Employee Benefit Tax News

The IRS made three announcements recently that are of interest to certain business and individual taxpayers:

The COBRA subsidy for those who have lost their jobs has been extended again until May 31.

Tax-free employer health coverage is now available for children under the age of 27.

Average small group premiums for each state have been issued by the IRS to determine the amount of the new small business health care tax credit.

COBRA SUBSIDY HAS BEEN EXTENDED AGAIN TO MAY 31

TAX-FREE EMPLOYER HEALTH COVERAGE NOW AVAILABLE FOR CHILDREN UNDER AGE 27

Workers who lose their jobs during April and May may qualify for a 65 percent subsidy on their COBRA health insurance premiums.

The American Recovery and Reinvestment Act established this subsidy to help workers who lost their jobs as a result of the recession maintain their employer sponsored health insurance.

The Continuing Extension Act of 2010, enacted April 15, reinstated the COBRA subsidy, which had expired on March 31. As a result, workers who are involuntarily terminated from employment between September 1, 2008 and May 31, 2010, may be eligible for a 65 percent subsidy of their COBRA premiums for a period of up to 15 months.

In some cases, workers who have their hours reduced and later lose their jobs may also be eligible for the subsidy.

Employers must provide COBRA coverage to eligible individuals who pay 35 percent of the COBRA premium. Employers are reimbursed for the other 65 percent by claiming a credit for the subsidy on their payroll tax returns:

Form 941, Employer’s Quarterly Federal Tax Return;

Form 944, Employer’s Annual Federal Tax Return; or

Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees.

Employers must maintain supporting documentation for the claimed credit.

There is more information about the subsidy for employers, employees and former employees on the COBRA pages of IRS.gov.

Some people who are eligible for the COBRA subsidy also qualify for the health coverage tax credit and may want to choose that more generous benefit. The health coverage tax credit pays 80 percent of health insurance premiums for those who qualify. See more at Eligibility Requirements and How to Receive the HCTC.

As a result of the recently enacted Patient Protection and Affordable Care Act, health coverage provided to an employee’s children under 27 years of age is now generally tax-free to the employee, effective March 30, 2010.

The IRS announced that the changes immediately allow employers with cafeteria plans – plans that allow employees to choose from a menu of tax-free benefits, cash or taxable benefits – to permit employees to begin making pre-tax contributions to pay for this expanded benefit. (IRS Notice 2010-38 [26.4 KB PDF download])

“These changes give employers a unique opportunity to offer a worthwhile benefit to their employees,” IRS Commissioner Doug Shulman said. “We want to make it as easy as possible for employers to quickly implement this change and extend health coverage on a tax-favored basis to older children of their employees.”

The expanded health care tax benefit applies to various workplace and retiree health plans. It also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal tax returns.

Employees with children who will not have reached age 27 by the end of the year are eligible for the new tax benefit from March 30, 2010, forward, if the children are already covered under the employer’s plan or are added to the employer’s plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child. This new age 27 standard replaces the lower age limits that applied under prior tax law, as well as the requirement that a child generally qualifies as a dependent for tax purposes.

Employers with cafeteria plans may permit employees to immediately make pre-tax salary reduction contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals. Plan sponsors then have until the end of 2010 to amend cafeteria plan language to incorporate this change.

The Affordable Care Act also requires plans that provide dependent coverage of children to continue to make the coverage available for an adult child until the child turns age 26. The extended coverage must be provided not later than plan years beginning on or after Sept. 23, 2010. The favorable tax treatment described in the notice applies to that extended coverage.

For more information, consult with your employee benefits and tax advisers.

IRS ISSUES STATE-BY-STATE PREMIUM AMOUNTS

Under the new healthcare law, small businesses and tax-exempt organizations can claim credits for nonelective contributions made on behalf of their employees for insurance premiums.

The amount of the credit is calculated by taking a percentage of the lesser of:

The nonelective contributions paid by an eligible employer on behalf of employees during the tax year; or

The nonelective contributions the employer would have made if employees were enrolled in a plan with premiums equal to the average premium for the small group market in the state where the employer is offering coverage. For this purpose, IRS Revenue Ruling 2010-13 establishes the premiums for the 2010 tax year.

The amounts range from a low of $4,215 in Idaho for employee-only coverage to a high of $6,204 in Alaska. Read the Revenue Ruling with the state-by-state table [9.1 KB PDF download]

Which employers qualify for the credit? Under the law, a small business is defined as one with 25 or fewer employees with average annual wages of less than $50,000. These businesses can claim up to 35 percent of nonelective contributions for premiums made on behalf of employees. Tax-exempt organizations can claim a 25 percent credit against payroll taxes.