IRS Releases More Details On COBRA Payroll Credit

(Published July 2009)

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Employers need not detail on their Forms 941 every subsidy-eligible individual who is receiving the 65% COBRA subsidy, according to the IRS's most recent clarification.  This is key, since you probably don't know how many individuals in an employee's family are receiving the subsidy. 

Form 941 mechanics.  Form 941 has been redesigned to include a line related to the COBRA subsidy — Line 12a, COBRA premium assistance payments, and Line 12b, Number of Recipients who received COBRA premium assistance payments reported on Line 12a.  Questions have arisen regarding how Line 12b should be completed.  The IRS says that each subsidy-eligible individual who paid a reduced COBRA premium during the quarter should be counted as one individual, even if that individual's COBRA election and subsidy was for family coverage.

The IRS also says that each subsidy-eligible individual is reported on Line 12b only once per quarter, regardless of whether he/she made monthly or more frequent premium payments during that quarter.  So, for example, if Harry paid his 35% COBRA premium for family coverage on May 1 and June 1, he's counted as one individual on Line 12b on the second quarter's Form 941. 

More FAQs. The IRS continues to update frequently asked questions and answers on its website.  In a recent posting, the IRS says that it won't challenge your determination that an employee was involuntarily terminated, provided your explanation is reasonable.  In addition, if you filed Form 2678, appointing an agent to file returns and make deposits, the credit is claimed on the returns the agent files; similarly, deposits made on your behalf are reduced by the credit.  What not to do: Don't file a separate 941 form showing $0 wages and payroll tax liabilities to claim the credit. 

Advice for multi-employer plans.  Multi-employer plans are the COBRA-payable entities that are eligible to take the payroll credit.  These plans may be in a bind, if they don't have employees — in other words, they don't normally have to file a Form 941.  The IRS says that these plans must still file Form 941 to take the credit.  Lines 12a and 12b must be completed, but all the other lines on the form should be completed by entering zeros.  Plans will then have an overpayment on Line 15, and they can receive a tax refund by checking the appropriate box. 

Audit scrutiny.  Employers must retain a vast amount of documentation regarding the subsidy.  However, the IRS subsequently ruled that employers need not submit anything with their 941s to claim the COBRA credit; documentation must be retained in employers' files, however.  That doesn't mean that the IRS can't question COBRA-related entries on the form.  If the IRS does query those entries, it will send you a Notice CP269C.  Don't panic! Instead, heed this advice.

• Gather your documentation.  Once your case is assigned to an examiner, you may be asked to provide information substantiating the actual premium payments made.  
  
  
• Don't jump the gun.  The IRS requests that you don't write or send in any documentation until you receive further notification with contact information.  You should receive a second letter within 30 days of the CP269C notice.
  
  
• Comply with those further instructions.  The IRS notes that sending information to the IRS office where you file your returns may delay the resolution of your claim. 

Related Topic(s): Benefits/COBRA