Businesses Required to Subsidize COBRA During Pandemic Might Be Eligible to Claim Tax Credit

The end of the COVID-19 national emergency will affect COBRA extensions beginning July 11, 2023, and employers who were required to subsidize 100 percent of COBRA continuation coverage under the American Rescue Plan Act (ARPA) might be eligible for a tax credit.

In March 2021, ARPA extended the subsidy from April 1 to Sept. 30, 2021. Generally, businesses with 20-plus employees subject to federal COBRA or those who sponsor self-funded group health plans were required to subsidize the health insurance for individuals who lost their employer-sponsored health insurance due to involuntary job loss or reduced hours.

Health insurance carriers also were charged with subsidizing coverage for participants who are covered under state continuation rules (generally, fewer than 20 employees).

Note: There currently is no state continuation in Alabama, Alaska, Hawaii, Idaho, Indiana, Michigan, Montana, and Nevada. 

With the requirement to subsidize the health insurance, those same businesses and health insurance carriers also could be eligible to get reimbursed through a payroll credit.

Businesses have three years from the tax filing deadline to file an amended return. Per the IRS, Forms 941 for a calendar year are considered filed on April 15 of the succeeding year if filed before that date. So, for calendar year 2021, forms 941 are considered filed on April 15, 2022. That would allow for 941-X returns to be filed until April 15, 2025.

• Employers may not claim the COBRA tax credit on the same allocable healthcare costs as the Families First Coronavirus Response Act (FFCRA) paid leave credits or Employee Retention Tax Credit. Additionally, premiums claimed through the COBRA tax credit may not be included in Paycheck Protection Program (PPP) loan forgiveness.

FAQ guidance on the COBRA subsidy (FAQ begins on page 6) and related tax credit addresses additional questions.

Other Clarifications Related to the COBRA Subsidy

Among the additional clarifications for employers:

• Federal COBRA requirements apply if the employer was subject to federal COBRA at the time of the qualifying event.
• If an employer agreed to pay for COBRA continuation coverage as part of a severance package, the amount agreed upon is not eligible for premium assistance.
• Employers may have required individuals to self-certify they were eligible due to involuntary termination or reduced hours, and that they were not eligible for other group health coverage or Medicare.

The impact to employers relates to recordkeeping, and employers who plan to file for the tax credit should have employee self-certifications, attestation or other record of assistance eligibility saved in their records.

Doing a Lookback on Subsidized COBRA Eligibility?

Employers can only take the tax credit for the COBRA Subsidy on an “Assistance Eligible Individual” (AEI), defined as an individual who qualifies for COBRA due to involuntary termination (other than gross misconduct) or reduction in hours that resulted in a loss of employer-sponsored health insurance. The AEI could only receive subsidized COBRA by actively electing coverage.

Employers needed to determine which participants fell under involuntary termination or reduction in hours.

An employer would not be eligible to claim the tax credit for any individuals who fit under voluntary termination. For example, if an individual ended employment because their child was unable to attend school due to the COVID-19 pandemic, the termination is considered voluntary. An employer who chose to fund such an individual’s continuation coverage could not claim the credit.

There are other instances where an individual could be considered an AEI, so employers needed to base their determination on the available guidance.

COBRA Subsidy Impact on ESR Affordability

If an employer reduced an employee’s hours, the employee might no longer have met a health plan’s eligibility requirements. Loss of employer-sponsored coverage due to reduced hours would then have been a COBRA qualifying event that could have made a part-time employee an AEI.

In general, Applicable Large Employers (ALEs) are employers with an average of at least 50 full-time employees, including full-time equivalents, during the prior calendar year. When an ALE reduces to part-time the hours of an employee who is considered full-time under an ESR look-back period, the ALE would have been at risk of an ESR assessment if it didn’t offer the employee affordable and adequate health insurance coverage and the employee received a premium tax credit (PTC).

With the full COBRA subsidy, an ALE’s offer of COBRA coverage would have been affordable for ESR purposes since the employee didn’t contribute toward the premium. However, the COBRA coverage would not likely have been affordable when the subsidy expired as the employee paid the entire premium. Consequently, those individuals might have put the employer at risk for an assessment if they obtained a PTC to purchase coverage on a government marketplace.

Paychex Can Help

You might have additional questions about eligibility or have concerns about taking time away from running your business to do the due diligence required when filing amended tax returns. The interplay of various programs (PPP, ERTC, etc.) is complex. Consider how our tax services could save you time by helping to alleviate extra work. Get help managing COBRA requirements in your state and find services to simplify everything from payroll processing to HR support, and managing your benefits package, with our location-based services.