Claiming COBRA medical coverage credit on payroll tax form

The IRS is providing new detailed information to help employers claim credit for the COBRA medical premiums they pay for their former employees, including:

• An extensive set of questions and answers for employers
• 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 two 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.

The American Recovery and Reinvestment Act of 2009, which became law last week, includes changes to the health benefit provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, commonly referred to as COBRA. The new law will affect former employees and their families, employers and others involved in providing COBRA coverage.

Under the new law, eligible former employees, enrolled in their employer's health plan at the time they lost their jobs, are required to pay only 35% of the cost of COBRA coverage. Employers must treat the 35% payment by eligible former employees as full payment, but the employers are entitled to a credit for the other 65% of the COBRA cost on their payroll tax return.

Employers must maintain supporting documentation for the credit claimed. This includes:

• Documentation of receipt of the employee's 35% share of the premium
• In the case of insured plans: A copy of 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

COBRA provides certain former employees, retirees, spouses, former spouses and dependent children the right to temporary continuation of health coverage at group rates. COBRA generally covers health plans maintained by private-sector employers with 20 or more full and part-time employees. It also covers employee organizations or federal, state or local governments. It does not apply to churches and certain religious organizations. The new COBRA subsidy provisions also apply to insurers required to offer continuation coverage under state law similar to the federal COBRA.

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