IRS says taking a credit in the wrong quarter for a subsidy the employee received in 2009 but paid for in 2010 could create a big paperwork hassle. Say a former worker pays his 35% share of the COBRA premium for 2009 coverage on 1/20/10. You may claim the credit for the related premium subsidy on Form 941 for either:

• the quarter in 2010 in which you receive the individual’s 35% premium payment, or
• a later quarter in 2010.

The credit can’t be claimed for a quarter in 2009, regardless of the fact that the premium is for coverage during 2009.

In all cases, however, if an employer chooses to reduce its payroll tax deposits during the quarter based on the receipt of the individual’s 35% premium payment, the company must claim the credit for the related subsidy amount on Form 941 for the quarter during which its payroll tax deposits were reduced. In addition, of course, an employer may only claim credit for the subsidy amount once.

During the past few quarters, IRS erroneously sent many employers a notice proposing a federal tax deposit penalty (CP 207) because it said the Schedule B was missing. In fact, the agency says it had a problem with scanning technology and didn’t properly process the returns. The notice asks recipients to submit Schedule B, even though they’d already done so with their paper filed returns.

While resending the Schedule B will be a hassle, IRS needs the resubmission to correct the penalty issue, IRS Branch Chief Amy Stanton, Wage & Investment Division, told attendees of an Oct. 1 payroll teleconference. Employers should sign the notice and staple to it the resubmitted form.

Here are a few guidelines that’ll help IRS better use its scanning technology (and reduce the number of problems for you):

• Make sure your forms are legible, and
• Write within margins and on the lines.

The agency says it’ll have the problem resolved for third-quarter reporting.

Here’s why: The COBRA credit must be claimed during the tax year in which the subsidy was paid – not later, IRS officials reminded participants of a recent industry partners conference call. During year-end when Finance Departments are often at their craziest, tasks like this often drop off the to-do list.

Remember, too, that if taking the credit resulted in an overpayment, Payroll claims that amount on the 941’s line 12a – again, during the same calendar year the subsidy was paid. Then, that overpayment may either be:

• refunded, or

• carried forward to the following quarter, even if the subsequent quarter is in the following tax year.

Employers should refer to the updated Form 941 instructions before reporting their COBRA subsidy payments.

You’ll find more info here.

The Internal Revenue Service just let you off the hook for what could’ve been a big administrative hassle this year-end.

IRS recently announced it won’t require any information reporting (i.e., Forms W-2 or 1099) for COBRA premium assistance payments employers make on behalf of terminated employees.

There’s a tradeoff, of course. It’s likely that because you don’t have to officially inform employees of the subsidy amount, recipients will have to call you when they prepare their personal federal tax returns.

Some will have to pay back a portion of the subsidy, e.g., those with adjusted gross income of $125,000 or more; $250,000 for married taxpayers filing jointly. Assistance eligibility phases out completely for people with modified gross incomes of $145,000 or more; $290,000 for joint filers. They’ll return the subsidy amount by increasing their tax liability on the Form 1040.

To prevent your phone from ringing off the hook, consider compiling subsidy info throughout the year, as your company makes the premium payments, and issue a simple statement at year-end along with your W-2s or 1099s.

What you’ll need
The info you’ll need should be easy enough to find. As part of the COBRA subsidy program, the American Recovery and Reinvestment Act requires employers to maintain the following documentation:

• Dates and amounts of the assistance eligible individuals’ 35% share of the premium.
• A copy of the invoice or other supporting statement from the insurance carrier (when you have an insured plan) and proof of timely payment of the full premium to the insurance carrier required under COBRA.
• Proof of the (1) premium amount and (2) coverage provided to the assistance eligible individuals. (Self-insured plans only.)
• Attestation of involuntary termination, including the date of the involuntary termination (which must be between 9/1/08 and 12/31/09), for each covered employee whose involuntary termination is the basis for eligibility for the subsidy.
• Proof of each assistance eligible individual’s eligibility for COBRA coverage at any time during the period between 9/1/08 and 12/31/09, and election of COBRA coverage.
• Social Security Numbers of all covered employees,  the amount of the subsidy reimbursed with respect to each covered employee,  and whether the subsidy was for one individual or two or more individuals.
• Other documents necessary to verify the correct amount of reimbursement. Note that although your company must maintain this documentation, you’re not required to submit it with your Form 941.

A new notice from the Internal Revenue Service, CP 269C, is being sent to certain employers explaining that examiners are “reviewing” the claim and temporarily freezing the reimbursement.

So who gets picked for the notice and why? Employers whose 941’s tripped IRS’s  “processing filters.”

Although IRS hasn’t said what sorts of errors could cause a notice to be sent, it did say that employers who receive a CP 269C don’t have to do anything until they’ve been contacted directly by an IRS examiner (usually within 30 days).  At that time, the company will be asked to provide any additional info needed.

