Prior Year COBRA Subsidy: IRS Changes Its Position on Claiming Credit

January 07, 2010

The American Recovery and Reinvestment Act of 2009 requires employers to subsidize 65 percent of the cost of health care premiums to eligible former employees involuntarily terminated from Sept. 1, 2008, to Feb. 28, 2010 for a period of 15 months so long as the eligible former employee elects to continue health care coverage through the former employer and pays the other 35 percent of the cost of coverage.

The IRS’ position on claiming the credit directed employers to use the Form 941 for the year of the COBRA coverage period to claim subsidy amounts, even when the payment made for that coverage occurred in the following year. This position effectively requires employers in these situations to amend prior-year Forms 941 to claim the tax credit for subsidizing the prior-year coverage.

In an email dated January 6, 2010, the IRS indicated that it was changing its position on how to claim the credit for COBRA premium assistance that covers a prior-year period but is paid for in the current year. The IRS indicated that if an employer receives an eligible individual's 35 percent share of the COBRA premium in 2010 for a coverage period in 2009, the 65 percent subsidy credit can be claimed on Form 941 for either the quarter in 2010 in which the 35 percent was received or a later quarter in 2010. The credit cannot be claimed for the quarter in 2009 when the coverage occurred.

This change is welcome news for employers who will not be required to amend prior year 941’s to claim the tax credit for subsidizing prior year coverage.

If you would like more information on the content of this alert, please contact Christine Burke Worthen, a shareholder and Chair of Eaton Peabody's Tax Practice Group, or Rodney A. Lake.

This alert is provided as general information, and is not a substitute for legal or other professional advice.