COBRA Premium Tax Treatment
COBRA lets a former employee keep employer group coverage after a qualifying event. The tax answer depends on who pays: employer-paid COBRA can be excluded from the former employee’s income, while what the individual pays is capped at a percentage of the plan cost.
How COBRA Premiums Are Capped and Who Qualifies
The Premium Cap
A plan may charge no more than 102 percent of the applicable premium for the period, or up to 150 percent for months after the 18th month of a disability extension (IRC §4980B(f)(2)(C)).
Who Is a Qualified Beneficiary
A covered employee, spouse or dependent child who was covered the day before a qualifying event, such as termination or reduced hours, can elect continuation coverage (IRC §4980B(g)).
How Long It Lasts
The standard period is 18 months for termination or reduced hours, and 36 months for other qualifying events such as divorce or death, with certain extensions.
The federal excise tax for failing COBRA is $100 per qualified beneficiary per day, with a cap of $200 per day for those affected by the same qualifying event. Employers with fewer than 20 employees are excluded from the federal tax (IRC §4980B(c), (d)).
Who Pays and How It Is Taxed
Employer-Paid COBRA
Publication 15-B says amounts an employer pays to maintain medical coverage under COBRA for a current or former employee are excluded from the employee’s income, whether paid directly or reimbursed, and whether the separation is permanent or temporary.
Employer Deduction
The employer’s cost is generally deductible as an ordinary business expense under Treas. Reg. §1.162-10. See Business Tax Deduction for Group Health Premiums.
Former Employee Pays
When the qualified beneficiary pays the premium, the cap in §4980B applies. Ask your CPA how the premium fits in the individual’s own return.
Severance Packages
If a severance agreement includes employer-paid COBRA premiums, the exclusion in Publication 15-B applies to amounts the employer pays.
COBRA and Owner Coverage
More-Than-2-Percent S Corporation Owners
They are not employees for the exclusion, so the premium follows the usual S corporation rules. See S Corporation Owners With More Than 2 Percent.
Partners and Sole Proprietors
Owners with no common-law employees may not have an employer group plan to continue. Their own coverage follows the self-employed health insurance rules. See Sole Proprietors and Partners and LLC Members.
COBRA Tax Questions
Can the employer pay COBRA for a laid-off employee tax-free?
Publication 15-B treats amounts an employer pays to maintain COBRA coverage for a current or former employee as excluded from income.
What is the most the plan can charge?
The plan may charge up to 102 percent of the applicable premium, or 150 percent for months after the 18th during a disability extension.
Does COBRA apply to every employer?
The federal excise tax excludes employers with fewer than 20 employees, and state continuation rules may apply to smaller groups. Ask your carrier or advisor.
Does the employer deduct the premium?
Generally yes, as an ordinary business expense.
Does COBRA apply when an owner leaves the business?
COBRA applies to the plan’s employees and their families. An owner’s own treatment depends on the entity type. See Tax Benefits of Group Health Insurance for Owners.
Where These Rules Come From
IRC §4980B · Publication 15-B · 26 CFR §1.162-10
CFH are licensed insurance brokers, not tax advisors. This page is general information, not tax advice, so confirm your situation with your CPA or tax advisor. Our clients also have access to CPAs and attorneys through the firm.
Related Guides
Related reading: Tax Benefits of Group Health Insurance for Owners · Business Owner Health Insurance Tax Guides · Employee Tax Exclusion for Employer-Paid Health Insurance · Adult Children, Domestic Partners and Imputed Income · S Corporation Owners With More Than 2 Percent · Business Tax Deduction for Group Health Premiums · COBRA Second Qualifying Event: Extending To 36 Months
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