Some people, however, might not be eligible for subsidized health insurance due to their income. In this article I'll discuss:
- income limitations for the COBRA premium assistance
- whether your COBRA premium assistance is taxable and if so, how much
- how to calculate any recapture or pay back of the COBRA premium assistance you received,
- how to report this on your federal income tax return,
- relevant laws, tax worksheets, and IRS resources.
Income Limitations on COBRA Premium AssistanceI want to make clear that paying back the US Treasury for COBRA subsidies is a look-back procedure. At the time of being laid off or having their hours reduced, people may have qualified for continued health insurance coverage under COBRA. Everyone who qualified for continuation of their insurance benefits were allowed to pay only 35% of their premiums. People who knew for a fact that their income would be too high to qualify for the subsidy might have opted out of subsidy and elected to pay 100% of their premiums.
Many people, however, would not know until later whether their income would be large enough to be ineligible for the COBRA premium assistance. Looking back at the previous year, it may become clear that a person's income was too high. Perhaps because they found a new job or had other sources of income that were not anticipated. In such cases, individuals may find a need to pay back or recapture the COBRA premium assistance they received on their federal income tax return.
For unmarried taxpayers and for married persons filing separately, if their "modified adjusted gross income" is below $125,000 for the year, then any COBRA premium assistance they received is entirely tax-free and no recapture is required. If their modified adjusted gross income is between $125,000 and under $145,000 for the year, then part of their COBRA premium assistance during that same year will need to be paid back to the Treasury. If their modified adjusted gross income is $145,000 or more, then all of the COBRA subsidy will need to be paid back.
For married taxpayers filing a joint return, the income limitations are double the above amounts. Below $250,000 of income, no COBRA recapture is required. Between $250,000 and under $290,000, some of the COBRA subsidy must be repaid. At income of $290,000 or more, all of the COBRA subsidy must be repaid.
Modified adjusted gross income for the purpose of calculating the recapture of COBRA premium assistance is defined as the adjusted gross income shown on your tax return for the year with the following tax exclusions added back: foreign earned income and income from Guam, American Samoa, Northern Mariana Islands, and Puerto Rico.
Calculating recapture or pay back of the COBRA premium assistanceThe Internal Revenue Manual provides the most succinct explanation of how the recapture amount is calculated: "To determine the amount of additional tax, divide the amount of modified adjusted gross income over $125,000 by $20,000, or the amount over $250,000 by $40,000 for joint filers. The percentage calculated, multiplied by the amount of premium assistance, is the amount required to be repaid. Worksheet F in Pub 502 can also be used." IRM 22.214.171.124.18.1.
How much was your COBRA premium assistance? Well, you can find this out from your former employer or you can easily calculate it yourself. Since the COBRA insurance premiums you paid were subsidized, you paid only 35% of the total amount. The federal government paid the other 65%. So take the amount you paid and divide by 0.35 to find the amount that equals 100% of your insurance premiums, and then multiply by 0.65 to find the amount that was subsidized by the federal government.
From there you can calculate your recapture amount. Basically the amount that is recaptured is a ratio of your income in relation to the phaseout range, and that ratio is then multiplied by the amount of the COBRA premium assistance to arrive at the amount that must be paid back to the federal government. You can utilize "Worksheet F" found on page 24 of IRS Publication 502 to calculate the recapture amount.
Reporting COBRA Recapture on Your Tax ReturnAfter you've calculated the amount of your COBRA premium assistance that needs to be paid back, you report that amount directly on your Form 1040. If you are preparing your return by hand, in the dotted line next to Line 60 write in COBRA and the recapture amount, and add this amount to your total tax that is reported on Line 60.
When to Report COBRA RecaptureCOBRA premium assistance was available for up to nine months if a person became unemployed or underemployed between September 1, 2008, and March 31, 2010. Accordingly, COBRA recapture could apply for tax years 2008, 2009, 2010, and 2011.
Relevant Laws, Tax Worksheets, and IRS ResourcesThe recapture provision for higher-income persons was legislated as part of the American Recovery and Reinvestment Act, specifically in section 3001(b). You can find the full text of that law beginning on page 351 of the pdf file for HR 1.
The IRS explains COBRA premium assistance and the recapture provision and provides Worksheet F for calculating the recapture amount in Publication 502, page 24.