COBRA Subsidy Guidance Begins

      In what promises to be a series of guidance pieces from the federal government on the new COBRA premium subsidy, the Internal Revenue Service (IRS) issued a group of questions and answers addressing how employers (both public and private) can claim a payroll tax credit for providing the 65 percent COBRA premium subsidy required under the American Recovery and Reinvestment Act of 2009 (ARRA).  The IRS guidance was issued on February 26, 2009, and can be found at the IRS's COBRA Health Insurance Continuation Premium Subsidy Web page.

      In general, the ARRA provides a nine-month COBRA premium subsidy for individuals and their dependents who are entitled to COBRA as a result of an employee being involuntarily terminated from a job between September 1, 2008, and December 31, 2009 (assistance eligible individuals or AEIs).  The subsidy phases out at income levels between $125,000 and $145,000 for taxpayers, or between $250,000 and $290,000 for joint filers. The subsidy is equal to 65 percent of the normal COBRA premium charged to COBRA recipients, and is funded by the federal government.  However, employers have to "front" the subsidy.  In return, employers may claim a dollar-for-dollar credit against their payroll taxes to be reimbursed for the subsidy.  Employers must identify eligible individuals and have new notice obligations related to this subsidy, all of which are detailed in a summary we issued on February 20, 2009, that can be found here.

      Getting Paid for the Subsidy.   According to the IRS guidance issued on February 26, employers may claim the tax credit for the 65 percent subsidy through Form 941 (Employer's Quarterly Federal Tax Return). The credit is claimed on Line 12a of the January 2009 revision of that form, but may not be claimed until after an AEI has paid his or her 35 percent share of the premium.  If the subsidy credit exceeds the employer's payroll tax liability for that quarter, the excess can be applied as a credit to the next quarterly return, or may be requested as a refund.  The number of AEI's to whom the COBRA subsidy is provided must be reported on Line 12b.  The new Form 941 was posted to the IRS website on February 20 and can be found here.

      The guidance also makes clear that employers can decide whether to reduce each tax deposit during a quarter for the subsidy credit, or to claim the subsidy credit just once each quarter as an overpayment at the end of a quarter.  Payroll tax deposits are generally due during a quarter either monthly or semiweekly depending on an employer's past tax liabilities.

      Record Maintenance.  Employers must also collect and maintain the following information and be prepared to present it to the IRS upon review or audit (although it need not be provided with the filed Form 941):

• Information on the receipt of the AEI's 35 percent share of the premium;

• A copy of the insurance carrier's premium invoice and proof of timely payment if the plan is insured;

• Proof of the premium amount and the coverage provided to the AEI if the plan is self-insured;

• Attestation of involuntary termination (including date) for each covered employee whose termination entitled the AEI to the subsidy;

• Proof of each AEI's eligibility for, and election of, COBRA coverage at any time between September 1, 2008, and December 31, 2009; and

• 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.

      More to Come.  We expect to see further guidance from both the IRS (relating to reporting subsidy payments for AEI's who may not claim the full subsidy) and the Department of Labor (DOL) (providing, among other things, model notices to inform AEI's about the subsidy).  In the meantime, both the IRS and the DOL have set up informational Web sites about the subsidy.

      Ice Miller will continue to monitor developments and will send future e-updates as guidance is issued.  Meanwhile, for more information please contact Chris Sears,  Tara Schulstad Sciscoe , Mary Beth Braitman, Terry Mumford, Rebecca Sczepanski or your Ice Miller LLP employee benefits attorney.