPA) COBRA tax credits as well as other provisions. The majority of companies who paid ARPA COBRA subsidies will submit a Form 941 to receive ARPA tax credits under the Affordable Care Act.
Employers can claim ARPA tax credits if they follow the IRS guidelines, which we have included in the section below.
Employers should consult with their tax expert to ensure that the tax credits are claimed correctly.
ARPA and Employer Tax Credits
In order to comply with federal COBRA, employers subject to federal COBRA (generally, those with fewer than 20 employees in the prior calendar year) and all employers that sponsor self-insured group health plans must provide a 100 percent COBRA subsidy from April 1, 2021 through September 30, 2021 for all “assistance eligible individuals” (AEIs). More information on the ARPA COBRA subsidies and AEIs can be found in our previous blogs, which can be found here and here. Employers who give ARPA COBRA subsidies are eligible to claim a tax credit that can be used toward their Medicare tax liabilities.
When are employers entitled to the ARPA tax credit?
Employers who elect COBRA coverage after April 1, 2021, will be eligible for tax credits for any period of coverage that occurs after that date and before the date of the election, starting on the day of the election. Employers are eligible for tax credits for periods of coverage that occur after the election has been made. Employers are eligible for tax credits when a period of coverage begins (regardless of when an AEI would have been required to pay the COBRA premium). The following is an example of how to use the term “example.” For this example, assume that an employer’s COBRA coverage begins on the first day of the calendar month and that payments are due on the tenth day of each calendar month.
An AEI chooses COBRA coverage on June 17, 2021, with coverage beginning on April 1, 2021.
After June 17, 2021, the employer would be eligible to receive a credit on July 1, 2021, for the period of coverage through July 31, 2021; on August 1, 2021, for the period of coverage through August 31, 2021; and on September 1, 2021, for the period of coverage through September 30, 2021 for periods of coverage after that date (assuming the AEI remains eligible and enrolled during those periods).
See Questions A74 and 75 on Notice 2021-31 for further information.
What is the amount an employer can claim in ARPA tax credits?
General, if an employer does not subsidize COBRA premium costs for similarly situated qualified beneficiaries who are not AEIs, the tax credit for a quarter equals the amount of premiums paid by AEIs for COBRA coverage that were not covered by ARPA subsidies because of the application of the ARPA subsidies. When AEIs fail to pay their COBRA continuation coverage payments, they are liable for the amount of the premiums charged to other similarly situated covered workers and qualifying beneficiaries as well as any other allowed administrative expenses (i.e., generally 102 percent of the applicable COBRA premium).
Employers are not eligible to claim a credit for sums that have been accounted for as qualifying wages under the CARES Act or as qualified health costs under the FFCRA, respectively.
How much can employers claim in ARPA tax credits if they provide a COBRA subsidy?
If an AEI’s COBRA coverage was sponsored by his or her employer, the company can claim a tax credit equivalent to the amount the AEI would have paid out of pocket (i.e., the COBRA premium less the employer-provided COBRA subsidy). See Q A64 on Notice 2021-31 for further information. Exemple No. 2: Assume that the cost of relevant COBRA coverage is $1,000 per month for the sake of this example. An employer is required to charge individuals who chose COBRA a monthly fee of $500 (thus giving a $500 per month COBRA subsidy) in the absence of ARPA.
Claiming ARPA Tax Credits
Employers can claim the tax credit by included a report of the credit on their federal quarterly employment tax returns (Form W-2) (usually Form 941). If an employer’s projected quarterly tax credit exceeds their anticipated quarterly Medicare tax liabilities, the employer can request an advance of the tax credit by submitting Form 7200 to the Internal Revenue Service (see discussion below). Returns on Federal Employment Taxes: Employers can deduct the amount they are entitled to receive in ARPA tax credits from their Medicare taxes (including parts withheld from workers) that they would have otherwise been obligated to deposit in anticipation of obtaining the ARPA tax credit if they do so before receiving the credit.
Form 941 and accompanying instructions: The ARPA tax credit will be available to employers that submit their quarterly employment tax returns using Form 941 and complete the following line items in order to be eligible for the credit.
- The “nonrefundable” portion of the ARPA tax credit provided by the employer in the quarter should be entered on Line 11e (Nonrefundable portion of COBRA premium assistance credit). Generally, this is the amount of COBRA subsidies provided by the employer that does not exceed their Medicare tax obligations. This sum is shown in Worksheet 5 under Step 2, line 2g, as the amount to be paid. Line 11f (Number of people who received assistance with COBRA premiums) consists of the following information: For each quarter, employers should report the number of AEIs for whom they gave a COBRA subsidy during the quarter. All AEIs who are covered by a single COBRA plan should be treated as a single individual. For example, if a former employee, his or her spouse, and two children are covered through COBRA, the company should treat them all as an one individual. Using line 13f (Refundable portion of COBRA premium assistance credit), employers should enter the amount of their COBRA premium assistance credit that exceeds their Medicare taxes. This amount (known as the refundable portion of the COBRA premium tax credit) should be entered in the box labeled “Refundable portion of COBRA premium assistance credit.” This sum is reported in Worksheet 5 under Step 2, line 2h, as a total.
