Payroll Manager's - Kluwer Law International

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Update on COBRA Subsidy Extension As we reported in the last issue of Payroll Manager’s Letter , the COBRA health care subsidy— and the related payroll tax credit for employers— has been extended. And that means your payroll department will be dealing with the subsidy and the related employment tax credit for an extended period of time. The Department of Labor (DOL) recently issued guidance on the subsidy extension [DOL Fact Sheet, COBRA Premium Reduction (Jan. 8, 2010)]. Basic rules. The COBRA subsidy allows eligible individuals who lose their jobs and their family members to obtain continued health care coverage under an employer plan by paying just 35% of the otherwise required premium, with the employer picking up the remaining 65% of the cost. An employer providing the COBRA subsidy can then claim an offsetting credit against its payroll tax liabilities for its 65% of the cost. As originally enacted in early 2009, individuals were eligible for the subsidy if they were involuntarily terminated from employment during the period beginning September 1, 2008, and ending December 31, 2008. The subsidy itself applied for periods of health coverage that began on or after February 17, 2009, and lasted for a period of nine months. New rules. The Department of Defense Appropriations Act of 2010 continues the COBRA eligibility period for two months through February 28, 2010. Consequently, employees who lose their jobs in the first two months of 2010 will now qualify for the subsidy. In addition, the new law extends the subsidy from nine months to 15 months. Significantly, this extension applies to all eligible individuals—both individuals who become newly eligible in 2010 and individuals who were already receiving the subsidy in 2009. KEY POINT The new law does not extend the maximum COBRA coverage period beyond the 18 months that normally applies in the case of a termination of employment. As a result, individuals who became eligible for COBRA in September 2008 will still max out their COBRA coverage at the end of February. Transition rules. Because the subsidy period was originally limited to nine months, employees who were eligible for the subsidy at the outset reached the end of their subsidy period last November. However, the extension of the subsidy period to 15 months was not enacted until mid-December. As a result, these employees may have either dropped COBRA coverage starting in December or continued the coverage by paying 100 percent of the premium. Individuals caught in this “transition” must receive notice of the changes to subsidy within 60 days of the first day of the transition period. In other words, an employee whose nine-month subsidy ran out at the end of November should have received notice of the new law change by the end of January 2010. According to the DOL, individuals who dropped COBRA coverage at the end of the nine-month subsidy period have until the later of (a) February 17, 2010, (b) 30 days after the notice of the extension is provided, or (c) the end of the otherwise applicable payment grace period to restore coverage and pay the premiums for the transition period. PAYROLL IMPACT Because of this transition, some eligible individuals will be paying premiums and receiving subsidies in 2010 for coverage provided in December 2009. Despite the mismatch, the payroll tax credit for these subsidies should be claimed for 2010, not 2009. Internal Revenue Service guidance provides that the credit should be claimed on the employment tax return for the quarter in which the subsidy is provided or for a later quarter in the same calendar year [COBRA: Questions and Answers for Employers, Q&A FP-15]. Individuals who continued coverage during the transition period by paying full premiums are also entitled to retroactive subsidies. The DOL guidance says these individuals should contact the plan administrator or sponsoring employer to discuss whether the subsidy will be provided either as a credit for future months of coverage or as a reimbursement of the premium overpayment. Here again, the employment tax credit for these subsidies should be claimed for the quarter in 2010 when they are provided (whether in the form of a credit or reimbursement) or for a later quarter in 2010. 4 Payroll Manager’s Letter
How You Handle FICA Overpayments Determines The Interest the IRS Pays The Internal Revenue Service (IRS) pays interest when refund claims are filed for overpayments of FICA. But according to newly released IRS guidance, the amount of interest paid can depend on how an employer handles the refund claim [Chief Counsel Advice 200951033]. Interest rates. The tax law provides that a taxpayer filing a refund claim for an erroneous overpayment of taxes is entitled to interest accrued from the date of the overpayment [I.R.C. § 6611]. There are three different interest rates that can be used to calculate the interest owed on overpayments: 1. Interest owed by the IRS to noncorporate taxpayers is calculated at a “regular” rate equal to the Adjusted Federal Rate (AFR) plus 3 percentage points; 2. The “regular” interest rate for refunds due corporations is equal to the AFR plus 2 percentage points; and 3. To the extent that an overpayment of tax by a corporation exceeds $10,000, interest on a refund is computed at the AFR plus 0.5%. (This rate is often referred to as the “GATT” rate because it was enacted as part of a law implementing the Uruguay Round of the General Agreement on Tariffs and Trade (GATT)) [I.R.C. § 6621(a)]. FICA refund claims. Since FICA taxes are shared by employers and employees, but refund claims are usually initiated by employers (by filing Form 941- X), the IRS has set up procedures designed to protect employees’ rights. Generally speaking, an employer cannot file a refund claim for its share of FICA taxes unless it also files a claim for a refund of the employee’s share. To do that, the employer must either (1) repay or reimburse the employee for the employee’s share of FICA before filing the claim, or (2) receive written consent from the employee to file a refund claim on behalf of the employee, in which case the employer refunds the employee’s share after getting the gross refund from the IRS. The repay/written consent requirement does not apply, of course, if no FICA was erroneously withheld from the employee’s pay (i.e., the employee has no right to a refund). This requirement also does not apply if the employer is unable to locate the employee or the employee refuses to provide the necessary written consent. In these situations, an employer may file a refund claim for only the employer’s share of FICA [Reg. § 31.6402(a)- 2(a)(1)(ii)]. New IRS Guidance XYZ Corporation deducted the employee’s share of FICA tax from its employee’s wages. XYZ paid that amount and its share of FICA tax to the IRS. XYZ later discovers that there was an overpayment of FICA tax. XYZ files a claim for refund of the overpayment plus interest. The refund claim indicates that (1) XYZ repaid or reimbursed some employees prior to filing the claim, (2) other employees have consented to having XYZ pursue the FICA claim on their behalf, and (3) in some cases, XYZ is filing only for its share of the refund. Which interest rates apply to the FICA overpayments? IRS answer. The IRS may refund an overpayment of tax, including interest, only to the taxpayer that made the overpayment. Thus, it is important to establish who “paid” the FICA taxes in XYZ’s case. • When a corporation is permitted to file a refund claim for only its own share of the FICA tax (Situation 3 above), interest will be calculated at the regular corporate rate or the GATT rate if applicable. • If a corporate employer repays a FICA tax overpayment to its employee and then files a claim for refund (Situation 1 above), the overpayment is generally considered to be “paid” by the employer. Thus, interest on the overpayment is calculated using either the regular corporate rate or the GATT rate. • Where the corporation files a claim on behalf of an employee and the refund plus interest will be paid over to the employee by the employer (Situation 2 above), then the corporate interest rates do not apply to the employee’s share of the FICA overpayment; instead, the regular noncorporate rate applies. This is because the employee share is considered the employee’s refund and failure to pay the correct interest to the employee would underpay the employee. The interest on the employer’s share of the overpayment is computed using either the regular corporate rate or the GATT rate. Payroll Manager’s Letter 5
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Payroll Manager's - Kluwer Law International

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