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The remote worker during
COVID-
19: Tax nexus and the new normal

07.27.20

Read this if you are a business with employees working in states other than their primary work location.

The COVID-19 pandemic has forced many of us to leave our offices to work remotely. For many businesses, that means having employees working from home in another state. As telecommuting become much more prevalent, due to both the pandemic and technological advances, state income tax implications have come to the forefront for businesses that now have a remote workforce and employees that may be working in a state other than their primary work location. 

Bipartisan legislation known as the Remote and Mobile Worker Relief Act of 2020 (S.3995) was introduced in the US Senate on June 18, 2020 to address the state and local tax implications of a temporary or permanent remote workforce. The legislation addresses both income tax nexus for business owners and employer-employee payroll tax responsibilities for a remote workforce. Here are some highlights:

Business income tax responsibility

The legislation would provide a temporary income tax nexus exception for businesses with remote employees in other states due to COVID-19. The exception would relieve companies from having nexus for a covered period, provided they have no other economic connection to the state in question. The covered period begins the date employees began working remotely and ends on either December 31, 2020 or the date on which the employer allows 90% of its permanent workforce to return to their primary work location, whichever date comes first.

The temporary tax nexus exception is welcome news for many business owners and employers, as a recent survey by Bloomberg indicated that three dozen states would normally consider a remote employee as a nexus trigger. Additional nexus would certainly add further income tax compliance requirements and potentially additional tax liabilities, complications that no businesses need in this already challenging environment.

Employee and employer tax responsibility

The tax implications for telecommuting vary wildly from state to state and most have not addressed how current laws would be adjusted or enforced due to the current environment. For example, New York implements a “convenience of the employer” rule. So if an out-of-state business has an employee working from home in New York, whether or not those wages are subject to New York state income tax depends on the purpose for the telecommuting arrangement. 

New York’s policy is problematic in the current environment. Arguments could be made that the employee is working for home at their convenience, at the employer’s convenience, or due to a government mandate. It is unclear which circumstance would prevail and as of this writing, New York has not addressed how this rule would apply.

If enacted, the Remote and Mobile Worker Relief Act would restrict a state’s authority to tax wage income earned by employees for performing duties in other states. The legislation would create a 90-day threshold for determining nonresident income tax liability for calendar year 2020, enhancing a bill in the House which proposes a 30-day threshold.

The 90-day threshold applies specifically to instances where the employee work arrangement is different due to the COVID-19 pandemic. For future years, the bill would put in place a standardized 30-day bright-line test, making it easier for employees to know when they are liable for non-resident state income taxes and for employers to know which states they need to withhold payroll taxes. 

What do you need to do?

With or without legislation, the year-end income tax filings and information gathering will be very different for tax year 2020. It’s more important than ever for business owners to have proper record keeping on where their employees are working on a day-to-day basis. This information is crucial in determining potential tax exposure and identifying a strategy to mitigate it. The Remote and Mobile Worker Relief Act would provide needed guidance and restore some sense of tax compliance normalcy.

If you would like more information, or have a question about your specific situation, please contact your BerryDunn tax consultant. We’re here to help.
 

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Read this if you are a New Hampshire resident, or a business owner or manager with telecommuting employees (due to the COVID-19 pandemic).

In late January, the Supreme Court asked the Biden Administration for its views on a not-so-friendly neighborly dispute between the State of New Hampshire and the Commonwealth of Massachusetts. New Hampshire is famous amongst its neighboring states for its lack of sales tax and personal income tax. Because of the tax rules and other alluring features, thousands of employees commute daily from New Hampshire to Massachusetts. Overnight, like so many of us, those commuters were working at home and not crossing state boundaries.

As a result of the pandemic and stay-at-home orders, Massachusetts issued temporary and early guidance, directing employers to maintain the status quo. Keep withholding on your employees in the same manner that you were, even though they may not be physically coming into the state. New Hampshire was against this directive from day one, but the nail in the coffin was an extension of the guidance in October. Within days, New Hampshire filed suit in the Supreme Court.

New Hampshire’s position

In its brief, New Hampshire asserts that the Massachusetts regulations are unconstitutional—in violation of the both the Commerce and Due Process Clauses of the U.S. Constitution. Each clause has historically prohibited a state from taxing outside its borders and limits tax on non-residents. For Massachusetts employers to continue withholding on New Hampshire resident’s wage earnings, New Hampshire argues, Massachusetts is imposing a tax within New Hampshire, contrary to the Constitution. 

