The COBRA credit: What employers must know

A provision in the American Recovery and Reinvestment Act of 2009 affects the health insurance coverage of your recently terminated employees — and your payroll tax liability.

The overview. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) contains health insurance rules applicable to your business when you employ 20 or more workers. Forty states have similar "mini-COBRA" laws that apply when your business employs less than 20 workers.

Under COBRA, you are generally required to provide eligible, recently terminated employees who were enrolled in your active health insurance plan the opportunity to continue coverage for up to 18 months. Your former employees pay the full premium.

What's changed. The new law, which became effective February 17, 2009, temporarily reduces the share of health insurance premiums your eligible former employees have to pay to 35%. Your business pays the remaining 65%. You then claim a credit for your share on your federal payroll tax return (Form 941, 943, or 944).

You can use the credit to reduce payroll tax deposits, or you can claim the entire amount at the end of each quarter.

The change applies to employees terminated through December 31, 2009, and is available for up to nine months of coverage.

What you need to do. Employees must be notified of the reduced premiums, and you'll need to keep copies of the notifications.

In addition, maintain records of payments you receive from employees who choose to participate, as well as proof of your remittance to your business's health insurance provider.

The only way to claim the COBRA credit is on payroll tax returns for applicable periods. If you overlooked it on your first quarter payroll return, please call. We can help you file an amended return and assist you with payroll return preparation in future quarters.