IRS will also send notices to reporting agents who are authorized to receive copies of their clients’ notices.

You may file adjusted returns for an:

• underpayment – within the applicable period of limitations for assessing the underpayment, and
• overpayment – before the 90th day prior to the applicable period of limitations on credit or refund expires.

Still pays to be prompt
Of course, just because there’s no “deadline” for filing a 941-X doesn’t mean you have all the time in the world, either. You can only make an adjustment interest-free if you report within a certain timeframe:

1. FIT underpayments when you withheld the incorrect amount – You can file your adjusted return only for errors found during the calendar year in which wages were paid. The return must be filed by the due date for the return period when you discovered the error.
2. FIT overpayments when you withheld the incorrect amount - File your 941x for errors discovered during the calendar year when you paid the wages. Repay the employee within the same year.

To get more help on making corrections:

1. Download the 941 instructions from www.irs.gov/pub/irs-pdf/i941.pdf
2. Check Section 13 of Publication 15, Circular E, Employer’s Tax Guide (www.irs.gov/pub/irs-pdf/p15.pdf), or
3. Go to the IRS Web site and enter “Correcting Employment Taxes” into the “Search” box.

Although the form asks you to report the “Number of individuals provided COBRA premium assistance reported on line 12a,” the instructions don’t specify whether the number corresponds to:

• just the employees receiving the subsidy, or
• number of people covered under the policy (e.g., dependents, spouses).

IRS now says the number you enter on Line 12b should be “one” for each individual receiving a subsidy – regardless of the number of people benefiting from that policy. So, for example, if you have five employees receiving the credit in one quarter, enter “5″ on the 941 – even if the number of people actually covered by the policy is 15 (i.e., 5 employees + 5 spouses + 5 dependents = 15).

The agency made the announcement during its weekly payroll partners conference call. You’ll see written confirmation within the new few weeks on the IRS Web site’s new COBRA page . You can bookmark the page and then go back to it when the confirmation is posted.

To download a copy of the new Form 941, go to www.irs.gov/pub/irs-pdf/f941.pdf.

1. “Who’s eligible for the subsidy?”
The most important thing to remember is that this new law did not affect who is/isn’t eligible for COBRA – eligibility rules remain the same. You can get more info on that point from www.dol.gov/ebsa/faqs/faq_compliance_cobra.html

As for the subsidy, the credit applies only to involuntarily terminated employees and their family members who are qualified beneficiaries. The involuntary termination must occur during the period from 9/1/08 through 12/31/09.

To clarify, an assistance-eligible individual can be any COBRA qualified beneficiary associated with the related covered employee (e.g., dependent child), who’s covered immediately prior to the qualifying event.

2. “March 1 came and went, and April 1’s almost here. When do I have to start paying the premiums for eligible former workers?”
The law took effect on 2/17/09. However, a transition rule says you may continue to pay the premium amount for up to two months after this (i.e., March and April). You can provide the subsidy retroactively in that case.

3. “We’re self-insured. Do the subsidy requirements still apply?”
Yes. All employers with plans subject to the COBRA requirements must comply with this law.

4. “Do we state on the 941 the dollar amount of the tax credit due as a refund, and receive the refund from the IRS?”
You need to download the newest version of Form 941 (www.irs.gov/pub/irs-pdf/f941.pdf). You’ll claim the credit on Line 12a, and include the number of individuals provided COBRA premium assistance on Line 12b. No other info relating to the subsidy is required on the form.

Say Line 12 is larger than Line 10. Line 13 would also be larger than Line 10, resulting in an overpayment that you could either:
1. apply to your next return, or
2. request as a refund.

If you choose to have the excess refunded, IRS will process the request (but you won’t receive any notification).

5. “Will Schedule B be the same as always, stating the actual liability for any given day, week or month?”
Yes. Schedule B is used to report an employer’s payroll tax liability for each payroll period – not the amount of the employer’s payroll tax deposits. Therefore, when you reduce a deposit by the COBRA subsidy amount, there’s no effect on your liabilities reported on the 941’s Schedule B.

Continue to show on your Schedule B (or in Part 2, Form 941) the total liabilities for all wages you reported on the 941.

6. “What resources can help us notify employees about these changes?”
The U.S. Department of Labor’s developing sample language to share with employees. Click this Web site for all sorts of resources, including English and Spanish versions of sample language, posters, etc.: www.dol.gov/ebsa/cobra.html

7. “I’m not sure we can meet the 4/30/09 deadline to file the new Form 941. Can I get an extension?”
Sorry, there’s no extension available.

8. “If the company I work for goes out of business, are employees still entitled to pay only the 35% toward their premium?”
No. Former employees on COBRA are still on their employers’ plans, so if there’s no company, there’s no health coverage (or anyone from corporate to pay for it, either).