Advance of ARPA Tax Credits
If an employer’s anticipated ARPA tax credits exceed the amount of Medicare deposits available, the employer may file Form 7200 to request an advance for the balance of the credit after the end of the payroll period in which the employer became eligible for the credit. Form 7200 must be filed within 30 days of the end of the payroll period in which the employer became eligible for the credit. See the section above for more information on when employers become eligible for the credit. Exemple No.
Because the AEI opted COBRA on June 17, 2021 (the day the employer made its federal employment tax payments), the employer may lower its federal employment tax deposits in anticipation of the credit to which the employer is entitled.
The employer may thus request an advance commencing on July 1, 2021, the day after the conclusion of the semi-payroll period from June 16 through June 30, 2021, because AEI opted coverage on that date (even though the employer is entitled to reduce its deposits as of June 17, 2021).
See Question A76 on Notice 2021-31 for further information. Remember that advances for a tax credit cannot be obtained for a period of coverage that has not yet started. Form 7200 must be submitted before the earlier of the following dates:
- The employer may file Form 7200 to obtain an advance for the remaining credit if the expected ARPA tax credits exceed the Medicare deposits that are available. The advance must be requested within 30 days of the end of the payroll period in which the employer becomes eligible for the credit. Refer to the discussion above on the time period during which employers are eligible to claim the credit. As an illustration, consider the third case. Example 2 makes use of the identical facts as in the previous example, except that the company pays employees semi-monthly on the 15th and last day of each month. In anticipation of the credit to which the employer would be entitled, the employer may lower its federal employment tax deposits as of June 17, 2021 (the date on which AEI opted COBRA). If the credit exceeds the amount of the available reduction in deposits, the employer may file a Form 7200 to request an advance for the balance of the credit after the end of the semi-monthly payroll period during which the employer became entitled to the credit was reached. Form 7200: Request for Advance for Balance of Credit Consequently, because the AEI elected coverage on June 17, 2021, the employer may apply for an advance commencing on July 1, 2021, the day following the completion of the semi-payroll period from June 16 through June 30, 2021. (even though the employer is entitled to reduce its deposits as of June 17, 2021). Q A76 on Notice 2021-31 provides more information. It is crucial to note that advances cannot be claimed for a tax credit for a period of coverage that has not yet started. Form 7200 must be submitted no later than the earliest of the following deadlines:
Form 7200 with accompanying instructions: Employers that wish to obtain an advance of the tax credit will need to complete the following line items on the tax credit application:
- Line G (Number of persons who received COBRA premium support during the quarter for which the advance was sought): Employers must indicate the number of individuals who received COBRA premium assistance during the quarter for which the advance was requested. For the purposes of Line G, all AEIs who are covered by “a single COBRA plan” should be treated as if they were all one individual. For example, if a former employee, his or her spouse, and two children are covered through COBRA, the company should treat them all as an one individual. Employers should enter the total amount of COBRA premium support they supplied to AEIs for the quarter on Line 4 (Total COBRA premium help provided this quarter).
It is the responsibility of the employer to collaborate with their payroll staff or tax adviser to ensure that the ARPA tax credits are properly claimed on the relevant tax forms and are lodged on time.
- The ARPA tax credits for COBRA subsidies supplied between April 1, 2021, and June 30, 2021 must be claimed on the employer’s federal quarterly employment tax return (e.g., Form 941), which is due on July 31, 2021. In the event that an employer’s projected ARPA tax credits exceed their Medicare tax due, the employer may choose to request an advance of the credits by submitting Form 7200. Employment tax credits will be available to employers who give ARPA COBRA subsidies in the months of July, August, and/or September in order to claim credits on their third quarter employment tax returns, which are due on October 31, 2021.
- Form 941: Employer Quarterly Federal Tax Return
- Instructions for Form 941
- Form 7200: Advanced Payment of Employer Credits Due to COVID-19
- Instructions for Form 7200
- Notice 2021-31: Premium Assistance for COBRA Benefits
- The Internal Revenue Service has released much-anticipated ARPA COBRA Subsidy Guidance
- 100 percent COBRA Subsidies are included in the most recent economic stimulus package
In her current role as a Client Compliance Consultant for Sequoia, Emerald works with our customers to help them improve the efficiency with which they comply with benefits regulations. Emerald likes stand-up comedy, live music, and non-fiction writing in her spare time. She also enjoys reading.
IRS Answers Questions on COBRA Premium Assistance Credits
In recent months, the Internal Revenue Service (IRS) issued updated instructions for businesses regarding the federal government’s 100-percent premium subsidy to qualifying COBRA health care subscribers for coverage between April 1 and September 30. Taxpayers, plan administrators, and health insurers have voiced concerns about the payroll tax credit associated with the COBRA subsidy, according to IRS Notice 2021-31, which was published on May 18. The subsidy was included in the American Recovery and Reinvestment Act (ARRA), which was passed into law in March.
Even if employees have exceeded the 18 months of coverage generally available under COBRA under federal law, the subsidy is available during the coverage period of April through September for employees eligible to elect continuation coverage under state laws, which are sometimes referred to as “mini-COBRAs,” during the April through September coverage period.
