COBRA Subsidy

Hello,

My employer has done quite a few layoffs this year and has offered those former employees COBRA subsidies as part of their severance agreement. My question is: if an employee is offered a COBRA Subsidy for a certain number of months, but does not actually elect COBRA, does that amount still need to be reported on their w2 for informational purposes? Or does it only need to be included if they elect COBRA?

I assume that if the former employee does not elect COBRA, they would not get paid or provided any type of subsidy.  If that is the case, then there would be no taxable income.  Also, even if the COBRA subsidy is provided, the subsidy may not have to be included in income.   Generally, when an employer pays COBRA premiums or subsidies directly to a terminated employee and does not control or verify that they actual use the payment for COBRA, the payment be includable as W2 wages.  However, if the employer pays the premium or subsidy directly to the carrier or requires the employee to provide proof for reimbursement premiums or subsidies for COBRA coverage that has actually been elected, the payment generally would not need to be included in W2 wages.

Agreed with Artie.  If it's a direct COBRA subsidy, it would generally be tax-free in the same manner as any employer-share of the health plan premium (active, retiree, or COBRA) under §106.  The former employee would receive it only if they timely elected COBRA.

If it's a taxable cash payment intended as a COBRA subsidy, in most cases the former employee receives it regardless of a COBRA election.  That cash payment would always be taxable.  The taxable approach is common for employers with self-insured plans to avoid §105(h) nondiscrimination issues.

• More details: https://www.newfront.com/blog/cobra-subsidies-reimbursement-2

Slide summary:

2025 Newfront COBRA for Employers Guide