What makes the New Hampshire situation unique is that it does not impose an income tax on individuals, a “defining feature of its sovereignty”, the state argues. New Hampshire would say that its tax regime creates a competitive advantage in attracting new business and residents. Maine residents, subject to the same Massachusetts rules, would receive a corresponding tax credit on their Maine tax return, making them close to whole between the two states. Because there is no New Hampshire individual income tax, their residents are out of pocket for a tax that they wouldn’t be subject to, but for these regulations. 

Massachusetts’ position

Massachusetts' intention behind the temporary regulations was to maintain pre-pandemic status quo to avoid uncertainty for employees and additional compliance burden on employers. This would ensure employers would not be responsible for determining when an employee was working, for example, at their Lake Winnipesaukee camp for a few weeks, or their relative’s home in Rhode Island. 

Additionally, states like New York and Connecticut have long had “convenience of the employer” laws on the books which imposed New York tax on telecommuting non-residents. Additionally, Massachusetts provided that a parallel treatment will be given to resident employees with income tax liabilities in other states who have adopted similar sourcing rules, i.e., a Massachusetts resident working for a Maine employer.

Other voices

The U.S. Supreme Court has requested a brief from the Biden administration with no deadline given. It’s assumed, however, to be received in time for the court to makes its decision before the end of term in June. Since the original filing, the States of New Jersey, Connecticut, Hawaii, Iowa, and others have filed briefs, imploring the Court to hear the case due to similar circumstances in their states and the wide ranging precedent Massachusetts and others may be effectuating. Additionally, Pennsylvania and others have released their own status quo guidance, following Massachusetts.

What now?

Right now, it’s wait and see what the Supreme Court decides. For Massachusetts employers specifically, you should review current withholdings and ensure compliance with the temporary regulations. The regulations for non-resident wages and withholding are in effect until 90 days after the state of emergency has lifted. Given that that date keeps moving further away, the rules may still be in effect when the Supreme Court delivers their decision in June. For all employers, it’s important that you review the rules in each state of operation and confirm that the proper withholding is made. 

Unwinding from the pandemic is going to be a long road, regardless of what decision the Supreme Court makes. If New Hampshire prevails, it’ll be a long compliance burden for both employers and employees to unwind the withholding and receive refunds. If Massachusetts wins, employers that weren’t following the regulations will have a costly tax exposure to correct.  

If you have questions about your specific situation, please contact us. We’re here to help.

Article
New Hampshire v. Massachusetts: Sovereignty or status quo?

Read this if you are a construction company.

I am pleased to introduce 2020 Tax Planning Opportunities: CARES Act, published in conjunction with CICPAC (Construction Industry CPAs-Consultants Association) by a national group of tax professionals focused on the construction industry. BerryDunn is proud to be one of CICPAC’s 65 member firms across the US, and one of only two in New England.

Within the document you’ll find an abundance of useful insights on the following topics and more related to the Coronavirus Aid, Relief and Economic Security (CARES) Act:

  • Paycheck Protection Program (PPP) loans
  • Net operating losses and excess business loss limitations
  • Qualified Improvement Property (QIP)
  • Payroll cash flow opportunities and employer tax credits

Every business has been impacted by COVID-19 in some form. The CARES Act offers opportunities galore for virtually every business. Now, perhaps more than ever, it’s time to work closely with your BerryDunn tax professional to ensure recovery through this difficult time. 

Read the entire document

Article
2020 tax planning opportunities: CARES Act whitepaper available now

Editor’s note: read this if you are a Maine business owner or officer.

New state law aligns with federal rules for partnership audits

On June 18, 2019, the State of Maine enacted Legislative Document 1819, House Paper 1296, An Act to Harmonize State Income Tax Law and the Centralized Partnership Audit Rules of the Federal Internal Revenue Code of 1986

Just like it says, LD 1819 harmonizes Maine with updated federal rules for partnership audits by shifting state tax liability from individual partners to the partnership itself. It also establishes new rules for who can—and can’t—represent a partnership in audit proceedings, and what that representative’s powers are.

Classic tunes—The Tax Equity and Fiscal Responsibility Act of 1982

Until recently, the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) set federal standards for IRS audits of partnerships and those entities treated as partnerships for income tax purposes (LLCs, etc.). Those rules changed, however, following passage of the Bipartisan Budget Act of 2015 (BBA) and the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). Changes made by the BBA and PATH Act included:

  • Replacing the Tax Matters Partner (TMP) with a Partnership Representative (PR);
  • Generally establishing the partnership, and not individual partners, as liable for any imputed underpayment resulting from an audit, meaning current partners can be held responsible for the tax liabilities of past partners; and
  • Imputing tax on the net audit adjustments at the highest individual or corporate tax rates.

Unlike TEFRA, the BBA and PATH Act granted Partnership Representatives sole authority to act on behalf of a partnership for a given tax year. Individual partners, who previously held limited notification and participation rights, were now bound by their PR’s actions.

