Dear Tax Talk,
I received a letter from my husband's employer that I may be eligible for subsidized COBRA tax payments as a result of tax law changes. I have been on COBRA since January of this year, as my husband no longer works. How do the tax law changes work? Does eligibility depend on income or assets?
Chances are if you received the notice, the employer has made a determination that you are eligible for the subsidy. The tax law changes are part of the American Recovery and Reinvestment Act that passed in February 2009.
The changes are addressed by the IRS in question-and-answer format in IRS Notice 2009-27 and on its Web site. To qualify for the subsidy, you must have been laid off or otherwise fired. It doesn't apply if you voluntarily quit.
If your 2009 adjusted gross income exceeds $125,000, or $250,000 in the case of a joint return, you may still claim the subsidy, but you will have to recover part of it as additional taxes when filing your 2009 tax return (without penalty, as discussed later). In this case you may want to waive your eligibility. There is no asset test for the subsidy.
The subsidy means that you will have to pay only 35 percent of the COBRA premium. The employer pays the remaining 65 percent and claims a refundable tax credit as part of paying payroll taxes. The law provides for up to nine months of subsidy.
Obviously, if you otherwise become ineligible for COBRA, the subsidy no longer applies. For example, if you start work somewhere else and become covered under that employer's plan, you are no longer eligible.
Generally, if the employer determined that the employee is eligible for the subsidy as a result of involuntary termination, the IRS will not question the employer's determination.
If the subsidy is not allowed to the individual, the IRS can charge it back to the individual plus a 10 percent penalty. For example, if an employee starts a new job but does not accept the new employer's health coverage (because it may be more expensive), the employee can be charged the subsidy.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
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