Some Taxpayers May Owe Taxes if COBRA Subsidy Is Not Paid Back

April 7, 2011 | By: TaxCure Staff

tax-consequences-of-taxesThe Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 enabled workers previously covered under a group health plan to continue their benefits after an involuntary or voluntary job loss, a decrease in the number of working hours, and in other situations. Basically for eligible participants, COBRA extends group health insurance benefits to individuals and qualified family members should their benefits be reduced due to termination or reduced hours. The American Recovery and Reinvestment Act (with proceeding legislation extending provisions) allowed for a 65% reduction in the health insurance premiums for workers and their families if:

  • They were a qualified beneficiary (a person covered under a group health plan before termination), and they were involuntarily terminated between 9/1/2008 and 5/31/2010, or they involuntarily worked fewer hours during the previous time frame which was followed by a termination between 3/1/2010 and 6/1/2010.
  • They were eligible for COBRA coverage during the period after August 31, 2008, and elected coverage.

Who Pays/Paid For the Coverage?

Qualified individuals and family members receive continued group coverage under the COBRA plan. While this is generally cheaper than paying for private health care, the cost will be higher when compared to the amount spent while fully covered by the employer. When receiving health care benefits under COBRA, the employer pays 65% of the health insurance premium (reimbursed later by the Government via a credit on payroll taxes), while the affected worker pays 35%.

How Does COBRA Affect Taxes? Who Does It Affect?

It affects higher-income taxpayers who took advantage of the subsidy (taxpayers could waive this premium assistance right). There is a tax consequence in most cases if a taxpayer falls within the income thresholds set forth by the IRS. What this means is that taxpayers who have a modified adjusted gross income (MAGI) which exceeds $125k or $250k for couples filing jointly, but is lower than $145k or $290k respectively, will have to pay a percentage of the premium assistance back through increased income taxes. If the MAGI of an individual is more than $145,000 ($290k if married filing jointly), then they are responsible for paying back the entire subsidy or premium assistance amount. In other words, their income taxes are increased by the premium assistance amount. It is what the “Recapture of Cobra Premium Assistance for Higher-Income Taxpayers” means.

How Is the COBRA Premium Assistance Recapture Amount Calculated?

The IRS in Publication 502 provides a worksheet if the taxpayer is within the phase-out limits (again $125-145k for individuals and $250-290k for married couples filing jointly) to figure out what percentage of the premium assistance needs to be tacked on to their tax liabilities. If you are unsure of how much assistance you received in 2010, then contact your former employer. For taxpayers above the income thresholds, then no calculation needs to be done because it is the whole amount received in 2010.

Where Would the COBRA Recapture Amount Go On My Tax Return?

For taxpayers using a software program, it may not prompt them with questions to make sure they pay back any COBRA premium assistance owed. Many software programs though will allow a taxpayer to manually input information onto their tax return. In any event, the recapture amount must be identified on the dotted line space on line 60 as “COBRA” (with the amount) or on the dotted line 59 on a 1040NR. Make sure to add the recapture amount to the total of line 60 on your 1040 or line 59 (if using a 1040NR).

Taxpayers who have received health care benefits through a COBRA subsidy must determine if they owe a tax liability and how much before filing their tax return. For any month a taxpayer received a credit, they are not eligible for the Health Coverage Tax Credit (HCTC).  Anyone with questions regarding this issue can contact the IRS or a qualified tax professional to ensure the proper preparation of their tax return. Failure to account for COBRA subsidies may result in an audit and/or tax penalties added onto any tax liabilities which are not paid in full by the deadline.