The American Rescue Plan Act (ARPA) allows employers and insurers to claim a tax credit for the COBRA premium subsidies they pay on behalf of assistance eligible individuals (AEIs). The credit is credited against the Medicare hospital insurance tax and is fully refundable, which means that the employer or insurer claiming the credit can receive a payment from the IRS if the amount of the credit exceeds their Medicare hospital insurance tax obligations (including where they do not owe any Medicare hospital insurance tax).
Remember that employers are eligible for the tax credit if they maintain self-insured plans or their fully insured plans are subject to federal COBRA. Insurers can claim the credit if they cover plans that are subject only to state healthcare continuation laws. Note that in the event of multi-employer plans, the plan itself can claim the credit.
The employer or insurer can claim the credit for periods covered by the premium subsidy, and they are entitled to the credit as of the date the AEI elects COBRA coverage. For instance, if an AEI elects COBRA coverage on July 1, and that coverage is retroactive to April 1 (the first day of the ARPA premium subsidy period), then the employer or insurer can claim the credit for the period beginning on April 1 through July 1. If the AEI continues the COBRA coverage through July, then the employer or insurer can claim a credit for that period too.
The employer or insurer claims the credit on its quarterly employment tax return, Form 941. They may reduce deposits of federal employment taxes (including amounts withheld from employees) up to the amount of the anticipated tax credit and then report the tax credit claimed, and the number of individuals receiving the tax credit for that quarter, on the Form 941. Since the return covers the months of April, May and June, the next filing is due on July 31, 2021.
Employers and insurers can obtain an advance on the tax credit by filing Form 7200 (which can only be filed via fax); however, they are still responsible for claiming the credit on Form 941.
Form 941 »
Instructions for Form 941 »
Form 7200 »
Instructions for Form 7200 »