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IRS Patrol: COBRA Subsidy Eligibility Period Extended Through February; 15-Months Subsidy Now Available to Those Who Qualify

WASHINGTON — Workers who lose their jobs during January and February may qualify for a 65-percent subsidy on their COBRA health insurance premiums, and these newly-eligible individuals, along with those already receiving the subsidy, can now receive it for up to 15 months, according to the Internal Revenue Service.

Created by the American Recovery and Reinvestment Act of 2009, the COBRA subsidy eligibility period was originally scheduled to expire at the end of 2009, and eligible individuals only qualified for the subsidy for nine months. But the Department of Defense Appropriations Act, 2010, enacted on Dec. 19, extended the eligibility period and the maximum duration of COBRA premium assistance.

As a result, workers who are involuntarily terminated from employment between Sept. 1, 2008, and Feb. 28, 2010, may be eligible for a 65-percent subsidy of their COBRA premiums for a period of up to 15 months. Involuntarily terminated employees who meet certain other requirements, and certain family members of those individuals, are referred to as “assistance-eligible individuals.”

Employers must provide COBRA coverage to assistance-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, Employers 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.

The administrator of a group health plan or other entity must notify certain assistance-eligible individuals of the extension by Feb. 17, 2010. For assistance-eligible individuals whose nine months of subsidy had already ended, the new law also provides an extended period for the retroactive payment of their 35 percent share during a transition period.

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

Beware – 110 Percent Penalty For Anyone Who Continues to Receive COBRA Subsidy After Becoming Eligible For Alternate Coverage.

[Stacie says: This reminder, issued by the IRS is a must read for anyone who has received a COBRA health insurance subsidy due to involuntary termination from a prior job. As indicated below, the American Recovery and Reinvestment Act of 2009 provided this 65 percent subsidy of COBRA health insurance premiums. ]

The IRS Say:

Individuals who have qualified and received the 65 percent subsidy for COBRA health insurance, due to involuntary termination from a prior job, should notify their former employer if they become eligible for other group health coverage.

The American Recovery and Reinvestment Act of 2009 provides a subsidy of 65 percent of the COBRA health insurance premium for employees who are involuntarily terminated from September 30, 2008, to December 31, 2009. The subsidy requires only 35 percent of the premium to be paid for COBRA coverage for individuals, and their families, who have involuntarily lost their job and do not have coverage available elsewhere.

The IRS announced the subsidy in a February 26, 2009, information release, IR-2009-15.

If an individual becomes eligible for other group health coverage, they should notify their plan in writing that they are no longer eligible for the COBRA subsidy. The notice that the United States Department of Labor sent to the individual advising them of their right to subsidized COBRA continuation payments includes the form individuals should use to notify the plan that they are eligible for other group health plan coverage or Medicare.

If an individual continues to receive the subsidy after they are eligible for other group health coverage, such as coverage from a new job or Medicare eligibility, the individual may be subject to the new IRC § 6720C penalty of 110 percent of the subsidy provided after they became eligible for the new coverage.

Taxpayers who fail to notify their plan that they are no longer eligible for the COBRA subsidy may wish to self-report that they are subject to the penalty by calling the IRS toll-free at 800-829-1040. In addition, taxpayers will need to notify their plan that they are no longer eligible for the COBRA premium subsidy.

Anyone who suspects that someone may be receiving the subsidy after they become eligible for group coverage or Medicare may report this to the IRS by completing Form 3949-A, Information Referral (PDF).

Small Business Tax Information

IR-2009-51, May 20, 2009
Small Business Week is May 17 to 23, and the Internal Revenue Service urges small businesses to act now and take advantage of tax-saving opportunities included in the recovery law.
The American Recovery and Reinvestment Act (ARRA), enacted in February, created, extended or expanded a variety of business tax deductions and credits. Because some of these changes—the bonus depreciation and increased section 179 deduction, for example—are only available this year, eligible businesses only have a few months to take action and save on their taxes. Here is a quick rundown of some of the key provisions.
Faster Write-Offs for Certain Capital Expenditures

