Who pays for the COBRA premium subsidy?

Employers (or insurers or multiemployer plans, as the case may be) must front 65 percent of the premiums, and the federal government will reimburse employers for that amount. The reimbursable amount will then be credited against the employer's payroll tax withholding. Employers should use Form 941, Employer’s Quarterly Federal Tax Return, to apply for the premium reimbursement.

If the credit exceeds the employer’s payroll taxes, the amount will be credited to the next quarter or refunded as if it were an overpayment of taxes. Employers that aren’t liable for withholding may apply for direct reimbursement from the Treasury Department. Note that an employer is not eligible for reimbursement of the subsidy until the reduced premium payment has been received from the qualified beneficiary.

Transition rule. For coverage periods in March and April 2009, employers must reimburse any extra premiums paid by assistance-eligible individuals, or provide a credit to reduce subsequent premiums due. If a credit reasonably wouldn’t be applied within 180 days, the employer must pay it to the individual within 60 days.

Recordkeeping requirements. Employers claiming the reimbursement on Form 941 are not required to submit any supporting documents to the IRS, but they must maintain the following records:

• Information on the receipt (including dates and amounts) of the assistance-eligible individuals’ 35-percent share of the premium.

• In the case of an insured plan, a copy of the invoices and proof of timely payment of the full premium to the insurance carrier required under COBRA.

• In the case of a self-insured plan, proof of the premium amount and proof of the coverage provided to assistance-eligible individuals.

• Attestation of involuntary termination, including the date of the involuntary termination (which must be during the period from September 1, 2008, to December 31, 2009), for each covered employee whose involuntary termination is the basis for eligibility for the subsidy.

• Proof of each assistance-eligible individual’s eligibility for COBRA coverage and of their election of COBRA coverage.

• A record of the Social Security Numbers of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and whether the subsidy was for one or more individuals.

Information reporting. Employers do not need to report the subsidy to eligible individuals on an information return or Form W-2.