IRS Releases Information for Employers to Claim COBRA Assistance Credit on Payroll Tax Form

Posted on February 26, 2009 by Michael Moore

On February 26, 2009, the Internal Revenue Service released detailed information that will help employers claim credit for the COBRA medical premiums they pay for their former employees.

Under the new law, eligible former employees, enrolled in their employer’s health plan at the time they lost their jobs, are required to pay only 35 percent of the cost of COBRA coverage.  Employers must treat the 35 percent payment by eligible former employees as full payment, but the employers are entitled to a credit for the other 65 percent of the COBRA cost on their payroll tax return.

  • Employers must maintain supporting documentation for the credit claimed. This includes:
  • Documentation of receipt of the employee’s 35 percent share of the premium.
  • In the case of insured plans: A copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier.
  • Declaration of the former employee’s involuntary termination.

The informational Release is IR-2009-15, includes an amended Form 941 and the Instructions,  together with a Q&A for Employers.  The Q&A makes the following notes on implementing and claiming the subsidy:

  • The Employer may provide the subsidy (65%) and take the take the credit on its employment tax return only after it has received the 35% premium payment from then intdividual.
  • The law became effective on the date of enactment, Feb. 17, 2009. However, under a transition rule, the regular premium amount may continue to be paid for up to two months after enactment (e.g., for March and April), and the subsidy can be provided retroactively.
  • An employer can reduce its tax deposits or claim the credit on its quarterly return.
  • An assistance-eligible individual can be any COBRA qualified beneficiary associated with the related covered employee, such as a dependent child of an employee, who is covered immediately prior to the qualifying event. The qualifying event for purposes of eligibility for the subsidy is involuntary termination of the covered employee’s employment that occurs during the period beginning Sept. 1, 2008, and ending Dec. 31, 2009. The individual must also be eligible for COBRA coverage, or similar state coverage, during this period.
  • Model notices implementing the law will be issued shortly apparently by the Department of Labor.
     

 

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WARN Act's Faltering Company Exception Clarified

Posted on September 2, 2008 by Michael Moore

Businesses face increasing uncertainty over the availability of financing because of the economic downturn and tightening of credit markets.   Financially troubled businesses may need to curtail operations through a plant closing or mass layoff if additional financing is not received. Employers need to manage compliance with the Worker Adjustment and Retraining Notification Act (WARN) as their negotiations with financial markets unfold.

WARN provides for an exception to the sixty-day notice requirement when a “faltering company” is confronted with a possible plant closing; however, the exception is a narrow one that requires careful employer analysis. An employer claiming the exception must prove: (1) it is actively seeking capital at the time the 60-day notice would have been required; (2) it had a realistic opportunity to obtain the financing sought; (3) the financing would have been sufficient, if obtained, to enable the employer to avoid or postpone the shutdown; and (4) the employer reasonably and in food faith believed that sending the 60-day notice would have precluded it form obtaining the financing.

A recent court decision in In Re: APA Transport Corp. Consolidated Litigation discussed several critical elements of the faltering company exception including the following:

Consolidation of related companies into a “Single Employer”

Related companies may be treated as a “single employer” for determining whether the employer meets the 100-employee coverage threshold for WARN and to assess whether the company is faltering. The faltering company exception is not available if a related has adequate capital to continue operations and it is treated as a single employer. Five factors are used to determine if related companies are liable under WARN on “single employer” grounds:

  • Common ownership
  • Common directors and/or officers
  • De facto exercise of control, i.e., one company was the decision maker for the employment practice that gave rise to the litigation
  • Unity of personnel policies emanating from a single source
  • Dependency of operations, i.e., interchange of employees or equipment or commingling of finances.

Timing and Proof of “Actively Seeking Additional Financing” 

 

According to the court, WARN requires that steps to “actively seek financing” be taken “at the time that the 60-day notice would have been required.” Therefore, the actions of the company occurring during the period of time, which is sixty days before the plant closing, must demonstrate active pursuit of financing. The court rejected APA’s argument that a company may qualify for the faltering company defense irrespective of whether it was actively seeking capital at the time the notice was required, so long as it did no foresee the shutdown that occurred sixty days later. Employers must demonstrate the timing and steps it took to secure financing.  The court’s view of the exception places a degree of omniscience on employers to predict exactly when the company will shut down.

 

Incidentally, the faltering company exception does not apply to mass layoffs under WARN.

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