September 17, 2021

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How to Claim COBRA Tax Credits

About the previous several months, businesses and system directors have concentrated on determining qualifying individuals suitable for COBRA top quality assistance less than the American Rescue System Act of 2021 (“ARP”), sending out correct notices, and gathering election kinds. Now that the dust has settled on the initial spherical of election notices, businesses and ideas have turned their notice to an additional urgent subject: claiming the COBRA top quality help tax credit score.

Why is it Important to Use for the Tax Credit?

ARP supplies a 100% COBRA top quality subsidy for qualifying folks from April 1, 2021, via September 30, 2021.  This subsidy is applied by a tax credit rating system.  This suggests that the human being to whom the COBRA rates would if not be payable in the absence of the COBRA subsidy—generally, the employer or the system and, sometimes, the insurer—must assert the tax credit history to be reimbursed for the charge of delivering “free” COBRA protection to qualifying men and women.  For information on identifying who the “premium payee” is for reasons of the COBRA high quality subsidy, you should see our site submit overview.

What Taxes are Offset by the Credit?

The tax credit rating is meant to offset Medicare tax liability.  If the amount of COBRA quality assistance presented to qualifying people today exceeds the Medicare tax payable (for example, in the case of a multiemployer plan that does not have any Medicare tax liability), a refund of the surplus amount can be asked for.

How Is the Tax Credit Claimed?

The tax credit score is generally claimed by reporting the COBRA top quality guidance provided to qualifying people on the quarterly work tax return (IRS Variety 941).  (Quality payees that do not commonly file the IRS Variety 941 for the reason that they do not have federal work tax liability, these as some multiemployer strategies, will have to do so to claim the tax credit score.)  There is a worksheet supplied with the guidance to the IRS Type 941 that outlines how to work out the two elements of the tax credit rating: (1) To start with, the non-refundable part of the tax credit rating (the volume by which the COBRA top quality support is offset by the Medicare tax legal responsibility) and (2) Second, the refundable portion of the tax credit history (the extra, if any, of the COBRA quality assistance offered about the Medicare tax liability).

For more information about calculating the sum of the COBRA high quality assistance that can be claimed as a tax credit, remember to see our blog put up.

How Can the Tax Credit history be Compensated in Progress?

It is feasible to assert the tax credit even ahead of the IRS Type 941 submitting deadline.  There are two additional actions wanted to get the credit history more quickly. (1) Very first, an employer (or system with federal employment tax liability, these types of as a multiemployer system with workforce or a multiemployer strategy that tends to make benefit payments issue to withholding) may perhaps decrease the federal work taxes it would in any other case be required to deposit up to the sum of the expected COBRA quality assistance tax credit. (2) Second, an progress of the expected tax credit right after lowering available federal employment tax deposits may well be claimed by filing an IRS Kind 7200 with the IRS.

  • Practice Pointer: If a strategy does not have any federal employment tax liabilities to minimize in action 1 (for example, in the case of a multiemployer prepare that does not have workers and does not make any benefit payments subject to withholding), the strategy can go straight to step two and file an IRS Form 7200 to request the expected tax credit.

  • Exercise Pointer: IRS Variety 7200 will have to be faxed to the IRS.

Even if the two methods over are used to claim the tax credit history in progress, an IRS Sort 941 is nonetheless demanded to full the comprehensive claim for the tax credit. Any progress of the tax credit score will need to be reconciled when IRS Sort 941 is submitted.

When Can the Tax Credit score be Claimed?

Claiming the tax credit score operates on a rolling deadline basis. There are two essential dates, every described underneath.

  • Date of COBRA Election: The person to whom rates are payable (e., the employer or the prepare) gets to be eligible to assert a tax credit score for the COBRA rates not compensated by the qualifying particular person so considerably on the date that it to start with gets the qualifying individual’s COBRA election. For example, if an employer receives a qualifying individual’s COBRA election on June 17, and the unique has not compensated premiums starting April 1, the employer would turn out to be qualified on June 17 to claim the tax credit history for the time period of protection from April 1 as a result of June 30.

  • Starting of Subsequent Intervals of Coverage: At the commencing of every single subsequent period of time of protection, the human being to whom premiums are payable will become qualified to assert a tax credit history for that protection time period (provided the specific stays eligible for COBRA high quality guidance for that protection interval). Returning to the information employed above, the employer would grow to be qualified on July 1 to assert the tax credit for coverage provided from July 1 by way of July 31.

When Can the Tax Credit rating be taken as an Advance?

If an advance of the tax credit rating is sought after, various timing regulations utilize.

As a reminder, to assert the tax credit score in advance of submitting an IRS Type 941, there are two actions: (1) Reduce federal work tax deposits, and (2) Subsequent the reduction of employment tax deposits to the extent out there, file an IRS Sort 7200 with the IRS to ask for an advance of the expected extra tax credit history.  The timing principles for eligibility to decrease federal work tax deposits use the identical plan described higher than. Having said that, if the employer or approach wishes to file an IRS Type 7200 to request the predicted surplus tax credit history subsequent reduction of deposits, it ought to wait around right until the conclude of the payroll interval in which it gets qualified to declare the tax credit history.

Returning to the 2nd part of our illustration over, for coverage provided from July 1 through July 31, the employer would turn out to be eligible to reduce employment tax deposits on July 1—the initially working day of that coverage period. To file IRS Variety 7200 to ask for an progress of the tax credit history for protection furnished from July 1 by July 31, the employer would have to have to hold out until eventually July 16—after the conclusion of the payroll period of time in which the employer to start with develop into eligible to assert the July credit rating (assuming the employer’s payroll period of time ran from July 1 by means of July 15).

Takeaway

This blog site publish offers a general overview on how to assert the COBRA quality help tax credit rating.  Employers and plans must acquire a training course of action to make certain the well timed restoration of any tax credits to which they are entitled.  But don’t hold off – for most employers and designs, the upcoming Type 941 submitting deadline is July 31, 2021, so the time to act is now.

Tanusha Yarlagadda, a Summer months Affiliate, also contributed to this report.


© 2021 Proskauer Rose LLP.
Countrywide Law Review, Volume XI, Quantity 207