Many small businesses that invest in new property and equipment will be able to write off most or all of these purchases on their 2009 returns. The new law extends through 2009 the special 50 percent depreciation allowance, also known as bonus depreciation, and increased limits on the section 179 deduction, named for the relevant section of the Internal Revenue Code. Normally, businesses recover these capital investments through annual depreciation deductions spread over several years. Both of these provisions encourage these investments by enabling businesses to write them off more quickly.
The bonus depreciation provision generally enables businesses to deduct half the cost of qualifying property in the year it is placed in service.
The section 179 deduction enables small businesses to deduct up to $250,000 of the cost of machinery, equipment, vehicles, furniture and other qualifying property placed in service during 2009. Without the new law, the limit would have dropped to $133,000. The existing $25,000 limit still applies to sport utility vehicles. A special phase-out provision effectively targets the section 179 deduction to small businesses and generally eliminates it for most larger businesses.
Bonus depreciation and the section 179 deduction are claimed on Form 4562. Further details are in the instructions for this form.
Expanded Net Operating Loss Carryback
Many small businesses that had expenses exceeding their incomes for 2008 can choose to carry those losses back for up to five years, instead of the usual two. For small businesses that were profitable in the past but lost money in 2008, this could mean a special tax refund. The option is available for a small business that has no more than an average of $15 million in gross receipts over a three-year period.
This option is still available for most eligible taxpayers, but only for a limited time. A corporation that operates on a calendar-year basis, for example, must file a claim by Sept. 15, 2009. For eligible individuals, the deadline is Oct. 15, 2009.
Eligible individuals should file a claim using Form 1045, and corporations should use Form 1139. Details can be found in the instructions for each of these forms, and answers to frequently-asked questions are posted on IRS.gov.
Exclusion of Gain on the Sale of Certain Small Business Stock
The new law provides an extra incentive for individuals who invest in small businesses. Investors in qualified small business stock can exclude 75 percent of the gain upon sale of the stock. This increased exclusion applies only if the qualified small business stock is acquired after Feb. 17, 2009 and before Jan. 1, 2011, and held for more than five years. For previously-acquired stock, the exclusion rate remains at 50 percent in most cases.
Estimated Tax Requirement Modified
Many individual small business taxpayers may be able to defer, until the end of the year, paying a larger part of their 2009 tax obligations. For 2009, eligible individuals can make quarterly estimated tax payments equal to 90 percent of their 2009 tax or 90 percent of their 2008 tax, whichever is less. Individuals qualify if they received more than half of their gross income from their small businesses in 2008 and meet other requirements. For details, see Publication 505.
COBRA Credit

Employers that provide the 65 percent COBRA premium subsidy under ARRA to eligible former employees claim credit for this subsidy on their quarterly or annual employment tax returns. To help avoid imposing an unnecessary cash-flow burden, affected employers can reduce their employment tax deposits by the amount of the credit. For details, see Form 941. Answers to frequently-asked questions are posted on IRS.gov.

Other ARRA business provisions relate to discharges of certain business indebtedness, the holding period for S corporation built-in gains and acceleration of certain business credits for corporations. Also see Fact Sheet FS-2009-11.

Highlights of the American Recovery and Reinvestment Act of 2009

Congress has approved and the President has signed new economic recovery legislation, the American Recovery and Reinvestment Act of 2009. The IRS is implementing tax-related provisions of this new program as quickly as possible.
Here are some key highlights:
Money Back for New Vehicle Purchases. Taxpayers who buy certain new vehicles in 2009 can deduct the state and local sales taxes they paid.

Increased Transportation Subsidy. Employer-provided benefits for transit and parking are up in 2009

Up to $2,400 in Unemployment Benefits Tax Free in 2009. Individuals should check their tax withholding.

Net Operating Loss Carryback. Small businesses can offset losses by getting refunds on taxes paid up to five years ago. Information on the carryback, an expanded section 179 deduction and other business-related provisions is now available.

COBRA: Health Insurance Continuation Subsidy. The IRS has extensive guidance for employers, including an updated Form 941, as well as information for qualifying individuals.

Notice 2009-27 is guidance provided under section 3001 of the American Recovery and Reinvestment Act of 2009 relating to the premium reduction for individuals who were involuntarily terminated and are electing COBRA continuation coverage under the group health plan of their former employer. Notice 2009-27 will appear in IRB 2009-16 dated April 20, 2009.

