IRS Form 7200: How to claim advanced payments for COBRA subsidies
Form 7200 allows employers to recoup COBRA overpayments of the cost of the premium subsidies exceed the Medicare payroll tax liability.
The American Rescue Plan Act of 2021 (ARPA), referred to as the third COVID stimulus package, took effect in March and extends support to employees through new COBRA premium credits. Assistance eligible individuals (AEIs) are entitled to 100% premium assistance under COBRA for a six-month period beginning April 1, 2021.
Related: IRS posts guidance for temporary COBRA premium subsidy program
The premium subsidy brings new notification and reporting requirements for HR professionals, as well as changes in claiming advanced payment of employer tax credits due to the COVID-19 pandemic. The IRS has provided guidance to employers to help claim the advanced payments. Here’s a look at what employers need to know to claim advanced payments for the COBRA premium subsidies.
Claiming advanced payments for tax credits
Under the new COBRA premium subsidies, employers front the full cost of the premium, plus administrative fees, and receive reimbursement in the form of a Medicare payroll tax credit by filing Form 941. In instances where the cost of the premium subsidies exceed the Medicare payroll tax liability, the employer can apply for a refund to recoup the overpayment through Form 7200. The intent is to ease the financial burden on businesses and generate much-needed cash flow.
The IRS created Form 7200 last year, allowing employers to receive advanced payment for tax credits that exceed the federal employment tax deposits for qualified sick and family leave wages and/or the employee retention credit. The IRS issued an updated Form 7200 in May to reflect changes in the ARPA, including the COBRA premium subsidies. Form 7200 includes two new line items related to the COBRA premium subsidies. The first item (Line G) asks employers to provide the total number of individuals receiving COBRA premium assistance, while the second line item (Line 4) asks for the total financial amount of premium assistance provided during the quarter.
When calculating the number of individuals receiving COBRA assistance, the IRS says to count each AEI that received assistance as one individual. For example, regardless of whether the AEI is receiving coverage as a single adult or for a family of four, they should be counted as one individual on the line item. The IRS indicates that each individual should be counted only once per quarter. When calculating the total amount of assistance provided, business should report the cumulative totals for the quarter.
The IRS further instructs that penalties for failure to deposit the Medicare payroll tax will be waived if the failure was due in anticipation of the premium tax credit. Form 7200 may be filed after the end of the payroll period in which the premium employer, or premium payee, became entitled to the credit. Deposits can only be reduced during the current period of eligibility; they may not be reduced for periods of coverage that have yet begun. In cases where the premium payee is entitled to claim the credit, but does not have any employment tax liability, the premium payee should claim the credit using Form 941 for the relevant quarter.
Employers may request an advance at the end of the payroll period in which they become entitled to the credit if the anticipated credit exceeds the available reduction in deposits. The IRS stresses that employers should not include any amount that counted towards qualified wages for the employee retention credit or included as qualified health plan expenses allotted towards qualified sick leave and family leave wages.
What employers should do
Employers should work with their COBRA administrators to ensure compliance with the COBRA premium subsidy notifications and begin collecting the necessary data for Form 7200. ARPA provides an extended election period for COBRA coverage, allowing individuals who did not originally sign up for COBRA, or let their coverage lapse, take advantage of the premium subsidy. It’s expected that many individuals will elect COBRA coverage, so the premium subsidies fronted by employers could be significant.
As businesses begin to emerge from the pandemic and plan for a return to a “new normal,” it’s important to take advantage of all of the resources available to them. While the new notification and reporting requirements create added burden to already stressed workloads of HR professionals, this work isn’t done alone. HR professionals should work closely with their plan administrators and tax professionals, among others, to ensure compliance and ensure their business is maximizing available benefits. Doing so will best position their organization for future growth and success.
Lisa Allen is senior compliance consultant at Alera Group.
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