How to Fill Out Form 941 to Receive COBRA Subsidy Tax Credits

Employers with team members who have been laid off or furloughed may qualify for COBRA subsidies that cover the full cost of coverage through the end of September 2021. Find out how employers can use Form 941 to request payment from the federal government for these COBRA costs. 

What is the COBRA Subsidy?

With the March 2021 passage of ARPA, the Biden administration stepped in to subsidize the full cost of COBRA coverage through the end of September 2021.

Employees who involuntarily lost their health insurance benefits any time after Nov. 1, 2019, may be eligible for up to six months of free COBRA from April 1, 2021, through Sept. 30, 2021.

Which Employees Are Eligible to Receive the COBRA Subsidy?

The COBRA subsidy only applies to certain employees, which can be divided into three categories of people. They include: 

1. Current: Anyone currently on COBRA.
2. Future: Employees who become eligible for COBRA between April 1, 2021, and Sept. 30, 2021.
3. Past: Anyone who became eligible for COBRA after Nov. 1, 2019, but waived coverage immediately or before their COBRA eligibility period (usually 18 months) ended.

Likewise, employees who are initially eligible for the subsidy will lose their eligibility under the following circumstances

1. They become eligible for health insurance under a new plan
2. They reach the date in which their COBRA coverage normally expires e.g. their 18 months ends in July

Employers and employees alike should note that the subsidy only covers the cost of the health insurance premiums, not copays, deductibles, or co-insurance, according to an article in Forbes. Still, as The National Law Review points out, the new legislation "provides free COBRA coverage to Assistance Eligible Individuals for the Subsidy Period" and the subsidy itself is non-taxable for eligible individuals.

What is Form 941?

Form 941 is an employer’s quarterly federal tax return. It indicates to the IRS how much income tax, Social Security tax, and Medicare tax that an employer withheld from its employees’ paychecks in the previous quarter. 

Download a blank Form 941 here, which was revised in June 2021 to reflect these adjustments.

How Employers Can Use Form 941 to Reimburse COBRA Subsidy Payments

Employers that comply with COBRA subsidy rules and notice requirements qualify for reimbursement by the government through the aforementioned payroll tax credit. 

Here’s how: 

1. An Employee Becomes Eligible for COBRA: Usually as a result of termination or a reduction in hours. 
2. The Employer Notifies All Qualifying Employees About the COBRA Subsidy: This must be done beginning April 1, 2021, within 60 days of the employee’s qualifying event. 
3. The Employee Elects COBRA Benefits: This needs to happen within 63 days of becoming eligible. In most cases, the qualifying employee won’t need to make any payments whatsoever, as the employer will cover the COBRA premium costs on behalf of qualifying employees who elect coverage. 
4. The Employer Pays the Carrier: This covers the cost of the healthcare premium. 
5. The Government Reimburses the Employer: This repayment arrives via a payroll tax credit, but only when the organization files Form 941 on its quarterly taxes.

Next up is actually filling out Form 941. Employers will notice that only three lines on Form 941 apply to the COBRA subsidy. They include: 

1. Line 11e – Nonrefundable Portion of COBRA Premium Assistance Credit: In this line, employers will put the total amount of COBRA subsidy dollars that don’t exceed their tax obligations for Medicare. In other words, each quarter, employers are required to pay Medicare taxes to the federal government. These taxes are exempt from the COBRA subsidy and aren’t eligible to be refunded. 
2. Line 11f – Number of Individuals Provided COBRA Premium Assistance: In this line, employers will put the total number of assistance eligible individuals (AEIs) who received COBRA subsidy assistance in the previous quarter. Note: When calculating AEIs, employers should treat a plan as one individual; the number of people per coverage plan (i.e. if an employee and their spouse are covered) should not be factored into the final sum provided in Line 11f. 
3. Line 13f – Refundable Portion of COBRA Premium Assistance Credit: In this line, employers will put the total amount of refundable COBRA subsidy dollars paid in that quarter that are eligible for credit (as long as the credit is larger than the employer’s Medicare tax obligations). This should include the cost of the COBRA coverage minus the Medicare taxes the employer owes to the government. 

Note: The best way to confirm what an employer has paid in subsidized COBRA premiums is to review bills or payments made to the insurance carrier(s) during the applicable quarter. 

To learn more about filling out Form 941, refer to the IRS’s full set of instructions.

How and Why Employers Can Claim COBRA Tax Credits in Advance

Not every employer will have the cash on hand to pay out legally required tax credits or subsidies. Thankfully, the government offers a solution: Form 7200. This document includes the option to request tax credits for the following payments: 

1. Qualified sick and family leave wages
2. The employee retention credit
3. The COBRA premium assistance credit subsidy