- Instructions on how to compute the credit
- Who is eligible
- Who is not eligible
- Who is eligible When does the premium-assistance period begin and end
As Saghi Fattahian and Lindsay M. Goodman, attorneys in Morgan Lewis’ Chicago office, wrote in a letter to the Chicago Tribune, “the notice comes as plan sponsors and COBRA administrators are preparing to issue required notices to subsidy-eligible individuals,” as required by the Affordable Care Act. In order to qualify for COBRA premium assistance, employers subject to COBRA must send a special election notice to AEIs who were still within their 18-month COBRA window in April 2021 by May 31.
Employers must also inform AEIs at least 15 days (but no more than 45 days) before their eligibility for the subsidy expires in order to maintain eligibility.
COBRA subsidy guidance and model notices are issued by the Department of Labor, according to a related SHRM article.
When do employees lose their eligibility for COBRA benefits?
Pilger, an attorney in the Atlanta office of law firm Fisher Phillips, put it, “ARPA compels AEIs receiving COBRA premium assistance to notify an employer if they become ineligible owing to other group health coverage or Medicare.” Notice 2021-31 is a formal notice “According to the regulations, if an AEI fails to inform an employer, the employer retains the credit obtained for the time of ineligibility, provided the employer was aware of the individual’s eligibility for the other coverage.
If the employer discovers that the employee is qualified for other coverage, the company will no longer be eligible for the credit from that time forward.” According to Pilger, the notice requires an employer to “maintain documents that prove its eligibility for the credit,” which includes keeping payroll records.
- When it comes to choosing COBRA during the subsidy period, are there any restrictions?
- “The IRS effectively eliminated the possibility of a more-than-18-month lookback for individuals with COBRA extensions,” says Edward Fensholt, senior vice president and director of compliance services at Lockton, a benefits brokerage and consultancy based in Kansas City, Missouri.
- Exactly when is a termination deemed “involuntary”?
- ‘Involuntary termination of employment,’ according to the Internal Revenue Service, “mostly corresponds to conventional thinking, but includes a number of head-scratching comments,'” according to the article “Fensholt penned the piece.
- “The likelihood of receiving a COBRA penalty for failing to give the subsidized option outweighs the likelihood of the IRS second-guessing your decision to offer it,” he added.
- According to Tripp VanderWal and Brett N.
- “In other words, if the employer does not subsidize the COBRA premiums for similarly situated COBRA, the amount ‘not paid’ is the COBRA premium (plus a 2 percent administration charge or a 50 percent administrative cost during disability extensions),” they stated.
- What happens if an employer does not owe any taxes?
- Downs and Elverine (Rena) F.
“What happens after September 30?” VandeWal and Liefbroer said that “unsubsidizedCOBRA automatically continues for an AEI who elects COBRA with the COBRA subsidy after September 30, 2021.” In accordance with EBSA Disaster Relief Notices 2020-01 and 2021-01, “payment for COBRA coverage beyond September 30, 2021 will be payable by the customary due date, which has been extended.” Organizations revise and complicate COBRA deadline extensions, according to a related SHRM piece.
What about coverage for dental and eye care?
Despite the fact that dental and vision plans are eligible for the subsidy, “if an individual elects COBRA for the dental and/or vision plan solely because he or she has other major medical coverage elsewhere (through a spouse’s employer, for example), that major medical coverage would disqualify the individual from the subsidy for the dental and/or vision coverage.” While some practitioners hoped the guidance would allow for a good faith interstate transfer, the guidance does not allow for such an interstate transfer.
What happens if an employer is no longer subject to COBRA because of a reduction in the number of employees?
It also applies to employee groups as well as federal, state, and municipal government entities.
According to NFP, an employer benefits broker and consultancy based in New York City, the new guidance clarifies that “employers who experienced a decrease in employees, such that they are not subject to federal COBRA this year, still have to offer COBRA premium assistance based on their status as a larger employer in 2020(for AEIs who were due an offer of COBRA in 2020),” and that “employers who experienced a decrease in employees, such that they are not subject to federal COBRA The COBRA Subsidy Has the Potential to Increase Employer Costs Similarly, the National Federation of Professionals (NFP) warned that the COBRA subsidy might increase expenses for self-insured firms.
As the firm’s report pointed out, historically, just 10 percent of dismissed employees chose COBRA (with the cost of coverage serving as the major disincentive).
According to NFP, for self-insured firms, “The difference between the tax credit and the claims produced by the COBRA members would have an influence on the budget’s overall balance.
[Express Request: ARPA: COBRA Premium Subsidy (4/1 – 9/30/21)] [SHRM members-only Express Request: ARPA: COBRA Premium Subsidy (4/1 – 9/30/21)
A Practical Guide to Claiming the COBRA Premium Assistance Tax Credit
Employers and plan administrators have spent their efforts over the last several months on identifying individuals who qualify for COBRA premium assistance under the American Rescue Plan Act of 2021 (“ARP”), sending out appropriate notices, and collecting election forms. The first round of election notices has come and gone, and companies and plans are now focusing on another critical issue: obtaining the COBRA premium assistance tax credit, which is now available. Why is it important to submit an application for the tax credit?
