IRS Clarifies COBRA Premium Payments

Continuation of Health Coverage (COBRA) benefits are available to individuals who lose health insurance after being laid off, furloughed, have hours reduced, or other qualifying events. During and after the pandemic, it’s estimated that as many as 16 million U.S. workers lost employer-sponsored health coverage. Even though COBRA is an option for 18 to 36 months or longer for some plans, the cost of premiums can prove too much for many to afford. The result is that many will simply have to go without healthcare coverage due to the high cost. To address this issue, there is a temporary and fully subsidized COBRA premium available for certain individuals throughout the summer. Recently issued IRS guidance can help Atlanta employers navigate the opportunity, as well as understand how to claim the subsidy. To help clients, prospects and others, Wilson Lewis has provided a summary of the key details below.

COVID-19 Changes to COBRA

The American Rescue Plan Act (ARPA) in March 2021 updated and extended health coverage through COBRA. It authorized six months of fully subsidized premiums from April 1 through September 30, 2021 to individuals who lost health benefits, plus their covered dependents.

The change applied to the following types of plans:

• Insured and self-insured
• Self-funded
• Insured plans subject to continuation coverage under certain state laws

Flex spending accounts, dental, and vision plans were not included, and individuals who voluntarily resigned or were fired were not included. Employers had until May 31 to notify eligible individuals.

During the six-month period, employers make the premium payments on behalf of covered individuals and receive a quarterly tax credit for reimbursement. Like other COVID-19 tax credits, employers reduce their payroll tax deposits in the amount of the COBRA premium(s) covered during the quarter; or file Form 7200 at any point to receive an advance credit in the amount of expected premiums.

Recent IRS Guidance

Following up on prior guidance, the IRS just added 11 more questions and answers to the existing Notice. The updated guidance addresses:

Extended coverage periods

For the first time, the IRS has clarified that if an individual’s original 18-month COBRA coverage expired but they’re eligible to extend it, the individual still qualifies for the subsidy.

Disability, second qualifying event, or a State mini-COBRA would all qualify.

The individual does not yet need to notify the employer of his or her intent to extend coverage for this period to apply.

Ending the subsidy if Medicare dental- or vision-only becomes available

This applies if the individual previously elected dental-only or vision-only COBRA coverage.

Thus, eligibility for Medicare would end the subsidy, even if it doesn’t offer dental or vision.

Comparable state continuation coverage

State continuation coverage applies in situations where a state program only covers certain state residents, like government employees.

If a plan is subject to both federal COBRA and state-mandated continuation coverage, the insurer is not entitled to the tax credits since it’s not the common law employer. This goes against existing guidance that previously treated insurers as the premium payee. This could lead to situations where the common law employer is eligible for the tax credit without actually paying the COBRA premiums itself.

Claiming the tax credit

The updated guidance confirmed which entity is eligible to claim the credit. In most circumstances, to claim the credit, the entity must have directly paid wages to the former employee as his or her employer and paid the related employment taxes. Other topics covered included how to claim the credit in situations with state-mandated continuation coverage as well as State government agencies.

Group health plans other than multiemployer plans can treat individual entities as employers for purposes of claiming the tax credit, even though the entire group is treated as a single employer for employee benefit purposes. Third-party payers – for example, a multiple employer welfare arrangement – that provide health coverage but do not actually pay employee wages are prohibited from claiming the credit.

The guidance also addressed which entity would be eligible for the tax credit if a company is bought or sold during the subsidy period. In some cases, the seller is still required to pay COBRA premiums – and thus, claim the tax credit – unless the buyer is obligated to make continuing COBRA coverage available.

For Small Businesses

Finally, remember that COBRA health coverage is only available in situations where the former employer has at least 20 employees, except for government agencies. The Small Business Health Options Program (SHOP) is available to small employers with 1-50 full-time equivalent (FTE) employees, so there may be situations where a health plan is not covered by COBRA but still entitled to pay premiums and then claim the subsidy tax credit.

To qualify, the plan must be fully insured, not covered by COBRA, offered through a SHOP exchange, and meet all four of the following requirements.

1. The SHOP exchange offers several insurance choices to employees enrolled in the same small group health plan.
2. The SHOP exchange provides the employer with a single premium invoice, aggregates and allocates all premium payments, and then pays the insurers.
3. The employer is contractually obligated with the SHOP exchange to pay any COBRA premiums to the exchange.
4. The employer would have received State mini-COBRA premiums directly from eligible former employees if the temporary COBRA subsidy were not in place.

If all requirements are met, then the employer, not the plan insurer, claims the tax credit; however, if even one of the above conditions is not met, then the insurer would claim the tax credit instead.

Though this is good news for small businesses, some insurers that thought they could claim the credit will now need to repay any amount they may have already received, nor are they eligible to continue filing for reimbursement. Likewise, certain small businesses may need to go back and re-evaluate to see if they can claim back-dated subsidy tax credits.

Contact Us

The recently issued guidance comes too late for taxpayers to make a claim on the July 31^st quarterly payroll tax filing. However, the good news for Atlanta businesses is that an amended quarterly payroll tax return can be filed to retroactively claim the savings. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.