COBRA Payments for New Hire

[Guest BetweenTheHedge]

A new hire has COBRA coverage through his old employer, which he is maintaining until he is eligible to enroll in his new employer's health & benefits plan. The new employer has agreed to pay his COBRA premiums pending his eligibility to participate in the current employer's plans. Must the new employer treat the COBRA payments as taxable wages? Is there any authority to exclude the COBRA payments from the employee's compensation under the established exclusion rubric for employee benefits coverage?

[Guest parrot87]

Yes, if its in YOUR the premium only plan document. You would treat this as reimbursement of individual insurance premiums. Regulations regarding who is then the Cobra admin is fuzzy and ambiguous. But this is allowed.

[GBurns]

Maybe I am missing something. A "premium only plan document" relates to a section 125 cafeteria plan, What does a cafeteria plan have to do with the situation in the OP ?

As I read the OP the employer simply wants to pay the COBRA premium for the employee in the samme way that the employer pays the other health insurance premiums for the other employees and wondering if the premium payments qualify for income exclusion under 106. The only difference is the insurance carrier.

I also see no mention in the OP of the employer reimbursing the employee.

BetweenTheHedge, Did I misunderstand your scenario ?

[Guest parrot87]

Pardon, I misunderstood. The old employer could reimburse IF its part of their plan. Although I haven't seen many plans that allow for that situation as "eligible" to participate in the plan.

One way to do this is a check cut to the employee from the old employer (as wages or severance or whatever, still taxed), then my above response of allowing the employee to pay via pre-tax is applicable. refer to IRS guidelines for procedures.

[J Simmons]

The COBRA premiums are premiums for health coverage. COBRA simply implies that the coverage with the old ER is being continued by the EE per his COBRA rights. But the payments are yet premiums for health coverage. Since the new ER is paying them to pay for health coverage for its EE, it ought to qualify for exclusion from the EE's taxable income under IRC § 106(a).

For mechanics of how to make the payments, you ought to look at Rev Rul 61-146.

You might want to get an opinion as to whether the new ER reimbursing the EE for paying the COBRA premiums is an ERISA employee welfare benefit plan. If so, then there will be ERISA plan document requirements involved.

[Guest BetweenTheHedge]

Thanks for everyone's help. I have referred the payroll administrator to Rev. Rul. 61-146.