The IRS recently posted additional information about COBRA premium assistance on its web site. The IRS described involuntary termination, documentation requirements, the payroll credit for employers, and more.

 Temporary subsidy

The 2009 Recovery Act provides nine months of COBRA premium assistance. Individuals pay 35 percent of the COBRA premium and employers must treat that payment as full payment. Employers and other qualified entities claim a payroll tax credit for the other 65 percent of the premium.

No every unemployed individual can take advantage of COBRA premium assistance. The COBRA subsidy phases out for individuals whose modified adjusted gross income (AGI) exceeds $125,000 and for married couples filing joint returns with modified AGI above $250,000. Taxpayers with modified AGI exceeding $145,000 ($290,000 for married couples filing joint returns) do not qualify for the subsidy.

Involuntary termination

An individual must be involuntarily terminated from employment to qualify for COBRA premium assistance. Generally, involuntary termination is a severance from employment due to the employer’s unilateral authority to terminate the employment. The IRS will accept an employer’s determination of involuntary termination as long as it is consistent with a reasonable interpretation of the statutory language and guidance.

In some cases, the end of employment for a seasonal worker may be treated as an involuntary termination. If an individual is willing and able to continue employment but ends employment because the employer does not have additional work, an involuntary termination has occurred, the IRS explained. This rule may apply, for example, to a teacher who is hired for only one school year.

An involuntary termination also occurs when a member of a military reserve unit or the National Guard is called to active duty. This is the case regardless of whether the civilian employer otherwise treats the employee’s absence as a termination of employment or a leave of absence, the IRS explained.

Under some multi-employer plans, which are common in the construction trades, an individual’s eligibility for health coverage is based on a minimum number of hours of covered employment. The IRS will deem an individual to have been involuntarily terminated if a reduction in his or her total hours of covered employment causes the individual to lose regular coverage and become eligible for COBRA continuation coverage.

Documentation

Employers should keep supporting documentation, the IRS advised. The documentation should include an attestation by the employer of involuntary termination for each employee who is eligible for COBRA premium assistance. Employers do not have to provide this information to the IRS unless the agency asks for it.

Revised form

The IRS also revised Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, to reflect the employer’s payroll credit for temporary COBRA premium assistance. The revised form and instructions are on the IRS web site. Employers should use Form 941-X to report any errors on a previously filed Form 941 relating to COBRA premium assistance.

In some cases, a taxpayer other than the qualified individual’s former employer will claim the payroll credit. When coverage is provided by a multi-employer plan, the multi-employer plan claims the credit. In the case of fully insured coverage subject to state continuation coverage requirements, the insurer providing coverage under the group health plan takes the payroll credit.

If you have any questions about COBRA premium assistance please contact our office.

Background

The 2009 Recovery Act temporarily allows individuals involuntarily terminated from their employment between September 1, 2008 and December 31, 2009 to elect to pay 35 percent of their COBRA coverage and be treated as having paid the full amount. In most cases, the former employer pays the remaining 65 percent of the premium and is reimbursed by claiming a payroll tax credit.

Some individuals who are “qualified beneficiaries” may also be eligible for the COBRA subsidy. They include spouses and dependent children. However, domestic partners generally do not qualify for the COBRA subsidy.

Income limits

The COBRA subsidy is excludable from gross income. However, individuals with modified adjusted gross incomes (MAGI) between $125,000 and $145,000 ($250,000 and $290,000 for married couples filing jointly) must repay part of the subsidy. For individuals with MAGI exceeding $145,000 and married couples with MAGI exceeding $290,000, the full amount of the subsidy must be repaid as additional tax.

Coverage period

The COBRA subsidy applies as of the first period of coverage starting on or after February 17, 2009 (the effective date of the 2009 Recovery Act). For most plans this was March 1, 2009. The subsidy is available for nine months. However, the nine-month subsidy period may end earlier if the individual becomes eligible for Medicare or another group health plan (such as one sponsored by a new employer).

Involuntary termination

One of the most important questions for purposes of the COBRA subsidy is what is involuntary termination? The IRS has explained that involuntary termination is severance from employment due to an employer’s unilateral authority to terminate the employment. However, the IRS stresses that whether an involuntary termination has occurred depends on all the facts and circumstances.