This subsidy is made possible through the use of a tax credit method.
Please check our blog postoverview for more information on identifying who the “premium payee” is for the purpose of assessing eligibility for the COBRA premium subsidy.
If the amount of COBRA premium assistance provided to qualifying individuals exceeds the amount of Medicare tax that must be paid (for example, in the case of a multiemployer plan that does not owe any Medicare tax), a refund of the excess amount can be requested from the Social Security Administration.
- According to the IRS, the tax credit is claimed by include the amount of COBRA premium assistance supplied to qualified persons on the quarterly employment tax return (IRS Form 941).
- There is a worksheet included with the IRS Form 941 instructions that shows how to compute the two elements of the tax credit: the refundable portion and the refundable portion.
- Please refer to our blog article for additional details on estimating the amount of COBRA premium assistance that may be claimed as a tax credit.
- It is possible to file for the tax credit even before the IRS Form 941 filing date, if you meet the requirements.
(1) In the first instance, an employer (or a plan with federal employment tax liability, such as a multiemployer plan with employees or a multiemployer plan that makes benefit payments subject to withholding) may reduce the federal employment taxes that would otherwise have to be deposited up to the amount of the anticipated COBRA premium assistance tax credit.
(2) Second, by completing an IRS Form 7200 with the Internal Revenue Service, you can claim an advance of the expected tax credit after deducting any available federal employment tax deposits.
- Tips for Employers: If a plan does not have any federal employment tax liabilities to reduce in step one (for example, if a multiemployer plan does not have any employees and does not make any benefit payments subject to withholding), the plan can proceed directly to step two and file an IRS Form 7200 to request the anticipated tax credit. Practice Tip: The IRS Form 7200 must be sent to the Internal Revenue Service.
It is still necessary to submit an IRS Form 941 in order to submit a complete claim for the tax credit, even if the two processes outlined above are employed to claim the tax credit ahead of time. It will be necessary to reconcile any tax credit that has been received in advance when IRS Form 941 is filed. When is it possible to claim the tax credit? The deadline for submitting a claim for the tax credit is on a rolling basis. There are two important dates to remember, each of which is outlined here.
- Upon receiving the qualifying individual’s COBRA election, the person to whom the premiums are payable (e.g., the employer or the plan) becomes eligible to claim a tax credit for the COBRA premiums that have not been paid by the qualifying individual to date. The date of the qualifying individual’s COBRA election is the date on which the qualifying individual receives the COBRA election. Example: If an employer receives a qualifying individual’s COBRA election on June 17, and the individual has not paid premiums since April 1, the employer would be allowed to claim the tax credit on June 17 for the period of coverage from April 1 through June 30. Initiation of Subsequent Periods of Insurance Coverage: Individuals responsible for paying premiums for a future term of coverage become entitled to claim a tax credit for each consecutive period of coverage commencing at the commencement of the subsequent period (provided the individual remains eligible for COBRA premium assistance for that coverage period). Following up on our previous example, the employer would become entitled to claim the tax credit on July 1 for coverage supplied between July 1 and December 31.
When may the Tax Credit be used as a financial advantage? If you want to take advantage of the tax credit sooner rather than later, you must follow a particular set of regulations. As a reminder, there are two actions you must take before you can claim the tax credit and file an IRS Form 941: (1) Reduce federal employment tax deposits to the extent possible, and (2) following the reduction of federal employment tax deposits to the extent possible, submit an IRS Form 7200 with the Internal Revenue Service to obtain an advance of the expected excess tax credit (if applicable).
- Eligibility to receive a refund of federal employment tax payments is determined according to the same timetable as indicated above.
- Returning to the second half of our previous example, for coverage given from July 1 through July 31, the employer would become eligible to lower employment tax payments on July 1, which would be the first day of the coverage period in our previous example.
- *** Takeaway This blog article includes a broad summary of how to claim the COBRA premium assistance tax credit, as well as links to further resources.
- But don’t wait – the next Form 941 filing deadline for most companies and plans is July 31, 2021, so the time to act is now.Tags:ARP,ARPA,COBRA,COBRA Subsidy,premium help,tax credit,tax credit for premium assistance
Employer COBRA responsibilities effective April 1
In accordance with the American Recue Plan of 2021 (ARPA), businesses will be required to provide new COBRA coverage beginning on April 1, but will be reimbursed for their expenses through refundable tax credits. Employers should take early steps to verify that qualified employees are receiving the necessary subsidies and that they are prepared to comply with the notice requirements. As part of this process, employers should be keeping track of information and ready to make credit claims. In accordance with the ARPA, which was enacted on March 11, 2021, employers must provide a 100 percent COBRA premium subsidy (including the 2 percent administrative fee) and additional COBRA enrollment rights to certain employees who have lost group health plan coverage as a result of involuntary termination or a reduction in working hours.
In the form of fully refundable payroll tax credits, employers will be repaid for their expenses.
In general, COBRA applies to all firms that regularly employ 20 or more people and provide a group health plan, with the exception of select religious plans and plans provided by the federal government.
In all cases, regardless of whether the plan is completely or partially insured, or if it is self-insured, a subsidy is required.
