COBRA Premium Subsidy Tax Credit

Posted by BAS - 20 May, 2021

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The American Rescue Plan Act (ARP) provides a COBRA premium subsidy for certain individuals whose qualifying event was a reduction in hours or involuntary termination of employment and who are not eligible for other health coverage. The premium subsidy is available for assistance-eligible individuals with continuation coverage between April 1, 2021 and September 30, 2021. Read our article on the ARP premium subsidy by clicking here.

The cost of providing the subsidized coverage is recouped by taking a tax credit. Employers have been anxiously waiting for guidance about claiming the tax credit. This guidance was issued in IRS Notice 2021-31.

Who may take the tax credit?

The person to whom premiums for COBRA continuation coverage are payable is entitled to a refundable tax credit. The IRS Notice describes this “premium payee” as

  • A multi-employer plan
  • The common law employer sponsoring a plan that provides coverage that is self-insured (in whole or in part) or
  • The insurer providing coverage under a fully insured plan subject to state continuation laws.

In some circumstances, a third party organization may be the premium payee if that party provides services such as withholding, reporting or paying employment taxes.

How does the premium payee claim the tax credit?

The tax credit is claimed by reporting the credit and the number of individuals receiving COBRA premium assistance on the designated lines of its federal employment tax return(s) (usually Form 941).

To get an advance of the credit, the premium payee may (1) reduce the deposits of federal employment taxes, including withheld taxes, that it would 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 is in excess of the federal employment tax deposits available for reduction by filing IRS Form 7200. Form 7200 may be filed after the end of the payroll period in which the premium payee became entitled to the credit (not earlier).

What happens if a premium payee does not have employment tax liability?

If a premium payee does not have any employment tax liability (such as for a multiemployer plan), the premium payee claims the credit on IRS Form 941 for the quarter in which the premium payee becomes entitled to the credit. Any advance payments received in anticipation of the credit should also be reported on the same Form 941. “0” is entered on all non-applicable lines so the overpayment is the amount of the credit reduced by any advance payment received.

What is the amount of the tax credit?

The amount of the tax credit is the premium that the eligible individual would be responsible for paying (including any additional administration fee). A credit may not be taken for any part of the premium an employer would have otherwise provided to the eligible individual, such as through a severance contribution toward the cost of COBRA coverage.

Is the amount of the tax credit income?

Yes. The premium payee must include the amount of any tax credit in its gross income for the taxable year.

Employers who provide subsidized coverage to COBRA continuants should discuss claiming the credit with their tax advisors.

Topics: COBRA, Health Care Reform (ACA), Affordable Care Act, HR & Benefits News


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