First-Time Homebuyer Credit Expands. Homebuyers who purchase in 2009 can get a credit of up to $8,000 with no payback requirement.

Enchanced Credits for Tax Years 2009, 2010. Details available on the earned income tax credit, additional child tax credit and American Opportunity Credit, a new higher education benefit.
Payroll Checks Increase This Spring. The Making Work Pay Tax Credit will mean $400 to $800 for many Americans. The IRS has issued new withholding tables for employers.

$250 for Social Security Recipients, Veterans and Railroad Retirees. The Economic Recovery Payment will be paid by the Social Security Administration, Department of Veterans Affairs and the Railroad Retirement Board.

Health Insurance and S Corporations

If you are a shareholder in an S-corporation, or if you are responsible for the accounting or tax needs of an S-corporation, you should be aware of the following information contained in IRS Notice 2008-1.
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S Corporations that pay accident or health insurance premiums on behalf of a 2-percent employee-shareholder must include those payments as wages for income tax withholding purposes on the Shareholder’s Form W-2.

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What if the shareholder’s ownership percentage is less than 2%?

IRS Notice 2008-1 indicates that only 2-percent shareholder-employees include these premiums on Form W-2. The term “2-percent shareholder” is any person who owns on any day during the taxable year of the S corporation more than 2 percent of the stock of the corporation.

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What if the shareholder does not receive a Form W-2?

Accident and health insurance premiums paid or furnished by an S corporation on behalf of its 2-percent shareholders are considered fringe benefits generally furnished in consideration for services rendered. However, a 2-percent shareholder is not an employee for purposes of Sec 106. Accordingly, the premiums are not excludable from the 2-percent shareholders gross income under Sec 106. Therefore, these payments should be included on the 2-percent shareholder employees Form W-2. An S-corporation is entitled to deduct the cost of such employee fringe benefits on its income tax return.
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Are the accident or health insurance premiums included on the 2-percent shareholders W-2 subject to Social Security and Medicare taxes?

The wages are not subject to Social Security and Medicare taxes.
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Can the shareholder deduct the accident or health insurance premiums included on his or her Form W-2 on his or her Individual Income Tax Return Form 1040?

The 2-percent shareholder-employee may claim the premiums that constitute medical care for the taxpayer, his or her spouse, and dependents as a deduction from the taxpayers adjusted gross income.
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How is the deduction taken?

The deduction is usually taken on page one of the shareholders Form 1040.
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Are there any restrictions to the deduction by the shareholder on his or her Form 1040?

The deduction is not allowed to the extent that the amount of the deduction exceeds the earned income derived by the taxpayer from the trade or business with respect to which the plan providing the medical coverage is established. Also, the deduction is not allowed for amounts during a month in which the taxpayer is eligible to participate in any subsidized health plan maintained by an employer of the taxpayer or the spouse of the taxpayer.
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Can the S corporation reimburse the shareholder for accident or health insurance premiums paid by the shareholder?

Yes. If the 2-percent shareholder makes the premium payments and furnishes proof of premium payments to the S corporation and then the S corporation reimburses the 2-percent shareholder-employee for the premium payments in the current tax year.
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If the S corporation does not include the accident or health insurance premiums on the 2-percent shareholder’s Form W-2 can the S corporation still deduct the premium payments?

An S corporation is entitled to deduct the cost of employee fringe benefits under Section 162(a). However, the requirement to include the premium amounts paid on behalf of 2-percent shareholder employees is not optional. Therefore, amounts paid and deducted by the S corporation must be included on the 2-percent shareholders W-2. The Notice 2008-1 indicates that timely filed amended returns to claim the deduction under Section 162(l) may be filed if the taxpayer satisfies the requirements of the Notice.

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Remember to always consult with your tax advisor regarding your income tax needs.

IRS Strengthens Withholding Compliance Program
The IRS has stepped up its withholding compliance program by making more effective use of information reported on W-2 wage statements to ensure that employees have enough federal income tax withheld from their paychecks. At the same time, employers are no longer required to submit potentially questionable Forms W-4 to the IRS.
For more information:
Withholding Compliance Questions & Answers
IRS Strengthens Withholding Compliance Program; Reduces Paperwork for Employers

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