In order to be considered for assistance, an individual must have experienced a qualifying event due to involuntary termination or reduction in hours during the Subsidy Period and be still within their COBRA continuation window (generally 18 months following loss of coverage) during the Subsidy Period, even if that individual did not timely elect COBRA or had their coverage lapse prior to April 1, 2021.
During the Subsidy Period, employers are responsible for paying 100 percent of the aid eligible individual’s COBRA premiums, and they will be reimbursed through payroll tax credits. An aid qualified individual’s COBRA subsidy terminates on the earliest possible date from among the following options:
- The American Recue Plan of 2021 (ARPA) requires companies to provide new COBRA coverage beginning on April 1, but it also provides refundable tax credits to help offset the costs of providing the coverage to employees. In order to comply with the notice requirements, employers should immediately check that they are providing the necessary subsidies for qualified workers and that they are planning to comply with the notice requirements. Also important is for employers to keep track of information and prepare for the possibility of having to make credit claims. In accordance with the ARPA, which was enacted on March 11, 2021, employers must provide a 100 percent COBRA premium subsidy (including the 2 percent administrative fee) and additional COBRA enrollment rights to certain employees who have lost group health plan coverage as a result of involuntary termination or a reduction in work hours. In the “Subsidy Period,” which runs from April 1, 2021, to September 30, 2021, the new, temporary COBRA rules will be implemented. Paid-in-full payroll tax credits will be issued to employers as reimbursement. Pre-tax dollars to help pay for COBRA premiums While the Subsidy Period is in effect, businesses that are subject to federal COBRA or state continuation coverage (collectively referred to as “COBRA”) are required to refrain from charging eligible employees and beneficiaries for COBRA coverage. In general, COBRA applies to all firms that regularly employ 20 or more people and provide a group health plan, with the exception of select religious plans and plans offered by the United States government. If an employer has fewer than 20 workers on a regular basis and offers a group health plan, the employer may be subject to comparable state continuous coverage requirements, depending on the applicable state legislation. In all cases, regardless of whether the plan is completely or partially insured, or if it is self-insured, the subsidy must be provided. During the Subsidy Period, aid eligible persons must receive a subsidy equal to 100 percent of their required COBRA premiums (including the 2 percent administrative fee). In order to be considered for assistance, an individual must have experienced a qualifying event due to involuntary termination or reduction in hours during the Subsidy Period and be still within their COBRA continuation window (generally 18 months following loss of coverage) during the Subsidy Period, even if that individual did not timely elect COBRA or let their coverage lapse before April 1, 2021. While the Subsidy Period is in effect, employers are responsible for paying the whole cost of the aid eligible individual’s COBRA premiums. Employers will be compensated via payroll tax credits. An aid qualified individual’s COBRA subsidy terminates on the earliest possible date from among the following choices:
Any premiums paid by an eligible individual within the Subsidy Term for a period of coverage must be returned to the individual within 60 days of the payment of the premium. The COBRA election period has been extended. The subsidy is available to individuals who become newly eligible for assistance on or after April 1, 2021, as well as to those assistance eligible individuals who qualified for COBRA coverage prior to April 1, 2021, but who either did not elect COBRA coverage during their original election period or who allowed their coverage to lapse prior to April 1, 2021, and who meet the other eligibility requirements.
Plan sponsors must provide financially eligible persons who do not have a COBRA election in situ as of April 1, 2021 with an extra election time of at least 60 days to elect COBRA coverage for any period of their original maximum COBRA coverage period that falls within the Subsidy Period.
Changes in enrollment in a health plan are optional.
To be able to enroll in different types of coverage, an individual who is eligible for help must meet all of the requirements listed below:
- The employer determines that such a modification in coverage is acceptable
- Individuals who experience a COBRA qualifying event must pay a premium for alternative coverage that is not more than the premium for the coverage in which they were enrolled at the time of the qualifying event. Additionally, the varied coverage is made available to similarly situated current employees of the business who are present at the moment of election. Any of the following are not acceptable alternatives to health insurance coverage:
- Coverage that only covers benefits that are specifically excluded
- A qualified small employer health reimbursement agreement (QSEHRA)
- A qualified small employer health reimbursement arrangement (QSEHRA)
- A spending agreement that is flexible
COBRA notification requirements have been updated. In addition, the ARPA requires the plan administrator to provide written notice to participants regarding the availability of the COBRA premium subsidy (including to those who are eligible for the extended election period), the option to enroll in an alternative plan coverage option, if permitted by the employer, and the expiration of the subsidy, as well as the availability of the COBRA premium subsidy.
