The Internal Revenue Service has issued information to help employers claim credit for the COBRA medical premiums they pay for former employees under provisions of the recently passed stimulus bill.
Under the American Recovery and Reinvestment Act of 2009, certain individuals who are eligible for COBRA continuation health coverage, or similar coverage under state law, may receive a subsidy for 65 percent of the premium. They are required to pay only 35 percent of the premium. The employer may recover the subsidy by taking the subsidy amount as a credit on its quarterly employment tax return.
However, the employer may provide the subsidy — and take the credit on its employment tax return — only after it has received the 35 percent premium payment from the individual.
The IRS has unveiled new information on its IRS.gov site that includes an extensive set of questions and answers for employers. In addition, the Web site contains a revised version of the quarterly payroll tax return that employers will use to claim credit for the COBRA medical premiums they pay for their former employees.
Form 941, Employer’s Quarterly Federal Tax Return, will also be sent to about 2 million employers in mid-March. The form is used to claim the new COBRA premium assistance payments credit, beginning with the first quarter of 2009.
“This is the first step in our effort to provide employers with information on this important health benefit for people who have lost their jobs,” said IRS Commissioner Doug Shulman (pictured) in a statement. “We will continue our work in the weeks ahead to help employers implement this crucial change for the nation’s unemployed.”
Employers must treat the 35 percent payment by eligible former employees as full payment, but employers are entitled to a credit for the other 65 percent of the COBRA cost on their payroll tax return.
However, employers must maintain supporting documentation for the credit claimed. This includes:
· Documentation of receipt of the employee’s 35 percent share of the premium;
· In the case of insured plans, a copy of the invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier;
· Declaration of the former employee’s involuntary termination.
More information about COBRA payments and the new law is available on www.dol.gov.
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