Fresh beats—new tax liability laws under LD 1819

LD 1819 echoes key provisions of the BBA and PATH Act by shifting state tax liability from individual partners to the partnership itself and replacing the Tax Matters Partner with a Partnership Representative.

Eligibility requirements for PRs are also less than those for TMPs. PRs need only demonstrate “substantial presence in the US” and don’t need to be a partner in the partnership, e.g., a CFO or other person involved in the business. Additionally, partnerships may have different PRs at the federal and state level, provided they establish reasonable qualifications and procedures for designating someone other than the partnership’s federal-level PR to be its state-level PR.

LD 1819 applies to Maine partnerships for tax years beginning on or after January 1, 2018. Any additional tax, penalties, and/or interest arising from audit are due no later than 180 days after the IRS’ final determination date, though some partnerships may be eligible for a 60-day extension. In addition, LD 1819 requires Maine partnerships to file a completed federal adjustments report.

Partnerships should review their partnership agreements in light of these changes to ensure the goals of the partnership and the individual partners are reflected in the case of an audit. 

Remix―Significant changes coming to the Maine Capital Investment Credit 

Passage of LD 1671 on July 2, 2019 will usher in a significant change to the Maine Capital Investment Credit, a popular credit which allows businesses to claim a tax credit for qualifying depreciable assets placed in service in Maine on which federal bonus depreciation is claimed on the taxpayer's federal income tax return. 

Effective for tax years beginning on or after January 1, 2020, the credit is reduced to a rate of 1.2%. This is a significant reduction in the current credit percentages, which are 9% and 7% for corporate and all other taxpayers, respectively. The change intends to provide fairness to companies conducting business in-state over out-of-state counterparts. Taxpayers continue to have the option to waive the credit and claim depreciation recapture in a future year for the portion of accelerated federal bonus depreciation disallowed by Maine in the year the asset is placed in service. 

As a result of this meaningful reduction in the credit, taxpayers who have historically claimed the credit will want to discuss with their tax advisors whether it makes sense to continue claiming the credit for 2020 and beyond.
 

Article
Maine tax law changes: Music to the ears, or not so much?

Proposed House bill brings state income tax standards to the digital age

On June 3, 2019, the US House of Representatives introduced H.R. 3063, also known as the Business Activity Tax Simplification Act of 2019, which seeks to modernize tax laws for the sale of personal property, and clarify physical presence standards for state income tax nexus as it applies to services and intangible goods. But before we can catch up on today, we need to go back in time—great Scott!

Fly your DeLorean back 60 years (you’ve got one, right?) and you’ll arrive at the signing of Public Law 86-272: the Interstate Income Act of 1959. Established in response to the Supreme Court’s ruling on Northwestern States Portland Cement Co. v. Minnesota, P.L. 86-272 allows a business to enter a state, or send representatives, for the purposes of soliciting orders for the sale of tangible personal property without being subject to a net income tax.

But now, in 2019, personal property is increasingly intangible—eBooks, computer software, electronic data and research, digital music, movies, and games, and the list goes on. To catch up, H.R. 3063 seeks to expand on 86-272’s protection and adds “all other forms of property, services, and other transactions” to that exemption. It also redefines business activities of independent contractors to include transactions for all forms of property, as well as events and gathering of information.

Under the proposed bill, taxpayers meet the standards for physical presence in a taxing jurisdiction, if they:

  1.  Are an individual physically located in or have employees located in a given state; 
  2. Use the services of an agent to establish or maintain a market in a given state, provided such agent does not perform the same services in the same state for any other person or taxpayer during the taxable year; or
  3. Lease or own tangible personal property or real property in a given state.

The proposed bill excludes a taxpayer from the above criteria who have presence in a state for less than 15 days, or whose presence is established in order to conduct “limited or transient business activity.”

In addition, H.R. 3063 also expands the definition of “net income tax” to include “other business activity taxes”. This would provide protection from tax in states such as Texas, Ohio and others that impose an alternate method of taxing the profits of businesses.

H.R. 3063, a measure that would only apply to state income and business activity tax, is in direct contrast to the recent overturn of Quill Corp. v. North Dakota, a sales and use tax standard. Quill required a physical presence but was overturned by the decision in South Dakota v. Wayfair, Inc. Since the Wayfair decision, dozens of states have passed legislation to impose their sales tax regime on out of state taxpayers without a physical presence in the state.

If enacted, the changes made via H.R. 3063 would apply to taxable periods beginning on or after January 1, 2020. For more information: https://www.congress.gov/bill/116th-congress/house-bill/3063/text?q=%7B%22search%22%3A%5B%22hr3063%22%5D%7D&r=1&s=2
 

Article
Back to the future: Business activity taxes!