For COBRA election notices to be valid during the Subsidy Period, they must include the following information:
- The paperwork that must be completed in order to determine eligibility for premium assistance
- In order to contact the plan administrator, you’ll need his or her name, address, and phone number. A description of the election period that has been extended
- A summary of the qualified beneficiary’s responsibility to tell their employer of their eligibility for other group health coverage or Medicare, as well as the $250 penalty imposed if the qualified beneficiary fails to comply with the obligation
- A description of the eligible beneficiary’s right to a subsidized premium, as well as any circumstances that may apply to the qualified beneficiary’s right to a subsidized premium
- A explanation of the qualifying beneficiary’s ability to enroll in several types of coverage, if that choice is permitted by the employer
In accordance with ARPA, the Department of Labor must prescribe sample COBRA election letters within 30 days of the law’s enactment. Additionally, between 15 to 45 days prior to the expiration of their premium aid, employers must issue a written notification to assistance eligible persons. This notification must include the following information:
- A notice indicating the individual’s premium support is about to expire, as well as a prominent indication of the date on which the aid will expire
- A notice informing the person that he or she may be eligible for coverage without the need for premium assistance under COBRA continuing coverage or coverage under a group health plan
Model COBRA premium assistance expiry letters must be prescribed by the Department of Labor (DOL) within 45 days of the ARPA being signed into law. Tax Breaks and Credits When an employer’s group health plan is subject to COBRA under the Internal Revenue Code (IRC), the Employee Retirement Income Security Act of 1974, or the Public Health Service Act, the employer is eligible to claim a fully refundable tax credit for both fully-insured and self-funded health coverage. In the case of a multi-employer plan, the plan is responsible for applying for the tax credit.
There is a deduction made for the tax credit against the 1.45 percent Medicare surcharge.
Despite the need for more instructions, it is anticipated that companies would submit for the tax credit using Form 941.
The ARPA also has a clause that prohibits the receipt of a duplicate benefit. A premium assistance credit for the same amount that is taken into consideration as either of the following is not available to employers:
- Qualified earnings for the purposes of the Employee Retention Credit
- Qualified health plan expenditures under the paid leave provisions of the Families First Coronavirus Response Act
- Qualified health plan expenses under the paid leave provisions of the Families First Coronavirus Response Act
The Employee Retention Credit is based on qualified wages; qualified health plan expenses are based on the paid leave provisions of the Families First Coronavirus Response Act are based on qualified wages; and qualified health plan expenses are based on the Employee Retention Credit are based on qualified wages.
Winston & Strawn
Note that the Internal Revenue Service (IRS) has issued two pieces of advice, Notice 2021-31 and Notice 2021-46 (the Guidance), that explain the COBRA subsidy provisions of the American Recovery and Reinvestment Act (ARP). You may read our earlier notice, “IRS Releases Guidance on COBRA Subsidies,” which focused on the substantive parts of the Guidance, here. The IRS provides much-needed details on how multiemployer plans, employers with self-insured plans, and insurers (Payees) can claim the COBRA subsidy tax credit (the Credit) to offset the mandatory payment of fully subsidized premiums for certain COBRA qualified beneficiaries.
Notice 2021-46 also contains useful information for identifying the common law employer for the purposes of this notice.
This revised Guidance is beneficial in view of the forthcoming July 31, 2021 deadline for reporting Form 941 for the second quarter of fiscal year 2020.
- Request a Refund for Amounts Paid in COBRA Premiums That Exceed the Amount of Federal Employment Tax Obligation: The Employer’s Quarterly Federal Tax Return, Form 941, Employer’s Quarterly Federal Tax Return, is the form used to claim the Credit as an employment tax refund on the corresponding employment tax return. According to this technique, the employer submits the amount of the Credit and the number of persons receiving the COBRA subsidy on the Form, and the employer may obtain a refund or a credit against employment taxes for the following quarter’s employment tax due
- Or Keep an amount of employment taxes equal to the amount of the credit withheld: Businesses are entitled to withhold Federal employment tax payments up to the amount of the Credit for COBRA Premium Subsidy and will not be subject to a penalty for failing to make the required deposit. Tax deposits, on the other hand, cannot be withheld for a period of COBRA Premium coverage that has not yet begun to run. As a result, pursuant to Notice 2021-24, employers are urged to lower deposits by the amount of any expected paid sick or family leave and employee retention credits before withholding in anticipation of the Credit. In order to request an advance from the IRS, you must do the following: Employers can make use of Form 7200, Advance Payment of Employer Credits, to make advance payments of employer credits. In accordance with COVID-19, it is necessary to seek an advance of the Credit. Form 7200, on the other hand, can only be submitted if the projected COBRA Premium subsidy is larger than the employer’s Federal employment tax responsibility under the FLSA. Therefore, before obtaining an advance on any residual balance, the employer must first lower employment taxes by the amount of the Credit.
Although an advance cannot be requested for a period of coverage that has not yet begun, Form 7200 can be completed at the end of the payroll period in which the employer becomes eligible for the Credit, just as it can be done with Method 2. Note also that Form 7200 must be submitted before the earlier of (1) the date on which Form 941 for the applicable quarter is filed or (2) the last day of the month following that quarter in order to be considered timely submitted. On Form 941, the employer must additionally declare the advance payment received as well as the tax credit that was claimed.
However, an employer may be able to claim a tax deduction for this amount in most cases.
Winston Takeaway: Since precisely determining the exact amount of COBRA premium tax subsidy and employment tax obligations may be difficult, most businesses will opt to simply file a Form 941 to claim the COBRA Premium tax credit rather than attempting to calculate the subsidy and employment tax liabilities.
Companies for which waiting for reimbursement is a significant burden should take care to precisely evaluate their employment tax due for each quarter and to strictly adhere to the timing regulations about when employment taxes can be withheld and when the advance can be claimed.
