By: HUB’s EB Compliance Team
As detailed in our Compliance Alert, the IRS provided extensive guidance in Notice 2021-31 on the COBRA subsidies under the American Rescue Plan Act (“ARPA”). One area of particular interest to employers is how they get reimbursed for the subsidies they are required to provide. The guidance goes into detail about claiming the credit, and employers should work with the payroll and tax advisors to appropriately claim the credit, but a high-level understanding is important.
Just like the COBRA subsidies provided during the 2008-09 financial crisis, employers can receive reimbursement of the ARPA COBRA subsidy by claiming a credit from quarterly Medicare taxes due to the IRS. (Note that employers are only able to claim the credit for federal COBRA subsidies; the reimbursement for state “mini-COBRA” subsidies goes to the carrier.) The IRS Q&As note that the credit claimed by the employer is included in the employer’s gross income (Q&A-79).
Taking all the Credit (Q&A 74 & 85)
Generally, the employer can take the credit as of the beginning of each period of COBRA coverage (i.e., each month, or shorter period if COBRA commences on a date other than the first day of the month). This rule applies even if the employer would have billed for the coverage at a later date if there was no ARPA subsidy. However, the employer cannot claim the credit before a covered individual is eligible to receive the subsidy and elects COBRA. In other words, if a COBRA-covered individual requests the subsidy on June 15, for monthly coverage periods dating back to April 1 (and is approved), the employer could claim the credit for April, May and June as of June 15. (Q&A-74)
As we noted in our prior alert, if an employer receives a premium payment from a subsidy-eligible individual for coverage during the subsidy period, the employer cannot claim the credit until the employer reimburses the individual. (Q&A-85) Under ARPA, the employer is supposed to issue the refund in 60 days. However, question 14 of the DOL FAQs that were issued in early April suggest that individuals can ask to have those payments applied toward future coverage. It is not clear when the employer can claim the credit in that circumstance. Some clarity around this conflicting guidance would be helpful.
Getting all the Credit (Q&A 75-76)
The IRS Notice says the credit is claimed on the employer’s Form 941, Quarterly Federal Tax Return. It also gives employers the ability to reduce Medicare tax deposits with the IRS in anticipation of claiming the credit. A separate IRS Notice (2021-24) provides additional detail on reducing deposits for the credit.
If the credit for a quarter exceeds the Medicare taxes for that quarter, an employer can claim a refund from the IRS as well using Form 7200, Advance Payment of Employer Credits due to COVID-19. These refunds should also be reported on the Form 941.
To be clear, deposits may not be reduced, and refunds may not be requested, for a credit for a period of coverage that has not begun.
Extra Credit (But No Double-Credit) (Q&A 78 & 80)
Under the COBRA ARPA subsidy rules, COBRA covered individuals are required to notify the employer if they become eligible for other group coverage or Medicare. Mere eligibility for this other coverage makes them ineligible for the credit. They are subject to penalties ranging from $250 to 110% of the credit amount if they fail to notify the employer/plan of their eligibility for other coverage. Even so, if they fail to notify, the Q&As confirm that the employer can keep the credit unless the employer knew the individual was eligible for other coverage. (Q&A-78)
However, employers cannot claim this COBRA ARPA credit for any amounts that were also claimed under either:
- the Employee Retention Credit available under the CARES Act or
- Paid Sick or Family Leave credits under the Families First Coronavirus Response Act. (Q&A-80)
Third-Party Payers and (Not) Sharing the Credit (Q&A 81-84 & 86)
Employers may use third-party payers (such as a reporting agent, payroll service, provider, professional employer organization [PEO], certified PEO, or Section 3405 agent) to report payroll taxes on their behalf. The Q&As confirm that, in most cases, the employer is still eligible for the credit rather than the third-party payer (“TPP”). The TPP may file the Forms 941 on behalf of the employer. However, the employer must file its own Form 7200 to request the advance payment of the credit and provide a copy of that form to the TPP.
The TPP may be the entity entitled to the credit if the TPP:
- maintains the group health plan;
- is considered the sponsor of the group health plan and is subject to the DOL COBRA rules; and
- receives the COBRA premium payments directly (in the absence of the subsidy).
This is most likely applicable in the PEO context or similar type arrangements. The Q&As provide extensive guidance on how TPPs claim the credit in these circumstances.
Special Credit Issues
In addition to the above general principles, the IRS Notice provides the following additional details:
- Not all participants electing COBRA qualify for the credit. Employers should make sure that they do not claim a credit for coverage rendered to domestic partners (registered or unregistered), children of domestic partners that are not tax dependents of former employees, and other ineligible individuals. However, to the extent those individuals are covered under family coverage, the IRS Notice provides a method for determining the amount of the credit described in our prior alert. (Q&A-19 and 68)
- Governmental entities, including those of Indian tribal governments, can claim the credit. (Q&A-73)
- Multiemployer plans with no employees can still claim the credit using Form 941. (Q&A-77)
- If a third party (such as a charity) paid a COBRA premium on an individual’s behalf when the individual should have been eligible for the subsidy, the refund generally should go to the individual. However, if the employer is aware that the COBRA-covered individual has assigned the right to be reimbursed to a third party. It will likely be rare that the employer would know about this and the employer would likely have to be told by the COBRA-covered individual. (Q&A-86)
Conclusion (i.e., the End Credits)
Employers should review the Q&As, including the examples, to fully understand their obligations. Employers will also need to work with their payroll providers (including TPPs, if applicable) to determine how they are going to calculate and claim the credit, and whether they need to file for an advance payment of the credit. They may want to consult with their tax advisors as well. Finally, employers should consider what records they may want to retain to demonstrate their entitlement to the credit.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.