IRS Eyes Employers for COBRA Subsidies

The IRS is taking no chances: It wants to stop employers that might try to be reimbursed for a subsidy they didn’t give ex-workers.

By Joan Pryde, Senior Tax Editor, the Kiplinger letters

May 7, 2009

The IRS is moving quickly to make sure the new COBRA subsidy doesn’t get abused by employers that claim a payroll tax credit they’re not entitled to. The Service already has a system in place to check payroll tax returns as they come in and flag questionable claims employers make for reimbursement of the subsidies, which are designed to help laid off workers keep their health coverage under their old employer’s plan. First notices questioning credits claimed will go out to employers in mid-May. Firms that receive a notice should expect an IRS examiner to follow up a month later.

The Service feels there’s no time to waste because the new continued coverage subsidy law casts a wide net: The federal government is picking up the tab for 65% of the monthly premium for Consolidated Omnibus Budget Reconciliation Act (COBRA) medical coverage for up to nine months for employees who are involuntarily terminated between Sept. 1, 2008, and Jan. 1, 2010. Employers pay the subsidy up front and then are reimbursed by taking a credit against their payroll taxes. The employer must receive the ex-worker’s 35% share before claiming the credit. If the amount of the subsidy that a firm pays out is more than its payroll tax liability, it can request a refund from the IRS. But if those IRS computers spot a problem on a return, the refund will be frozen until the issue is cleared up.

Questionable claims for the credit aren’t the IRS’ only concern. The Service also wants to make sure that the continued coverage subsidy goes to qualified individuals, so it’s calling on employers to keep a lot of supporting documentation. If an IRS agent comes calling for a routine employment tax audit, an employer will need to provide paperwork to prove, among other things, that ex-workers who received the subsidy were let go during the period between Sept. 1, 2008, and Jan. 1, 2010, were involuntarily terminated and paid their 35% share of the premium.

Although the extra documentation may be a headache, it could have been worse: The IRS recently shelved plans for a new information return that companies would have had to file to show the amount of subsidy that ex-workers received. Instead, the IRS will rely on employment tax exams to turn up any hanky-panky in this regard.

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