Payroll in Practice: 11.20.2023

Question: An employer reimbursed a former employee for COBRA payments. Since the individual is no longer an employee, are the payments taxable? If so, should the employer issue a Form 1099?

Answer: Reimbursement for COBRA payments are not taxable to the former employee and should not be reported on a Form 1099, Miscellaneous Information, or a Form W-2, Wage and Tax Statement. This is true regardless of whether the reimbursement is paid by the former employer or the employee’s current employer.

COBRA stands for the Consolidated Omnibus Budget Reconciliation Act of 1985, which established continuation of health care coverage for workers and their families who lose access to their employer-sponsored health care benefits. In general, COBRA requires employer sponsored group health plans to offer workers the right to choose to continue their group health plan for limited periods of time under specified circumstances. These include voluntary or involuntary job loss, reductions in hours worked, transitions between jobs, and other life events such as death or divorce.

COBRA generally applies to group health plans sponsored by employers with 20 or more employees in the prior year. To ease the compliance burden on employers, qualified individuals who elect COBRA coverage may be required to pay the entire premium for COBRA coverage up to 102% of the cost of the plan.

COBRA is a fringe benefit that falls within the Accident and Health Benefits category as discussed in IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits. Employer-provided accident and health benefits generally are exempt from income tax withholding and, except for certain payments to S corporation employees who are 2% shareholders, are also exempt from Social Security and Medicare taxes.

An accident or health plan is an arrangement that provides benefits to employees, their spouses, their dependents, and their children in the event of personal injury or sickness. Covered children generally must be under age 27 at the end of the tax year. A plan may be insured or noninsured and does not have to be in writing.

For purposes of the exclusion for accident and health benefits, The IRS defines the term “employee” broadly and includes current employees, former employees, certain leased employees, retired employees, and their widows and widowers.

Publication 15-B specifically states that the exclusion for accident and health benefits applies to amounts an employer pays to maintain medical coverage for a current or former employee under COBRA. The exclusion applies regardless of the length of employment, whether the employer pays the premiums directly or reimburses the former employee and whether the employee’s separation from service is permanent or temporary.

Federal regulations generally exclude employer contributions to an accident or health plan from the gross income of an employee.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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