Read this if your company uses QuickBooks Online.

QuickBooks Online offers numerous ways to help you track your sales, expenses, and profitability. If you’re using QuickBooks Online Plus or Advanced, you can create and assign Classes to transactions to differentiate between, for example, store departments or product lines. Some of the site’s reports are designed specifically for these tools, like sales by class and profit and loss by class. 
 
You can assign categories to products and services to gain insight into your sales and inventory. There’s a different set of categories that you’ll use when you record bills and expenses. These are important for reporting and tax purposes. You can also add a location field to sales transactions so you can track sales by stores, sales regions, or counties, for example.

What are tags and how do you use them?

Tags are fairly new to QuickBooks Online. They are customizable labels you can assign to transactions (invoices, expenses, and bills). They’re more flexible than the tools we’ve already mentioned—they allow you to track your money any way you want. They don’t affect your books, and they’re not included in the customization criteria for reports. But there are two reports specifically designed for them: profit and loss by tag group and transaction list by tag group.

Creating your own tags

Before you create a tag, you need to create a group. Groups consist of related tags that share a common theme. For example, say you do some event planning. You might have a group titled events. Individual events might read, for example, Grayson Wedding, Spring Art Show, and Hillman Conference.

To get started, click the gear icon in the upper right. Under lists, click tags to get to the tool’s home page. (You can also click on the transactions link in the toolbar, then click the tags tab.) Click new, then tag group. A vertical panel slides out from the right. Enter a name in the group name field. Click the down arrow to select a color, then click save. 

Enter your tags one by one in the fields labeled tag name. Click add after each one until your list is complete. Click the edit button to make any changes. When you’re finished, click done. The main tags page will open again, and you’ll see your new group under tags and tag groups. Repeat to add as many as you’d like, up to 300 tags.

Making the most of the tags in QuickBooks Online

 

You can add tags to any transaction that contains a field for them

Let’s look at how you’d use tags in an expense. Click the expenses link in the toolbar, then new transaction | expense in the upper right. Click the down arrow in the payee field in the upper left and select + add new. Enter Billy’s Bridal in the name field. Leave the type as vendor and click save. Back on the expense screen, select the payment account, payment date, and payment method for the expense (reference number is optional).

Directly below those fields, you’ll see the tags field. Click manage tags if you need to add or edit one; the right vertical pane you saw before will slide out. Otherwise, click in the field below tags. Your list of tags will drop down. Select Grayson Wedding to move it into the field. You can assign as many tags as you’d like to transactions, but you can only select one tag from each group. Finish the expense and save it. 

Go back to the tags home page, and you’ll see that there’s a link to one transaction in the events row. At the end of each row is the action column, where you can run a report, add a tag, and enter or delete a group. Your expense total appears in the money out (by tag) box above it. 

Tags are a great addition to the tools QuickBooks Online provides to help you track incoming and outgoing funds. If you’re not familiar with the others mentioned at the beginning of this column and want to learn how to explore them, let us know. We're here to help.

Article
Tag, you're it: Making the most out of QuickBooks Online tags

Read this if you are an employer with a defined contribution plan.

This article is the fourth in a series to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with Employee Retirement Income Security Act (ERISA) requirements. You can read the previous articles here.

One of the most common errors we identify during an audit of defined contribution plans is the definition of compensation outlined in the adoption agreement or plan document is not consistently or accurately applied by the plan sponsor. This can be a serious problem, as operational failures will require correction and those errors can become costly for plan sponsors. 

Calculation challenges and other common errors

It is important plan sponsors understand the options selected for the calculation of employee elective deferrals and employer non-elective and matching contributions into the plan. While calculating compensation sounds straightforward, it is often complicated by the fact that your adoption agreement or plan document may use different definitions of compensation for different purposes.

For example, the definition of compensation used to calculate deferrals could differ from the definition used for nondiscrimination testing and allocation purposes. Therefore, determining the correct amount of compensation requires a strong understanding of both your entity’s payroll structure and adoption agreement or plan document. Plan sponsors should work with both in-house personnel and plan administrators to ensure definitions of compensation are appropriately applied, and that any changes are quickly communicated to all involved.  

During an audit, we commonly identify pay types excluded from the definition of compensation in the adoption agreement or plan document that are incorrectly included in the compensation used in the calculation of employee deferrals and employer contributions. Taxable group term life insurance is a common example of compensation that is improperly included in the definition of compensation. Alternatively, we also identify codes for certain types of pay excluded from the calculation of employee deferrals and employer contributions that should be included based on the applicable definition of compensation. For example, retro pay, bonus payments, and manual checks are often incorrectly excluded in the definition of compensation.

