IRS Notice 2021-31 (“Notice”) was published on May 18, 2021, and contained guidance on the American Rescue Plan Act (ARPA) COBRA subsidy. Our prior two articles address the involuntary and reduction of hours guidance and an overview of other matters relating to the subsidy. This third article focuses on the subsidy calculation and how an entity claims the credit.
TRI-AD mailed out all subsidy notices before May 31, 2021, and now it is time to focus on claiming the subsidy credit and the reporting. Below are the details from the Notice.
CALCULATION OF THE COBRA SUBSIDY CREDIT
Generally, the amount of the subsidy credit is the amount that the Assistance Eligible Individual (AEI) is required to pay for COBRA coverage. The amount of the subsidy credit an employer or insurer can take is based on whether or not the employer subsidizes the COBRA premium for AEIs.
Employer does not subsidize COBRA premium costs – the amount of the subsidy credit an employer or insurer may take is the amount of the premiums paid by the AEI, e.g., premiums paid for a single individual, individual plus one, or family. (QA-63)
Example – an AEI pays $1,000 (includes a 2% administrative fee) each month for major medical health insurance premiums. The employer can claim a subsidy credit of $1,000 for each month of coverage between April 1 – September 30.
Employer subsidizes COBRA premium costs – the amount of subsidy credit an employer or insurer may take is the amount that the AEI normally has to pay if the ARPA subsidy was not available. (QA-64)
On an important note, COBRA coverage must be in place when the employer claims credit for the subsidy. Most severance agreements are drafted indicating that COBRA starts immediately upon the start of the severance benefits, rather than COBRA starting at the end of the severance benefits. If COBRA coverage begins at the end of the severance benefit, no ARPA subsidy credit may be claimed until COBRA begins.
Example A – pursuant to a severance agreement, COBRA starts immediately upon the start of severance benefits. For three months after an AEI loses coverage on April 1, 2021, the former employer requires the employee to pay $200 for COBRA coverage and the normal premium is $1,000 (includes a 2% administrative fee). The employer can claim an ARPA subsidy credit of $200 for April – June. The employer continues to pay $800 per the severance agreement. For July – September, the employer can claim a credit of $1,000, after the employer subsidy has expired.
Example B – assume the same as in Example A, but COBRA does not start until after the severance benefits end, or July 1, 2021. The employer cannot claim any subsidy credit for April – June. Once COBRA begins on July 1, 2021, the employer can claim $1,000 for July – September.
Employer may increase COBRA premiums and pay taxable subsidies – if the employer has charged less for COBRA than the full premiums to similarly situated covered employees and qualified beneficiaries if certain requirements are met, the employer may increase the COBRA premiums and the subsidy may apply to the increased premiums. An employer can also provide a separate taxable payment to the AEI and still receive the subsidy credit for the increased premiums. (QA-65 & QA-66)
Subsidy calculation for family members who are not AEI’s – only family members who were covered under the group health plans on the day before an AEI was involuntarily terminated or hours were reduced are eligible for the subsidy. These family members are considered “qualified beneficiaries.” Family members that are not qualified beneficiaries and added later during an open enrollment period are not qualified beneficiaries and are not eligible for the subsidy. If family members are not qualified beneficiaries and there is a difference in the insurance premiums due to these added family members, the additional cost is not eligible for the subsidy and the COBRA member must pay for the difference. (QA-68)
Subsidy calculation for benefits added during open enrollment – if an AEI added benefits during an open enrollment period, these added benefits are eligible for the subsidy. For example, if the AEI was eligible for dental and vision when he or she was involuntarily terminated, and added major medical at the last open enrollment period, the major medical premium is eligible for the subsidy. (QA-69)
CLAIMING THE COBRA SUBSIDY CREDIT AND REPORTING
Entity eligible for the subsidy – the “premium payee” is eligible for the subsidy credit (QA-71). The premium payee is:
1. Common law employer maintaining the plan (other than a multi-employer plan) that is subject to federal COBRA, whether the coverage is self-insured, fully insured or a combination of both;
2. Multi-employer plan, in the case of a group health plan that is a multiemployer plan;
3. Insurer providing the coverage, in the case of any group health plan not described in 1 or 2 above. (QA-72)
Governmental entities are also eligible for the subsidy credit. These entities include the government of any State or political subdivision, Indian Tribal governments (as defined in § 139E(c)(1)), any agency or instrumentality of any of these entities, and any agency or instrumentality of the Government of the U.S. described in § 501(c)(1) and exempt from taxation under § 501(a). (QA-73)
When the premium payee is eligible for the subsidy credit – generally, once the AEI elects COBRA and the subsidy, the premium payee is entitled to the credit retroactively to April 1, 2021, and forward. After the initial period, the premium payee is eligible for the credit as of the beginning of each period of coverage (e.g., monthly or a shorter period based on when premiums are charged) that the AEI does not pay the premiums. (QA-74)
Example – On June 17, 2021, the premium payee receives a COBRA election from a potential AEI who elects COBRA continuation coverage as of April 1, 2021. The premium payee is entitled to a credit as of June 17, 2021, for the premiums not paid by the AEI for the periods of coverage for April, May, and June. Thereafter, the premium payee becomes entitled to the credit as of July 1, 2021, for the premiums not paid by the AEI for the period of coverage of July; August 1, 2021, for the period of coverage of August; and September 1, 2021, for the period of coverage of September.
