If you haven’t heard of the Internal Revenue Service’s “6720C” penalty, you will soon — and so will ex-employees who don’t follow the rules when accepting COBRA.
And it’s something you’ll want to be sure you mention to ex-employees who are taking COBRA.
In a conference call with reporters, the IRS just announced that — under the 6720C provision — terminated employees who accept a COBRA subsidy will end up paying a price if they don’t adhere to strict eligibility rules.
Not only will they lose their health insurance, but they’ll also face a penalty for 110% of the subsidy if they’re later offered insurance coverage from another company or plan, and fail to inform their former employer.
The penalty was designed to help recapture subsidy payments (and then some) from people who accept the help but don’t qualify, IRS’ Joe Tiberio said in the conference call.
To illustrate how it works:
- Let’s say former employee Fred gets laid off and accepts a COBRA subsidy valued at $5,000 to continue his insurance.
- Six months later, he’s offered coverage from a new employer but decides to keep his current policy intact because it’s less expensive.
- His former employer finds out about the insurance and contacts IRS.
- Fred not only can lose his insurance, he must pay $5,500 — $5,000 to repay the subsidy amount plus the $500 additional penalty.
While Tiberio admits IRS doesn’t expect to frequently apply this penalty, it’s good news for struggling companies still carrying a lot of former workers on their insurance plans. By letting terminated employees know about the potential penalty when they sign up for coverage, you’ll not only save your company’s resources, but maybe also help employees already down on their luck resist the temptation of insurance fraud.
Always an exception
It’s important to note that not everyone who accepts the subsidy but isn’t eligible will be penalized. For example, the subsidy phases out for individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. Taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for those filing joint returns, don’t qualify for the subsidy at all. In these cases, the subsidy amounts will be recaptured when the former employee files a personal tax return (Form 1040).
