Mar 01, 2023
Question: Is an employer subsidy for COBRA premiums taxable to the qualified beneficiary?
February 27, 2023
An employer has offered, or wants to offer, to subsidize part or all of a qualified beneficiary’s COBRA premiums. Is that subsidy taxable to the qualified beneficiary?
The taxability of an employer’s COBRA subsidy will depend on the method of distribution of the subsidy.
Funds to the qualified beneficiary must be taxed:
- Employer pays premium amounts directly to the employee for the employee to pay the insurance company. Since there is no guarantee that the employee will use the funds to pay the COBRA premiums, the funds are deemed taxable income.
Funds to the qualified beneficiary are non-taxable:
- Employer reimburses the employee for premium payments that the employee made to the insurance company, and the employee provides documentation verifying that payments to the insurer were actually made for COBRA coverage.
- Employer pays COBRA premiums directly to the insurance company.
The real lynchpin is whether an employer can guarantee that their funds are being used for the COBRA premium – if that guarantee can be made, then the employer’s subsidy for COBRA premiums can be provided on a non-taxable basis.
For employers that are considering offering a COBRA subsidy, there are a few other issues to keep in mind:
- To avoid potential claims of any COBRA violation, COBRA election paperwork should still be required to continue coverage and take advantage of the employer’s subsidy. The terms and conditions of the employer subsidy should be clearly defined in such paperwork.
- If the plan is self-funded, and the employer subsidy is available only to some employees, it will be necessary to consider Section 105(h) non-discrimination rules, which prohibit offering benefits in a way in which highly-compensated individuals are favored.
- Finally – assuming that the employer subsidy would not cover the entire maximum coverage period under COBRA, the employer may actually be doing the individual a disservice, as a limited employer subsidy may incent an individual to choose COBRA when long-term individual coverage through a public Exchange or another group health plan may be the better route. In most states, once COBRA is elected, the individual is then ineligible to enroll through a public Exchange until open enrollment, or at the time the COBRA coverage is exhausted (not when the employer subsidy terminates). Similarly, neither voluntary early termination of COBRA nor loss of an employer subsidy will trigger HIPAA special enrollment rights for other group health plan coverage.
While every effort has been taken in compiling this information to ensure that its contents are totally accurate, neither the publisher nor the author can accept liability for any inaccuracies or changed circumstances of any information herein or for the consequences of any reliance placed upon it. This publication is distributed on the understanding that the publisher is not engaged in rendering legal, accounting, or other professional advice or services. Readers should always seek professional advice before entering into any commitments.