Corrective actions

If errors are identified, we recommend that corrective actions including contributions, reallocation, or distributions are made in accordance with the Department of Labor regulations in a timely fashion.

If appropriate, the plan sponsor should consider amending the plan to align with the definition of plan compensation currently used in practice. We also recommend plan sponsors perform annual reviews of plan operations to ensure compliance and avoid the costs that can accompany non-compliance.

If you have questions about your specific situation, please contact our Employee Benefits consulting team. We’re here to help.

Article
Plan compensation and contributions: Common errors and solutions to fix them

Read this if you are a renewable energy developer, installer, or investor.

Renewable energy has what amounts to an 18-month opportunity to make major strides before the mid-term elections. During the mid-terms, all 435 seats in the United States House of Representatives and 34 of the 100 seats in the United States Senate will be contested. Thirty-nine state and territorial gubernatorial and numerous other state and local elections will also be contested. Until then, a slim majority in both the House of Representatives and the Senate looks to be favorable for the renewable energy sector. 

The Biden administration’s proposed American Jobs Plan would eliminate tax benefits for fossil fuel companies, increase the corporate income tax, and promote renewable energy investment and jobs. How does an increase in the corporate tax rate create opportunities for renewable energy? If corporations have more tax liability they’ll be more likely to invest in projects that provide investment tax credits.  

Of particular interest to the team at Berry Dunn is the proposed ten-year extension and phase down of an expanded direct-pay investment tax credit (ITC) and production tax credit (PTC) for clean energy generation and storage. While details are sparse, direct-pay sure sounds a lot like the very successful 1603 grant program that was part of the 2009 stimulus package. Direct-pay eliminates a lot of the inefficiencies and tax hoops of the flip structure now often deployed to monetize the ITC. This allows developers to benefit directly instead of having to bring in tax equity investors. The inclusion of storage is welcome as it is now a part of most renewable energy projects and is critical in overcoming the non-intermittent power arguments that the fossil fuel industry uses to differentiate themselves from renewable energy companies. 

While there is a lot of negotiation and arm wrestling ahead to turn some or all of this into law, we encourage our renewable energy clients to line up projects and employees to be ready to pounce as this opportunity could be around for a short period. Hopefully the focus on American jobs and manufacturing will give it staying power, but don’t underestimate the political power of the fossil fuel industry. Now is the time.

The American Jobs Plan Fact Sheet

Below are some of the highlights from the fact sheet that pertain to renewable energy and clean electricity. You can read the full fact sheet posted on The White House's website here

  • Reenergize America’s power infrastructure. As the recent Texas power outages demonstrated, our aging electric grid needs urgent modernization. A DOE study found that power outages cost the U.S. economy up to $70 billion annually. The President’s plan will create a more resilient grid, lower energy bills for middle class Americans, improve air quality and public health outcomes, and create good jobs, with a choice to join a union, on the path to achieving 100 percent carbon-free electricity by 2035. President Biden is calling on Congress to invest $100 billion to:
  • Build a more resilient electric transmission system. Through investments in the grid, we can move cheaper, cleaner electricity to where it is needed most. This starts with the creation of a targeted investment tax credit that incentivizes the buildout of at least 20 gigawatts of high-voltage capacity power lines and mobilizes tens of billions in private capital off the sidelines right away. In addition, President Biden’s plan will establish a new Grid Deployment Authority at the Department of Energy that allows for better leverage of existing rights-of-way—along roads and railways—and supports creative financing tools to spur additional high priority, high-voltage transmission lines. These efforts will create good-paying jobs for union laborers, line workers, and electricians, in addition to creating demand for American-made building materials and parts.
  • Spur jobs modernizing power generation and delivering clean electricity. President Biden is proposing a ten-year extension and phase down of an expanded direct-pay investment tax credit and production tax credit for clean energy generation and storage. These credits will be paired with strong labor standards to ensure the jobs created are good-quality jobs with a free and fair choice to join a union and bargain collectively. President Biden’s plan will mobilize private investment to modernize our power sector. It also will support state, local, and tribal governments choosing to accelerate this modernization through complementary policies—like clean energy block grants that can be used to support clean energy, worker empowerment, and environmental justice. 