Claiming the subsidy credit – the premium payee (e.g., employer) reports the credit and the number of individuals receiving the subsidy on the designated lines of its federal employment tax return, Form 941, Employer’s Quarterly Federal Tax Return.
Example – based on the example above, the credit for April – June 2021 should be reported on the June 30, 2021 Form 941. Credit for July – September can be taken on September 30, 2021, and December 31, 2021 941 forms.
In anticipation of receiving the credit to which it is entitled, the employer may (1) reduce the deposits of federal employment taxes, including withheld taxes, that it would otherwise be required to deposit, up to the amount of the anticipated credit, and (2) request an advance of the amount of the anticipated credit that exceeds the federal employment tax deposits available for reduction by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. IRS Notice 2021-24 has additional information about the tax withholding reductions for the credit and other employment tax credits. (QA-75)
Form 7200 must be filed before the earlier of 1) the day the employment tax return for the quarter in which the employer is entitled to the credit is filed, or 2) the last day of the month following that quarter. QA-76 has good examples of this process. (QA-76)
Deposits may not be reduced and advances may not be requested for a credit for a period of coverage that has not begun. (QA-76)
Credit available even if AEI fails to report ineligibility for the subsidy – AEIs are required to notify the employer/plan administrator if they become eligible for other group health coverage or Medicare, and therefore become ineligible for the subsidy. The premium payee may claim the subsidy credit even if an AEI fails to notify the employer/plan administrator that they are eligible for other group health plan coverage or Medicare. The premium payee is not required to refund to the IRS the subsidy credit arising after the AEI’s subsidy ended unless they were aware that the AEI was not entitled to the subsidy. (QA-78)
Subsidy credit is included in the premium payee’s gross income – premium payees must include the subsidy credit in their gross income for the taxable year which includes the last day of any quarter with respect to which the credit is allowed. However, this addition to gross income should be offset from the premium expense paid on behalf of AEIs. (QA-79)
Third-party payer for employment taxes and reporting – the premium payee is entitled to the subsidy credit even if they use a third-party payer (e.g., a reporting agent, payroll service provider, professional employer organization (PEO), or certified professional employer organization (CPEO)) to report and pay its federal employment taxes unless the third-party payer is considered the premium payee. The third-party payer must report the subsidy credit on the federal employment tax returns it files on behalf of the premium payee. The premium payee must submit its own Form 7200 to request any advance payment of the credit. (QA-81)
QA-82 describes when a third-party payer is treated as a premium payee.
Premium payees must provide third-party payers adequate information for claiming the subsidy credit and either one must be able to substantiate the subsidy credit at the request of the IRS. (QA-84)
Subsidy credit for reimbursed amounts to AEIs – where AEIs have paid premiums for the months they were eligible for the subsidy, the premium payee is entitled to the subsidy credit on the date they reimburse the AEI for the premiums. (QA-85)
Now that subsidy notices have gone out and AEIs are enrolling in COBRA and receiving the subsidy, employers and service providers must address the reporting issues so that the subsidy credits are first reported on the June 30, 2021 Form 941. It’s important to calculate and report the subsidy credit correctly based on the above rules. The IRS has provided a draft Form 941 and instructions. Hopefully, these will be finalized soon. Payroll departments and third-party payers should be prepared to gather the necessary information to claim the subsidy credit by the next Form 941 deadline, July 31, 2021.
TRI-AD and our Associates’ suggestions or recommendations shall not constitute legal advice. No content on our website can be construed as tax or legal advice and TRI-AD may not be considered your legal counsel or tax advisor. Clients are encouraged to consult with their tax advisor and/or attorney to determine their legal rights, responsibilities, and liabilities. This includes the interpretation of any statute or regulation, federal, state, or local; and/or its application to the clients’ business activities.