In order to obtain further information, please speak with a member of the WinstonStrawn Employee Benefits and Executive Compensation team.
The 411 on the 941: Everything You Need to Know About How to Claim the COBRA Subsidy Tax Credits
Companies and insurers have been diligently familiarizing themselves with the rules for administering the temporary 100 percent COBRA premium subsidy established by the American Rescue Plan Act (“ARPA”), and preparing and sending notices to potential “Assistance Eligible Individuals” who may be eligible for the subsidized coverage, since the law was enacted in March 2021. Employers and insurers will need to figure out how to collect the tax credit being granted by the federal government to repay them for the premiums they subsidized.
Notice 2021-31, which was just published, gives some guidance on the requirements for obtaining the tax credit.
Answers to some of the inquiries we’ve been getting concerning the draft Form 941 are provided in the section below.
According to ARPA, a “person to whom premiums are payable” is qualified to claim a tax credit for COBRA premiums that were not paid by an assistance eligible individual (“AEI”) as a result of the subsidy on the part of the AEI. The “person to whom premiums are payable” is referred to as the “Premium Payee” in Notice 2021-31, according to the Internal Revenue Service. The following premium payers are entitled to receive the tax credit:
- The plan
- In the event of a multiemployer group health plan
- And in the case of any other group health plan The continuation of the plan by the employer in the case of other self-funded plans and insured plans that are subject to federal COBRA. For any group health plan that is not specified above (such as insured plans offered by small companies that are not subject to federal COBRA but are subject to state continuing coverage requirements), the insurer that is providing the coverage will be responsible.
The IRS has said informally that if a plan is subject to both federal and state COBRA, as is the case with a big employer insured plan, the employer can claim a tax credit for all months of coverage, including the months during which employees are eligible for state continuation coverage.
What tax credit is available for providing the COBRA subsidies?
The tax credit can be applied to the Medicare hospital insurance tax, which is levied under Internal Revenue Code (“Code”) section 3111(b) of the Internal Revenue Code. The tax credit is fully refundable, which means that Premium Payees might receive a reimbursement from the Internal Revenue Service if the amount of the credit exceeds the amount of Medicare hospital insurance tax obligations that they are responsible for (including where they do not owe any Medicare hospital insurance tax).
Claiming the Tax Credit
A Premium Payee is eligible to receive the tax credit as of the date on which it receives notice of a prospective AEI’s election to continue COBRA coverage under the Affordable Care Act. Example: If an employer that sponsors a plan subject to federal COBRA gets a COBRA election from an AEI on June 17 electing COBRA retroactive to April 1, the employer would be entitled to the tax credit for April, May, and June as of June 17 if the plan was subject to federal COBRA on April 1.
(assuming the AEI is eligible for COBRA coverage during that entire period). On July 1, if the AEI continues to provide COBRA coverage through July, the Premium Payee becomes eligible to get a tax credit for that month.
What if an AEI receiving the COBRA subsidy fails to provide notice to the plan of his/her eligibility for coverage under a disqualifying group health plan or Medicare, and the plan continues to provide the subsidy?
Except in cases where the Premium Payee was aware of the individual’s eligibility for other coverage, the Premium Payee retains the right to claim the tax credit for the whole time in which it supplied the subsidized insurance coverage.
How does a Premium Payee claim the tax credit?
The Premium Payee claims the tax credit on its quarterly employment tax return, which is filed by the government (typically a Form 941). On Form 7200, the Premium Payee has the option of receiving advance installments of the tax credit.
- Employment Tax Return: In anticipation of obtaining the tax credit, a Premium Payee may decrease deposits of federal employment taxes (including amounts withheld from employees) by an amount equal to the amount of the expected tax credit. Employment Tax Return: When filing its federal employment tax return(s), which is usually Form 941, Employer’s Quarterly Federal Tax Return, the Premium Payee should indicate the amount of tax credit claimed as well as the number of individuals who received the tax credit for the quarter in which the tax credit was claimed. For example, a Premium Payee who wishes to claim the tax credit for the coverage months of April, May, and June can do so on the quarterly Form 941 that is due on July 31, 2021. Form 7200 is used to record information about a person or organization. When a Premium Payee’s expected tax credit exceeds the amount of deposits available, he or she may request an advance of the tax credit by submitting a Form 7200 to the IRS. The IRS will only accept this form if it is sent to them through fax. However, in order to receive the tax credit, the Premium Payee must still complete Form 941 with the IRS.
GROOM INSIGHT:While the COBRA subsidy tax credit is taken against the Medicare Hospital Insurance Tax under Code section 3111(b), IRS guidance is clear that the Premium Payee may reduceanywithheld income taxes and taxes under FICA that it would otherwise be required to deposit, up to the amount of the anticipated credit.In other words, if the COBRA subsidy tax credit happens to exceed what is effectively the adjusted Medicare tax obligation, the refundable credit can be applied to reduce the other employment tax obligations.
The insurer submits a claim for the credit following the same procedure as explained above. Premium payers, whether they are employers, insurers, or multiemployer plans, must submit a tax credit claim on Form 941 in order to qualify (and, if applicable, Form 7200).