    President Biden will establish an Energy Efficiency and Clean Electricity Standard (EECES) aimed at cutting electricity bills and electricity pollution, increasing competition in the market, incentivizing more efficient use of existing infrastructure, and continuing to leverage the carbon pollution-free energy provided by existing sources like nuclear and hydropower. All of this will be done while moving toward 100 percent carbon-pollution free power by 2035.
  • Build next generation industries in distressed communities. President Biden believes that the market-based shift toward clean energy presents enormous opportunities for the development of new markets and new industries. Jumpstart clean energy manufacturing through federal procurement. The federal government spends more than a half-a-trillion dollars buying goods and services each year. This incredible purchasing power can be used to drive innovation and clean energy production. The President is calling on Congress to enable the manufacture of electric vehicles, charging ports, electric heat pumps, and clean materials, as well as critical technologies like advanced nuclear reactors and fuel, here at home through a $46 billion investment in federal buying power, creating good-paying jobs and reinvigorating local economies, especially in rural areas.
  • Create good jobs electrifying vehicles. The President is proposing a $174 billion investment to win the EV market. His plan will enable automakers to spur domestic supply chains from raw materials to parts, retool factories to compete globally, and support American workers to make batteries and EVs. 
Article
Now is the time: Renewable energy opportunities before mid-term elections

Read this if you are an employer with employees on COBRA. There are tax credits available to you. 

The American Rescue Plan Act of 2021 (ARP) creates a requirement that employers treat the total payment for Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage due from certain eligible individuals as being “paid in full” for April 1 through September 30, 2021 (Subsidy Period). The eligible individuals with COBRA coverage will not receive the subsidy directly from the government; rather, they will have a premium holiday during which time the employer pays 100% of the applicable COBRA premium. The employer will be reimbursed in full through refundable payroll tax credits.

The ARP provisions do not apply to all COBRA-eligible individuals; eligibility is limited to employees who lost health care benefits due to an involuntary termination or reduction in hours. While the loss of coverage event can be linked to COVID-19, it is not required to be. A loss of coverage event could have occurred as far back as November 1, 2019, since the law requires an employer to offer a continuation of COBRA coverage for 18 months after an involuntary termination (18 months from November 1, 2019 is April 30, 2021). Eligible individuals who opted not to pay for COBRA coverage will be given another opportunity to elect the free coverage.

Employers and COBRA administrators should prepare to distribute new COBRA election and subsidy notices and to make operational changes soon after further guidance is released. Eligible individuals not already on COBRA will need to act quickly after receiving the notice to elect subsidized COBRA coverage. Failing to timely elect COBRA coverage could result in forfeiting this valuable benefit.

It is expected many people will rush to take advantage of this opportunity, which can provide up to six months of health insurance at no cost. However, employers should keep in mind that the subsidy is available only for certain limited situations.

Which employers are eligible for the new subsidy?

Employers subject to federal COBRA provisions or to a state program that provides comparable group health care continuation coverage are not allowed to charge eligible individuals for COBRA coverage during the Subsidy Period. The subsidy applies to workers in every industry, most tax-exempt employers (except churches who are exempt from COBRA) and union, governmental, and Indian tribal government workers. The federal COBRA provisions generally apply to all private-sector group health plans maintained by employers that had at least 20 employees on more than 50% of its typical business days in the previous calendar year. Both full- and part-time employees are counted to determine whether a plan is subject to federal COBRA coverage. Many states have “mini-COBRA” laws that apply to employers who have fewer than 20 employees. The subsidy is mandatory for all employer-sponsored group health plans (i.e., all employers must offer the subsidy, regardless of whether the plan is fully or partially insured, or self-insured).

During the Subsidy Period, generally, the federal government will reimburse COBRA costs to employers by allowing credits against employers' Medicare (not Social Security or income) taxes (but for union plans, the plan would receive the subsidy and for insured, state “mini-COBRA” plans, the insurer would receive the subsidy). Guidance is needed to clarify how the flow of funds for the subsidy would work. The full cost of COBRA continuation coverage (including up to a 2% administrative fee) at any coverage level (e.g., single, “single-plus-one”, or family coverage) for employees and former employees and their spouses and dependents is eligible for the subsidy via the payroll tax credit. The subsidy applies to health, prescription drug, dental and vision plans, but does not apply to health flexible spending accounts (FSAs), health savings accounts (HSAs), or long-term care plans (further guidance is needed to clarify the scope of the subsidy).  

Due to the fact that most individuals who elect COBRA group health care continuation coverage usually pay 100% of those premiums (and in many cases they must also pay up to a 2% administrative fee), the new subsidy via the employment tax credit keeps the free COBRA coverage at zero cost to the employer. While the employment tax credit is taxable income, it will be offset by the employer’s deductible payment of the healthcare premiums.

Impact on eligible individuals

An eligible individual with an existing or new COBRA election will be provided tax-free health care coverage (both the premium and any administrative charge) at no charge for their remaining COBRA period that overlaps with the Subsidy Period.   