1. “If I pay the 65% premium subsidy for an ex-employee, how long will I have to wait to recoup that money?”

First of all, you will have to front the money for the premium payment, but only after the employee pays his or her 35% share. The amount employers put out is fully refundable – and, for many employers, in a matter of days.

After your company pays the 65%, it can either:

A. Take a credit on its very next federal income tax deposit. You don’t have to wait until the end of the quarter to file your Form 941. Whenever the tax deposit is due, Payroll can reduce the deposit amount by the subsidy.

B. Claim the subsidy as an overpayment on the Form 941.

2. “Is this going to make Form 941 more complicated?”

By now, you’ve probably seen the new Form 941 and its instructions. Employers will only have to fill in entries on Lines 12a (to claim the credit) and 12b (the number of people given the COBRA premium assistance) – and if there’s no subsidy paid, the amounts entered will be zero. There’s no additional info relating to this subsidy that needs to be reported on the 941.

Your recordkeeping burden will be a bit more involved. Employers claiming the credit must maintain supporting documentation for the credit claimed, such as details about:

• which former employees paid the 35%, how much the payment was, when it was made, etc.
• proof of timely payment of the full premium payment to the insurance carrier, and
• Social Security Numbers of all covered employees and the amount of the subsidy reimbursement for each.

3. “Is the tax credit considered taxable income, and will anyone  have to jump through more hoops to report the income?”

There is no taxable income, because the subsidy shouldn’t be included in gross income.

You, however, may want to alert former high-earning employees who receive the subsidy that their tax liability may be affected. The subsidy starts phasing out for those with a modified adjusted gross income exceeding $125,000 ($250,000 for those who are married and filing joint returns). For those whose modified adjusted gross income is between $125,000 and $145,000 ($250,000 to $290,000 for married couples filing joint returns), tax liability increases so they end up repaying a portion of the subsidy,

Taxpayers with a modified adjusted gross income exceeding $145,000/$290.000 will have to repay the entire subsidy, in the form of additional tax on their personal income tax returns next year.

1. Implement new withholding tables. The “Making Work Pay” tax credit means Payroll will begin withholding less federal income tax from workers’ pay, probably in June. The average American worker will see about $13 more per weekly paycheck in 2009, and about $9 more in 2010. The credit, which amounts to 6.2% of earned income up to $400 for single taxpayers ($800 for marrieds) begins phasing out at $75,000 ($150,000 for marrieds). Those who don’t get the credit through payroll can also claim it on their personal tax returns.

Nonresident aliens don’t qualify for this credit – only employees with valid Social Security Numbers.

It’s still unclear how companies should handle new hires who may have already received a portion of the credit from a previous employer.

2. Begin new reporting duties on Form 941. To help workers who are involuntarily terminated from work, the government’s now offering to subsidize 65% of COBRA premium payments. Here’s how it’ll work: Once an employee pays his or her 35% share, the company must then front the rest of the money. The employer will pay the insurer directly, then claim the amount as an offset against payroll tax liabilities. Payroll will report any subsidies made and take the offset on an updated Form 941 the IRS will soon release.

Employers will have to pay the premiums for up to nine months for workers (and their families) who are involuntarily terminated between 9/1/08 and 12/31/09. Anyone who was terminated after the 9/1/08 start date and the date’s enactment but didn’t take the coverage because of the expense has 60 days to elect COBRA and take advantage of the subsidy.

Employees with an annual income of $125,000 ($250,000 for families) don’t qualify for this assistance.

This provision will take effect with the first COBRA payment period – March 1st, for most employers. Form 941 reporting will also likely be effective for first quarter 2009.

3. Increase reporting to your higher-ups. You may have to more carefully track the wages of certain employee populations. Under the new law, businesses can claim a work opportunity tax credit equal to 40% of the first $6,000 wages paid to employees in nine particular groups (e.g., unemployed veterans, “disconnected” youth between the ages of 16 and 25 who are not in school, etc.).

4. Change the amount of tax-free transit benefits. Under the new law, employers can offer employees $230 a month, tax free, in parking and transit benefits for 2009. Previously, there were different dollar amounts allowed for each benefit.

5. Process more Forms W-5. In 2009 and 2010, the stimulus package increases the Earned Income Tax Credit for working families with three or more children to 45% of the family’s first $12,570 of earned income. The bill also increases the start point of the phase-out for married couples filing jointly by $1,880. As a result of these changes, more workers may submit Forms W-5 to receive the credit. Look for revised Advance Earned Income Tax Credit tables in Publication 15, Circular E.

6. Process more Forms W-4. Other employees may need to fill out a new Form W-4 to adjust their withholding in light of changes to federal income tax withholding (e.g., the ATM patch) and other tax credits (e.g., first-time home buyer credit). Watch for revised withholding tables and additional guidance.