Involuntary termination can also occur when an employer:

• Declines to renew an employee’s contract;
• Furloughs an employee;
• Reduces an employee’s time to zero hours;
• Tells an employee to “resign or be fired;”
• Relocates its office or plant and an employee declines to relocate; or
• Locks out its employees.

Extended election

Moreover, individuals involuntarily terminated between September 1, 2008 and February 18, 2009, but who declined COBRA coverage, have a second chance under the 2009 Recovery Act. They may be eligible to re-elect COBRA coverage and receive the subsidy.

Small businesses

COBRA continuation coverage and the subsidy are generally unavailable to employees of small businesses (businesses with 20 or fewer employees). However, some states have mini-COBRA laws that extend COBRA continuation coverage and the subsidy to workers at small businesses. COBRA continuation coverage and the subsidy are also unavailable if the employer terminates its health plan.

If you would like to know more about the COBRA premium subsidy, please contact out offices. We can help determine your eligibility for this assistance.

De minimis fringe benefits

A de minimis fringe benefit is any property or service whose value is so small or minimal that accounting for it would be administratively impracticable. Such benefits are excluded from an employee’s gross income. Examples of de minimis fringe benefits include:

Occasional overtime meals and meal money. To qualify as a tax-free de minimis fringe benefit, the meal or meal money must be provided to your employees so that they can extend their normal workday, thereby enabling them to work overtime. Such meals and meal money can only be provided occasionally. This means that they generally cannot be provided routinely, when overtime work is a common occurrence or are contractually mandated for overtime work. Occasional snacks may also qualify as a de minimis fringe benefit but if the snacks are provided daily, they would not qualify.

Occasional transportation. Transportation costs can also qualify as de minimis fringe benefits. Taxi-fare for an employee to return home after working late, for example, may be a de minimis fringe benefit. The transportation must be occasional.

Holiday gifts. Traditional holiday gifts, such as a Thanksgiving turkey, with a low fair market value can generally qualify as a de minimis fringe benefit. However, cash or a cash equivalent such as a gift certificate in lieu of the property, do not qualify. In fact, cash and cash equivalent fringe benefits, no matter how little, are never excludable as a de minimis fringe benefit, except for occasional meal money or transportation fare.

E-filing. Electronically filing an employee’s tax return, but not paying for someone to prepare the return, may qualify as a de minimus fringe benefit.

Telephone calls. An employer may treat the cost of local telephone calls made by employees as a de minimis fringe benefit.

Working condition fringe benefits

A working condition fringe benefit is any type of property or service provided to your employees to the extent that the cost of such property or services would have been deductible by the employee as a trade or business expense, depreciation expenses, or as if the employee paid for the property/services himself or herself. Working condition fringe benefits have special tax rules for employers and employees.

Vehicles. If an employer-provided vehicle is used 100 percent for business and the use is substantiated, use of the vehicle is considered a working condition fringe benefit. The value of use of the vehicle is not included in the employee’s wages. However, when an employer-provided vehicle is used by the employee for both personal and business purposes, an allocation between the two types must be made. The portion allocable to the employee’s personal use is generally taxable to the employee as a fringe benefit. The portion allocable to business use is generally considered a working condition fringe benefit and is excludable from the employee’s income. 

No additional cost services

If an employer-provided service does not cause the employer to incur any substantial additional costs, it may qualify as a “no additional cost service” and be excludible from the employee’s income. The service must be offered to customers in the employer’s ordinary course of business. Some of the most common examples are airline, rail and bus tickets and hotel and motel rooms provided at a reduced rate or at no cost to employees. This benefit can be offered to retired employees as well as active employees. There are special rules for highly-compensated employees.

If you are considering alternatives to salary compensation, and would like to know what your options are, please contact our office. We can discuss the tax benefits and drawbacks of providing your employees with various types of fringe benefits.

 
New Year’s Day brought relief for most taxpayers, especially upper-income ones — even as President-elect Barack Obama is proposing new tax cuts as part of his wide-ranging economic-stimulus package. Read more.

The continuing drumbeat of bad economic news has spurred the lame-duck Congress to pass an emergency package of pension recovery provisions and pension-related technical corrections. Read more.