The free COBRA provided during the Subsidy Period would be “affordable” coverage under the Affordable Care Act (ACA). But it is not clear how this “affordable” coverage affects an individual who has purchased coverage on the exchange before they had an offer of affordable coverage.

A recipient of the free health care coverage must notify the employer or plan administrator when they become eligible for Medicare or another group health plan—other than coverage under an excepted benefit, an FSA or a qualified small employer health reimbursement arrangement (QSEHRA). Individuals who fail to promptly give this notice could be subject to a $250 fine and other penalties.

Who is eligible?

Generally, individuals are eligible for free COBRA coverage if (1) they are involuntarily terminated or have a reduction in hours that qualifies them for federal or state COBRA coverage and (2) the Subsidy Period overlaps with their COBRA coverage period.

The new COBRA premium assistance is not available to the following individuals:

  • Employees who are terminated for gross misconduct.
  • Employees who voluntarily terminated their employment or who retired.
  • Individuals who are eligible for COBRA due to other reasons, like divorce, death, or loss of dependency status.
  • Individuals who are eligible for other group health care coverage (such as from a new employer) or Medicare.
  • Individuals who are beyond their normal COBRA coverage period connected to the original qualifying event (i.e., the employee’s involuntary termination or reduction in hours that caused a loss of group health plan coverage).
  • Domestic partners who are not federal income tax dependents of the employee.

What’s the coverage?

Generally, the COBRA coverage will be the same as the coverage elected just prior to the involuntary termination or reduction in hours. However, employers can (but are not required to) allow individuals who are eligible for premium assistance to change their coverage provided it does not result in an increased premium cost. Further guidance is needed regarding the scope of who can change to a lower cost health plan as a result of the new law.

Eligible individuals who lost health care coverage after October 31, 2019 but do not have COBRA coverage on April 1, 2021 due to nonelection or lapse of payment will have a new, 60-day opportunity to elect COBRA coverage. If timely elected, the COBRA covered period will begin on the date of the individual’s qualifying event, but it appears that no payment is due for months prior to April 2021 and no claims can be filed prior to April 1, 2021. For the months remaining in the COBRA period that coincide with April 1 through September 30, 2021, the employee makes no payment but will have claims paid in accordance with the plan’s provisions. To have continued coverage after September 30, 2021, the employee must make the payments required under the plan. If the individual finds this unaffordable, they can simply drop the coverage.

What notices are needed?

The federal government is expected to issue model required notices addressing the existence of the subsidy, the availability of the 60-day election period and advance notice of when the Subsidy Period will be ending. In the meantime, employers should prepare for the following new notice requirements.

  • Group health plans must modify their COBRA election notices for individuals who become eligible for federal or state COBRA during the Subsidy Period to notify them of the premium assistance (and, if applicable, the option to enroll in a lower priced plan).
  • By May 31, 2021, individuals who previously rejected (or terminated) COBRA coverage and to whom a new election period must be offered, must be notified of their new election period and the availability of the premium assistance. This essentially creates a special COBRA enrollment period for such individuals.
  • Between August 17 and September 15, 2021, group health plans must provide a notice to individuals receiving the premium assistance stating that the subsidy will expire on September 30, 2021, and that they may be eligible for COBRA coverage without the subsidy. But if the subsidy would end earlier for any individual, the plan must provide a notice that the subsidy is expiring no earlier than 45 days and no later than 15 days before the subsidy expiration date.

It is not clear how these required notices must be delivered (sending paper mail to former employees may be needed).

How does the subsidy work?

Individuals who are eligible for COBRA premium assistance do not receive a payment from the federal government, group health plan, employer, or insurer. Rather, their COBRA costs are waived during the Subsidy Period.

Employers that sponsor a fully insured plan would continue paying the full premium to the insurer for the assistance eligible participants. Employers that sponsor a self-insured plan would pay the claims incurred by the assistance eligible participants. In both cases, the employer would receive no payment from the eligible individual during the Subsidy Period but would instead recover its COBRA costs (102% of the COBRA premium) for the assistance-eligible individuals by claiming a refundable federal tax credit against the employer’s Medicare taxes.

The COBRA subsidy is prospective only and cannot begin before April 1, 2021.

Although the law does not require employers to pay for any COBRA coverage, some employers pay for some or all of COBRA coverage (for example, as part of a severance package). Such employers can cease those contributions during the Subsidy Period and the federal government will provide the subsidy for 6 months. And although the subsidy is tax-free to employees, employers who take the COBRA premium tax credit must increase their gross income by the amount of such credit for the taxable year which includes the last day of any calendar quarter with respect to which such credit is allowed.
 
