- 3,384
Does COBRA Stimulus Apply to Small Business Who Drop Coverage?
- Thread starter dgoldenz
- Start date
- 9,744
My understanding is that they don't have to "front" anything. I thought you got a credit against your payroll tax deposits?
- Thread starter
- #13
I'm not sure - this is the first time I've run into a situation where it may be usable. This still begs the question....what if the employer terminates the group plan altogether? Would the 65% apply to HIPAA policies for 9 months, or are they still screwed?
G
Guest
Guest
Aren't payroll taxes done quarterly? That's 3 months of cash the small biz has to come up with before they can offset it via tax credit? Or do I not understand it correctly?
- 3,384
The Virginia mini-COBRA program for groups 2-19 is brand new and will be enacted in line with the susdidy and ARRA. Prior to today, Virginia had NO mini-COBRA state continuation plan so I am curious if it is currently in effect or goes into effect in the near future. From what I have read online, it is currently in effect and brand new.
As to you question, dgoldenz, unless a state has some very strange rules, HIPAA is considered individual coverage, not group coverage, and to be eligible there must be an exhaustion of group benefits (no further possible continuation). Since HIPAA is not a group plan and not part of an employer-sponsored program, at least in CA it would never be eligible for any subsidy.
As to Al and Paul, I agree with Al here that the subsidy does create an possible incentive to drop group coverage. 65% of actual premium is real, a tax credit against payroll taxes is also real, but will likely never net out.
Think about it this way. If your family gets a $5000 tax credit for something, how much do your REALLY get back on your taxes? It's never equal, it just drops your AGI down some and you end up getting like $250 back in real money. The same will happen to employers. They will take the payroll tax credit and get a fraction of it back in real dollars.
As to you question, dgoldenz, unless a state has some very strange rules, HIPAA is considered individual coverage, not group coverage, and to be eligible there must be an exhaustion of group benefits (no further possible continuation). Since HIPAA is not a group plan and not part of an employer-sponsored program, at least in CA it would never be eligible for any subsidy.
As to Al and Paul, I agree with Al here that the subsidy does create an possible incentive to drop group coverage. 65% of actual premium is real, a tax credit against payroll taxes is also real, but will likely never net out.
Think about it this way. If your family gets a $5000 tax credit for something, how much do your REALLY get back on your taxes? It's never equal, it just drops your AGI down some and you end up getting like $250 back in real money. The same will happen to employers. They will take the payroll tax credit and get a fraction of it back in real dollars.
- Thread starter
- #16
G
Guest
Guest
So how is this going to work?
Let's say that you have a $10,000 payroll. Lets say payroll taxes are 10%. In this case you pay $1,000 in taxes. That's simple.
Now let's say you also had to pay $1,000 for COBRA. If we use that as a credit against your payroll you have a basis of $10,000 - $1000 = $9,000. You pay $900 in taxes. So you are still out $900 on the COBRA: $1,000 minus the $100 you saved via the credit. This is how a 125 POP plan would work.
But that just can't be right. The government will have to give it back in real dollars... meaning that if you paid $1000 in COBRA AND you have a $1000 payroll tax, they would cancel themselves out and you are in effect getting your COBRA expenditure back by not paying the payroll tax you normally would have.
I could be wrong but I doubt they will use the COBRA expenditure as a reduction of tax basis but instead have it as an after-computation credit (against actual tax owed.)
Still, I'll bet some companies will not be able to "front" the money for the COBRA and will just cancel their plan.
Al
Not really.
This is a tax credit, not a credit against income.
Tax credits are a dollar for dollar credit against taxes owed.
The employer does in fact "front" the money and then apply that advance against future payroll taxes due. Payroll taxes are indeed filed and paid quarterly. So an employer can conceivably make COBRA payments for April, May & June but will have to wait until July to get the credit.
This assumes the employer has the cash flow to front the money.
Say the employer had 50 employees, but had to lay off 20 due to business downturn. Say also the premium for a single employee is $300 and $1000 for a family. Assume the employer was paying 80% of the employee premium and 0% of dependent. Assume half the laid off employees had single coverage, the others had family coverage.
Prior to the lay off the employer was paying 80% of $300 x 20 = $4800. Assume all of the terminated employees (and their dependents) opt for COBRA. The new employer liability for up to 9 months after termination is 65% x $300 x 10 + 65% x $1000 x 10 = $8450.
This may or may not happen this way but it illustrates the point as to why employers may drop group insurance rather than shoulder the burden of paying for employees no longer working for that employer.
Do you think anyone in Washington thought this through?
- 9,744
Payroll returns may be done quarterly, but the taxes you withhold from employee's checks have to be deposit within like three days of the payroll...
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