What’s changing on Form 941 and Schedule R?
The credit is claimed by the insurer using the same procedure as explained above. Claimants for the tax credit, whether they are employers, insurers, or multiemployer plans, must submit a completed Form 941. (and, if applicable, Form 7200).
When may a Premium Payee reduce its deposits of federal employment taxes, and when and how does the Form 7200 get filed to request an advance of the tax credit?
Upon becoming eligible for the tax credit (i.e., upon receiving notice of a potential AEI’s option of COBRA continuing coverage), a Premium Payer may choose to lower its deposit amounts by a certain amount. It is possible, but not mandatory, for the Premium Payee to file a Form 7200 to seek an advance payment of the expected tax credit where the anticipated tax credit exceeds the tax deposits that are available for reduction. A Form 7200 may be filed by a Premium Payee at any time following the end of the payroll period for which the Premium Payee becomes eligible to receive the tax credit.
- Consider the following scenario: On June 17, 2021, an employer gets a COBRA election from an AEI that is effective retroactively to April 1, 2021.
- Paydays are given to employees twice a month by the company (on the 15th and the last day of the month).
- The employer may file Form 7200, but not until July 1 (the day after the end of the payroll period from June 16 to June 30), in order to receive an advance payment of the remaining tax credit.
- From the first of July, the employer becomes eligible to get the credit for July coverage and may begin to decrease its federal employment tax payments as of that date.
- The credit for June is claimed by the employer on the second quarterly Form 941, which is due on July 31.
- If the Premium Payee later learns that it should have claimed more in tax credits for a quarter than it reported on the applicable quarter’s Form 941, the employer must file an updated Form 941, known as the Form 941-X, with the Internal Revenue Service.
The employer will not be able to claim that tax credit on the following quarterly Form 941. (in this case, due October 31).
What if a Premium Payee doesn’t have any employment tax liability?
Assuming that the Premium Payee does not have any employment tax liabilities, the Premium Payee should make a claim for the tax credit on Form 941 for the quarter in which the Premium Payee first becomes eligible for the credit (even if does not typically file a Form 941). Moreover, if any advance payments have been received, the Premium Payee should record these as well as write “zero” on all remaining non-applicable lines, so that the overpayment amount on Form 941 is equal to the amount of the tax credit less any advance payments that have been received.
Yes. As a result, regardless of whether the third-party payer is regarded a “employer” for other reasons, the third-party payer is not eligible to get the tax credit unless it fulfills specific conditions (explained below). The third-party payer, on the other hand, may claim the tax credit on behalf of a customer who is a Premium Payee on the employment tax returns that the third-party payer submits on their behalf. It makes a difference whatever type of third-party payer the Premium Payee employs (reporting agent, certified PEO (CPEO) or Code Section 3504 agent, or non-certified PEO and or other third party payer) since the reporting regulations are different.
How can a Premium Payee that uses a third-party payer request an advance payment of the tax credit?
To request an advance payment of the tax credit, a Premium Payee must submit its own Form 7200 to the Internal Revenue Service (IRS) rather than relying on the third-party payer to report and pay employment tax on its behalf. The third-party payer cannot file the Form 7200 on the premium payer’s behalf. The Premium Payee will subsequently be required to give a copy of the Form 7200 to the third-party payer in order for the Premium Payee’s Form 941 to take into account the credit that was recorded on the Form 7200 by the Premium Payee.
Can a third-party payer, like a PEO, be treated as a Premium Payee for purposes of claiming the tax credit?
Yes, under certain situations. It is necessary for the third-party payer to meet the following requirements: I maintain the group health plan; (ii) be considered the sponsor of the group health plan and be subject to the applicable DOL COBRA guidance, which includes providing COBRA election notices to qualified beneficiaries; and (iii) have received the COBRA premium payments directly from AEIs (were it not for the subsidy). It is the same form 941 that is used by all other Premium Payees if a PEO want to claim the tax credit for its own benefit.
If client employers are claiming their own tax credits in addition to those claimed by the client, those credits would be reported separately on Schedule R with regard to those clients as well.
If the expected credit exceeds the reduction of deposits, the PEO may file Form 7200 and seek an advance payment of the credit.
What information must a third-party payer obtain from its clients that are Premium Payees in order to claim the tax credit on their behalf?
The third-party payer is responsible for obtaining any information that would have been required for the Premium Payee to claim the tax credit on its own behalf from the Premium Payee. Either the third-party payer or the client’s employer is required to maintain documents demonstrating that the client is eligible for the credit. If the IRS inquires, the third-party payer and/or the client employer will be required to submit paperwork confirming eligibility for the credit, if requested (including documentation demonstrating that individuals were AEIs).
We hope that this notice has answered any questions you may have regarding claiming the COBRA subsidy tax credit; nevertheless, we are confident that other queries may emerge in the coming days and weeks.
In the event that you require any further information or direction regarding the COBRA subsidy tax credit, Form 941, or Form 7200, please contact your Groom attorney, and we would be pleased to address these problems with you in greater detail.
- Information on claiming COBRA subsidy tax credits
- The 411 on the 941 – Everything You Need to Know About How to Claim the COBRA Subsidy Tax Credits