Also, under a “no double dipping” rule, employers cannot take the COBRA premium tax credit for any amount which is taken into account as qualified wages for the employee retention credit (ERC) under the Coronavirus Aid, Relief, and Economic Security Act (CARES) and Consolidated Appropriations Act, 2021 (CAA), or as qualified health plan expenses for the Families First Coronavirus Response Act (FFCRA), as amended by CAA and ARP. Likewise, amounts attributable to the COBRA premium tax credit would not be eligible payroll costs under the Paycheck Protection Program (PPP).

Guidance from the Internal Revenue Service (IRS) is needed to clarify how exactly employers would claim the tax credit, but it appears that employers would claim the credit on their quarterly IRS Form 941 or in advance on IRS Form 7200 if the actual or estimated amount of the credit exceeds the employer's Medicare taxes for any calendar quarter. Further guidance is also needed regarding the mechanics of the subsidy for employers that have insured state COBRA coverage, since under Section 9501(b) of the ARP the tax credits reimbursements would go to the insurer, not the employer.

Other considerations

For past COVID-19 relief tax credits, such as the ERC and FFCRA, IRS guidance allowed employers to dip into withheld income and Social Security taxes as a source of claiming those refundable tax credits. But the IRS has not yet authorized such actions for the ARP COBRA subsidy tax credit. Social Security taxes may not be available as a source for the new COBRA tax credits, since the ARP was enacted under budget reconciliation rules which prohibit any changes to Social Security.

Employers are not allowed to voluntarily expand the group of people who are eligible for the special COBRA premium subsidy, because the federal government is paying the full COBRA premium for the designated class of assistance-eligible individuals.

We expect the IRS to issue FAQs on the new COBRA Medicare tax credits, similar to the FAQs that the IRS issued on the ERC and FFCRA payroll tax credits.

This new COBRA subsidy may be economically more valuable than using qualified health care expenses for the ERC, because ERC nets 70% on the dollar whereas the COBRA subsidy is 102% (premium plus administrative charge).

What should employers do now?

Employers should immediately identify all employees who lost group health plan coverage after October 31, 2019 due to an involuntary termination or reduction in hours, without regard to their COBRA elections, because such event would have entitled the individual to 18 months of COBRA coverage (i.e., through April 30, 2021). Guidance is needed on whether notices must be given to individuals in this group that declined COBRA due to eligibility in another employer’s plan or Medicare. Employers will need to notify individuals who have an unexpired COBRA period that premium assistance is available, and they have a right to reconsider their original COBRA election.  

Employers will also need to review and perhaps modify any existing, automatic processes that might otherwise terminate COBRA coverage when premiums are not received during the Subsidy Period.

Year-end reporting on health benefits should also be reviewed to ensure these increased COBRA participants receive the appropriate Form 1095-B or C for 2021.

Employers should develop a procedure to identify COBRA recipients who are eligible for the premium assistance and those who do not qualify (for example, employers will need to distinguish a voluntary quit from an involuntary termination of employment and whether the employee was fired for gross misconduct). For premium-assistance eligible individuals, employers must refund within 60 days any premiums paid during the Subsidy Period. Not all COBRA participants will qualify for the subsidy, so the plan administrator will still need to handle some premium payments from non-eligible individuals.

Vendor outreach

Many employers use outside service providers for their COBRA administration, so employers should reach out to their vendors as soon as possible to coordinate their response to the ARP changes to current COBRA rules, especially the special election period for certain assistance-eligible individuals.

Keep in mind that, separate from the ARP COBRA subsidy, many employees (and their family members) may currently have extended COBRA election rights due to COVID-19 deadline extensions. For example, ERISA Disaster Relief Notice 2021-1 issued on February 26, 2021, announced an individualized one-year deadline extension for COBRA elections, which begins on the date the clock for the particular deadline would have started running (i.e., the one-year extension is applied on a rolling basis to each deadline for each affected individual). But individuals electing retroactive COBRA coverage under those extended deadlines will generally have to pay the full COBRA premiums for such periods. Guidance is needed on how the deadline extension coordinates with the new COBRA subsidy.

Employers may recall that in February 2009, under the American Recovery and Reinvestment Act of 2009 (ARRA), the federal government subsidized 65% of COBRA premiums for certain individuals who were terminated or laid off between September 1, 2008 and March 31, 2010 due to the financial crisis linked to the bursting of the home mortgage lending bubble. The ARRA subsidy was extended through May 31, 2010, so perhaps with Democrats currently controlling both Congress and the White House, the ARP COBRA subsidy may be extended beyond September 30, 2021. Also, the ARRA may be a model for how the flow of funds will work for the ARP premium tax credits for insured state COBRA coverage.

If you have specific questions about your situation, please contact our Employee Benefits consulting team. We’re here to help. 

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