Vision Payroll

March 12, 2010

Question of the Week: What Do We Need to Provide Vision Payroll to Get the COBRA Subsidy Credit?

This week’s question comes from James, a company controller. We have employees who are eligible for the COBRA subsidy credit. We receive a credit on Form 941 for the subsidy we provide employees. What do we need to provide Vision Payroll to get the COBRA subsidy credit? Answer: The COBRA subsidy credit has been extended to include employees terminated through March 31, 2010. The credit is generally 65% of the total premium, but Notice 2009-27 provided further details on the calculation of the premium reduction. Simply provide Vision Payroll the amount of the employer subsidy eligible for the credit and Vision Payroll will reduce the federal tax deposit due on Form 941.

April 7, 2009

Calculation of Premium Reduction under Notice 2009-27

The Internal Revenue Service recently released an advance copy of Notice 2009-27, Premium assistance for COBRA benefits. Pursuant to the American Recovery and Reinvestment Act of 2009 or ARRA, certain involuntarily terminated employees are eligible for employer-provided subsidies to help pay for their Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage. Employers may then claim a credit on their Form 941 to be reimbursed for the assistance provided. Vision Payroll provided an overview of Notice 2009-27 when it was first issued. Today we will be reviewing Calculation of Premium Reduction under Notice 2009-27.

The premium amount used to calculate the 35% share that the employee must pay is the amount that would be charged to the Assistance Eligible Individual (AEI) if the AEI were not an AEI. If the employer charges 102% of the premium as allowed by COBRA, the 35% paid by the AEI would be 35% of the 102% amount. If, however, the employer subsidizes any or all of that premium, the 35% share is based on that reduced premium. Payments by parties other than the employer, including but not limited to parents, guardians, state agencies, or charities, are counted towards the 35% payment required of the individual.

The following table provides amounts based on the example descriptions that follow the table:

Example

Normal Premium Amount

Employee Contribution

Employer Credit Allowed

1

$500.00

$175.00

$325.00

2

$1,000.00

$70.00

$130.00

3

$1,000.00

$350.00

$650.00

4

$1,000.00

$200.00

5

$1,000.00

$350.00

$650.00

6

7

$1,000.00

$350.00

$650.00

8

$1,000.00

$1,000.00

9

10

$1,000.00

$350.00

$650.00

11

$1,000.00

$350.00

$650.00

12

$1,000.00

$350.00

$650.00

13

$1,000.00

14

$1,000.00

$350.00

$650.00

15

$1,000.00

$480.00

$520.00

16

$1,000.00

$707.50

$292.50

Example 1: The employer normally requires COBRA eligible individuals to pay $500 per month. Credit based on $500 premium.

Example 2: Severance package requires payment of $200 per month for a period of six months, the same as is required of active employees. Employer considers $800 balance as employer contribution towards employee’s required COBRA payment during the COBRA continuation period. Credit based on $200 premium.

Example 3: Example 2 facts, except that after six months, the employer requires payment of the full $1,000 per month. Credit based on $1,000 premium.

Example 4: Same as example 2, except that the employer considers the COBRA continuation period to begin after the six month severance period. No premium allowed since COBRA coverage not applicable.

Example 5: Example 4 facts, except that the employer considers the COBRA continuation period to begin after the six month severance period. Credit based on $1,000 premium for the next nine months.

Example 6: Severance package requires no payment for a period of six months, even though active employees are required to pay $200 per month. Employer considers the continuation period to begin on date of involuntary termination. No credit allowed since no premium required.

Example 7: Example 6 facts, except the employer requires payment of $1,000 per month for months seven, eight, and nine. Credit based on $1,000 premium.

Example 8: Example 7 facts, with employer continuing to require $1,000 payment for remainder of COBRA coverage period. No credit since subsidy period of nine months has elapsed.

Example 9: Example 6 facts, except employer considers no loss of coverage until after six months (end of severance period). No credit allowed since no premium required.

Example 10: Example 9 facts, employee elects COBRA coverage after severance period. Credit based on $1,000 premium, allowable for a period of up to nine months.

Example 11: Employer had charged $500 per month prior to March 1, 2009 for COBRA continuation coverage, even though 102% of premium would have been $1,000. Effective March 1, 2009, employer charges $1,000 per month. Credit based on $1,000 premium.

Example 12: Employer had charged $400 per month prior to March 1, 2009 for COBRA continuation coverage, even though 102% of premium would have been $1,000. Effective March 1, 2009, employer charges $1,000 per month, but also provides a $600 taxable severance benefit to AEIs. Credit based on $1,000 premium.

Example 13: Employer had charged $400 per month prior to March 1, 2009 for COBRA continuation coverage, even though 102% of premium would have been $1,000. Effective March 1, 2009, employer charges $1,000 per month, but also provides a $350 reimbursement to employees that is excludible from income under IRC §106. No credit allowed since no premium required.

Example 14: Employer charges $1,000 per month for self-plus-two-or-more dependents. The covered individual has two assistance eligible individuals as dependents and one individual who is not an assistance eligible individual. Since there is no additional cost to providing the coverage for the ineligible individual, the credit is based on the entire $1,000 premium.

Example 15: Example 14 facts, except that individual has only one assistance eligible individual as a dependent and one individual who is not an assistance eligible individual. Employer charges $800 per month for self-plus-one dependent. Credit based on $800 premium. Employee pays 35% of $800 plus the full $200 for the non-eligible individual.

Example 16: An AEI has self-only coverage that would normally cost $450. With the subsidy, the employee pays $157.50 and the employer is eligible for a subsidy of $292.50. While still eligible for the premium subsidy and during an open enrollment period, the AEI adds a spouse and dependent child to coverage, resulting in a total monthly premium of $1,000. The spouse and child are not assistance eligible individuals since they were not covered under the plan on the day before the involuntary termination. Credit based on $450 premium. Employee pays 35% of $450 plus the full $550 for the non-eligible individuals.

This section also clarifies that the premium reduction does not apply to portions of premiums for individuals who are not qualified beneficiaries, even if the coverage is allowed under the employer’s plan or required by state law. Therefore, same-sex spouses or civil union partners will generally not be eligible for coverage as qualified beneficiaries. Furthermore, covered non-dependent children will not qualify as qualified beneficiaries. This is so even if state law requires the AEI to provide coverage to these children.

Finally, if an individual changes coverage from the coverage in place before termination to a new, more expensive coverage, the premium reduction can apply to the new, higher premium.

The next topic covered will be Coverage Eligible for Premium Reduction. Contact Vision Payroll if you have any questions on Notice 2009-27.

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