Federal Law The American Recovery and Reinvestment Act of 2009, enacted February 17, 2009, provides for a 65% reduction in the premium otherwise payable by certain involuntarily terminated individuals and their families who elect COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) continuation health coverage.
An assistance eligible individual is generally an individual who was involuntarily terminated during the period from September 1, 2008, through December 31, 2009. The premium reduction applies for up to nine months.
The amount of any premium reduction is excluded from an individual's gross income. If the premium reduction is provided and the individual's modified adjusted gross income for the tax year exceeds $145,000 ($290,000 for married filing jointly), the amount of the premium reduction is recaptured as an increase in the individual's federal income tax liability. The recapture is phased in for individuals with modified adjusted gross income in excess of $125,000 ($250,000 for married filing jointly).
The employer is reimbursed for the remaining 65% of the premium through a credit against its federal payroll taxes.
Wisconsin Law A subtraction from income is generally allowed to self employed individuals, individuals who are employed, and individuals who have no employer and are not self employed, for all or a portion of the amount paid for medical care insurance for the individual, his or her spouse, and the individual's dependents.
For taxable years beginning in 2009, an individual who is neither employed nor self employed may subtract 66.7% of the amount paid for medical care insurance. An individual whose employer paid a portion of the cost of the insurance may subtract 10% of the amount paid for medical care insurance.
Effect of Cobra Assistance on the Wisconsin Subtraction for Medical Care Insurance
- An individual who has elected COBRA continuation health coverage and who is eligible for the 65% premium reduction pays 35% of the cost of the insurance. The 35% amount actually paid by the individual is the amount that the individual may use in the computation of the subtraction for medical care insurance.
- An individual who has elected COBRA continuation health coverage and is eligible for the 65% premium reduction may claim 66.7% of the amount paid for medical care insurance by a person who is neither employed nor self-employed. The reason the individual is eligible for the premium reduction is due to involuntary termination. An individual who is involuntarily terminated does not have an employer. As such the individual is eligible for the subtraction for 66.7% of the amount paid for the insurance, rather than 10% which is allowable to a person whose employer paid a portion of the cost of the insurance.
- When an individual is required to recapture the premium reduction, the amount of the recapture is considered an amount paid for medical care insurance and may be claimed as a subtraction for the year of the recapture.
An individual was involuntarily terminated in July of 2009. The person elected COBRA insurance coverage and qualified for the COBRA premium reduction. The cost of the insurance was $1,000 a month. For three months, the individual paid $350 a month for the insurance and the COBRA premium reduction was $650 a month. The individual was then employed by another company.
For the period during which the individual was unemployed, the amount paid by the individual for medical care insurance was $1,050 ($350 x 3). Assuming all qualifications are met, the individual may claim a subtraction for $700.35 ($1,050 x .667 = $700.35) as an individual who was neither employed nor self employed.
The facts are the same as in Example 1. However, as a result of the new employment, the individual had an increase in income to the extent that the entire premium reduction had to be recaptured. The individual added $1,950 ($650 x 3) to his/her 2009 federal tax liability. The recapture amount was paid with the 2009 federal income tax return due April 15, 2010.
The recapture amount is considered an amount paid for medical care insurance. The $1,950 may be used in computing the subtraction for medical care insurance on the 2010 Wisconsin income tax return.
September 22, 2009