The IRS has posted 14 new questions and answers explaining how employers can claim a credit for the 65% COBRA continuation premium subsidy provided to qualifying terminated workers and their families under the American Recovery and Reinvestment Act of 2009. This information explains numerous details, such as how employers may reduce payroll deposits by the amount of the COBRA subsidy, when to claim a credit on Form 941 (Employer's Quarterly Federal Tax Return), and how long employers will be able to claim the credit.  Click Here to read the questions and answers on the IRS web site.

Background. The Recovery Act provides a 65% premium subsidy for 9 months to assistance-eligible individuals, namely employees or members of their families who: are eligible for COBRA continuation coverage at any time between September 1, 2008 and December 31, 2009; elect COBRA coverage; and are eligible for COBRA as a result of the employee's involuntary termination between September 1, 2008 and December 31, 2009.

The subsidy requirement applies to group health plans that are subject to the Federal COBRA continuation coverage requirements or to similar requirements under State law. Employers with such a plan that receive a 35% payment from an assistance-eligible individual, must make the remaining 65% payment. The subsidy requirements apply to all plans subject to the COBRA requirements, including self-insured plans. In this case, the employer must provide the COBRA coverage if the eligible individual pays 35% of the otherwise required premium and the remaining 65% is treated as a payment of payroll taxes by the employer maintaining the plan.

Employers will get a tax credit for 65% of the COBRA cost on their quarterly employment tax returns. (Code Sec. 6432(a) and Code Sec. 6432(c), as added by 2009 Recovery Act Sec. 3001(a)(12)) Employers should use the updated Form 941, Employer's Quarterly Federal Tax Return, to report their COBRA premium assistance payments.

Following are highlights of the additional guidance for employers in IRS's latest set of Q&As on the COBRA continuation premium subsidy.

COBRA subsidy treated as deposited on first day of quarter. The COBRA subsidy amount provided by the employer during a quarter (based on the 35% premium payments received from assistance eligible individuals during the quarter) is treated as having been deposited on the first day of the quarter and applied against the employer's deposit requirements. As a result, timely deposits up to the subsidy amount are treated as having been made during the quarter, regardless of the otherwise applicable due dates for deposits.

Where the subsidy amount provided during the quarter is less than the total amount of the employer's required deposits during the quarter, the employer must make timely deposits during the remainder of the quarter to make up the difference.

Illustration: Employer ABC's required payroll deposits for the second quarter of 2009 total $10,000, determined without regard to the COBRA premium subsidy provided by ABC during the quarter. ABC provides assistance eligible individuals with a total COBRA subsidy of $12,000 during the quarter, based on the 35% premium payments it received from them during the quarter, and reports the $12,000 subsidy on Line 12a of Form 941 for the quarter. ABC is treated as having made a $12,000 payroll tax deposit on the first day of the quarter and thus will not be subject to a Failure to Deposit penalty for the quarter even if it reduces its deposits during the quarter by the amount of the subsidy. Alternatively, ABC may make some or all of its required deposits during the quarter, determined without regard to the COBRA premium subsidy provided by it during the quarter, rather than reducing its total deposits by the subsidy.

If ABC's total COBRA subsidy during the quarter is only $8,000, it would be treated as having made an $8,000 payroll tax deposit on the first day of the quarter and thus would not be subject to a Failure to Deposit penalty for the quarter, provided that, once the total of its required deposits exceeds $8,000, it makes its regularly required deposits for the remainder of the quarter.

If the amount of the COBRA premium subsidy entered on Form 941 exceeds the employer's tax liabilities for the quarter, they can choose to have the excess either refunded or applied to the next quarter (but if the employer chooses to have the excess refunded, IRS will not send a notice before making the refund).

Which quarter to take credit. An employer isn't required to claim the credit for the COBRA premium subsidy on Form 941 (or Form 941X) for the quarter during which the subsidy is provided to assistance eligible individuals. They may generally choose to claim the credit on Form 941 for a later quarter in the same year.

Payroll tax is exclusive method of taking a credit for the subsidy. The IRS makes it clear that a credit for the subsidy must be claimed on the employer's payroll tax return, whether the quarterly filed Form 941 or the annually filed Form 943 (Employer's Annual Federal Tax Return for Agricultural Employees) or 944 (Employer's Annual Federal Tax Return). A payroll tax return is the only way to claim a credit and be reimbursed for the COBRA subsidy.

The Employer isn't always the party providing the subsidy and claiming a credit. The Q&As make it clear that a person other than the employer may be the proper party to provide the subsidy and take the credit on its Form 941. For example, under Code Sec. 6432(b)(1), if the COBRA coverage is provided by a multiemployer plan, the plan provides the subsidy and is reimbursed by taking a credit on Form 941.

Final date for claiming the credit. IRS's Q&As point out that an individual can be eligible for the COBRA subsidy based on an involuntary termination of employment occurring as late as December
31, 2009 (the qualifying event), and the subsidy can apply for up to nine months of COBRA coverage, which generally begins shortly after the qualifying event. Thus, it's expected that eligibility for the subsidy will be exhausted by the end of 2010 and Form 941 for the fourth quarter of 2010 will be the last time to take the subsidy credit.

For more information or questions, please contact your Bruner-Cox LLP Engagement Executive or Gregory F. McNulty, CPA, JD, Tax Partner,  at 330.497.2000.

This information is reprinted with permission from Thomson Reuters, Inc.