New Employers’ COBRA Assistance May Be Taxable

Some employers want to help new hires with the cost of COBRA coverage when the employer’s health plan has a waiting period. While the intentions are good, the result may not be, if employers fail to take certain precautions as outlined in a recent IRS information letter

Information Letter 2006-0042 addressed concerns raised by John Shimkus (R-IL) about tax issues associated with employers paying COBRA premiums for their current employees. The general rule taken by IRS, of course, is that employer payments to employees are taxable and subject to FICA taxes. The exception is such payments are non-taxable if the employer:

• Obtains verification of the payment for health coverage before reimbursing the payments; or
• Makes the payment directly to the carrier.

Direct payments to carriers for health coverage could inadvertently create a separate ERISA health plan, which could trigger COBRA, HIPAA and other obligations. The safer approach is to verify, then reimburse. Employers are also cautioned against offering to make COBRA elections on behalf of their new hires. Such a practice could result in litigation, like the case decided earlier this year in Lloyd v. Harrington Benefit Services.

A copy of the Information Letter is available at: www.irs.gov/pub/irs-wd/06-0042.pdf.

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