COBRA vs SEHI Deduction

[FDNY]

I have a self employed client whose spouse was primary insured from his job.  He was terminated and offered COBRA but clients declined and went out on their own.  Would she, being SE be eligible to claim SEHI deduction even though insurance was offered through COBRA?   I know if employer insurance was declined she would not be able to claim deduction but not sure if COBRA.

I've been going crazy trying to research the answer and I come up with nothing, you're my last hope.

Thanks,

Bill

 

[Gail in Virginia]

I did not realize that if you were self-employed there was any requirement to take your spouse's employer coverage.  I know that you cannot take subsidized coverage under ACA if you declined employer coverage, but I didn't think you were not allowed a SEHI deduction just because your spouse declined employer coverage.  Do you have a cite for that?

[Elrod]

Bill, I would believe that the client is eligible to claim  SEHI deduction.

Publication 535 worksheet says....
 Don’t include the following. • Amounts for any month you were eligible to participate in a health plan subsidized by your or
your spouse’s employer or the employer of either your dependent or your child who was
under the age of 27.

Cobra is not an employer subsidized plan.  Cobra is paid for by the taxpayer,  just as if they went out and bought their own plan.

My wife and I had to go on Cobra is the past. I had to contact the insurance co.... Set the plan choice....  And send a check for the premiums.

It was not paid/subsidized by Mary's old employer.  We paid it.  And I took the SEHI deduction.

Hope this helps...   https://www.irs.gov/forms-pubs/about-publication-535

[jklcpa]

I don't have an answer but will give you two conflicting points of view.  Sorry it may not be much help except to say that there isn't clear guidance, and that is the reason you aren't finding a definitive answer.  There are two issues: first, is it continuation and participation in a group plan established in the name of the former  employer, and second, is it subsidized.

I could certainly be wrong, but I believe COBRA coverage is a continuation of coverage that is considered to be group coverage under the plan established in the name of the former employer.  That's going to prelude taking the SEHI deduction for COBRA premiums because it isn't established in the name of the individual or S.E. business.  Take a look at the COBRA information found on  the DOL site here: https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/cobra-continuation-health-coverage-consumer.pdf

One of the reasons I say it is still continuation of a group plan of the former employer is that the COBRA coverage can end if the former employer ceases to exist, chooses to discontinue offering coverage and terminates the plan, or if the # of employees drops below threshold and employer is no longer required to offer COBRA coverage. 

Also, in the past I've seen the invoices received by corporate clients with former employees that chose COBRA coverage, and I recall seeing the former employees' names on those invoices but with no premium charge because those were being paid by the employees separate from the company.  Also, keep in mind that the employer could choose to pay some or all of COBRA premiums as part of their overall benefit package, and I don't think that would be allowed if the former employees' COBRA premiums were considered a separate individual plan. Again, just my unresearched opinion.

_____________________________

With all of ^^ that being said, Lasser says that it's an unclear position.  Here's a Q & A from last year that also isn't much help except to say that there's no official guidance on whether or not the COBRA premiums are still considered an employer subsidized plan. Here's the C&P from Lasser's site:

Quote

Q -My wife was laid off from a job and took COBRA. Now she’s become an independent contractor filing Schedule C to report her income. Can she deduct the COBRA premiums that she pays for as an adjustment to gross income for self-employed health insurance?

A - It’s not clear. IRS has not issued any official guidance on this very common question as yet. The law says that the policy must be established, or considered to be established, under her business. The IRS has decided that premiums for Medicare qualify for the self-employed health insurance deduction (CCA 201228037); clearly, Medicare is not a plan established by the business but is treated as “considered to be established.” It could be argued that COBRA should be similarly treated as self-employed health insurance and that the premiums should be deductible from gross income (rather than as an itemized deduction) as long as she is otherwise qualified (i.e., she is profitable and does not qualify for any employer-subsidized health coverage). Best bet: Decide on your best course of action with your tax advisor.

 

 

[FDNY]

Thank you everyone, you've given me enough information to advise the client to take the deduction.  In their case the employer was not subsidizing any amount for COBRA.   Whew!  Glad Judy let me know going crazy for not finding anything was not my fault.  

Gail, the most official source I found was what Elrod referenced, Pub 535 among other non official sources like Nolo, I was all over the place.

Here's the longer version from the Pub.

Other coverage:

You can’t take the deduction for any month you were eligible to participate in any employer (including your spouse's) subsidized health plan at any time during that month, even if you didn’t actually participate. In addition, if you were eligible for any month or part of a month to participate in any subsidized health plan maintained by the employer of either your dependent or your child who was under age 27 at the end of 2018, don’t use amounts paid for coverage for that month to figure the deduction.

I was hoping Elrod could find a graphic of me going crazy, I was in need of a good laugh after not finding anything.

Thanks again,

Bill

 

[jklcpa]

@FDNY, I found cites for you:

Sec 35 is the section that covers SEHI, ,and subsection (e) has the list of qualified coverage.

The first item listed as allowable for SEHI under Sec35(e)(1)(A) is "Coverage under a COBRA continuation provision (as defined in section 9832(d)(1)).

Then, Sec 35(f) "Other Specified Coverage" section talks defines "subsidized coverage".  You can read that section, but basically says that subsidized is where at least 50% or more of the cost of coverage is paid or incurred by the employer.

Here is a safe link to Cornell Law of that section if you want to print or save the documentation: https://www.law.cornell.edu/uscode/text/26/35

Edited November 27, 2019 by jklcpa
wrong IRC section

[FDNY]

Thank you Judy, that was very helpful and so nice of you to make it easy for me.

If you were at my house for Thanksgiving dinner I would serve you first and offer you any part of the turkey you want, even though I'll be taking the chance that I may have to fight over the remaining leg and thigh.  

Happy Thanksgiving!

[DANRVAN]

2 hours ago, jklcpa said:

Sec 35 is the section that covers SEHI, ,and subsection (e) has the list of qualified coverage

Judy I think you have some references crossed.  Section 35 pertains to HCTC while section 162(l)(1) covers SEHI.

[jklcpa]

Ack!  Dan, you are correct. Second time this week with bad code!  I surrender.  

@FDNY, I'm sorry. I deserve no turkey, and certainly no dessert for me! 

[FDNY]

HA!  No problem, I did well with your help.  So turkey for you and thanks to Dan, you're invited too.  I better buy a second turkey, might need at least 3 legs and thighs.             

This is the link

https://www.law.cornell.edu/cfr/text/26/1.162(l)-1

 

 

[DANRVAN]

Judy, there are so many health insurance issues stuffed into the tax code it is easy to see how someone could get it crossed over.

8 minutes ago, FDNY said:

.  I better buy a second turkey, might need at least 3 legs and thighs.

Not for me, I come from a line of cattle ranchers on both sides,  I can smell the prime rib already!

 

[Elrod]

                                               Bills Thanksgiving.............

His celebration the day before....

 

 

Up early to hunt it down.....

 

 

Trying to cut it up for friends.....

 

 

Sharing with his friends when it's time to eat...

         Thanks Bill.....and Happy Thanksgiving to all of you wonderful tax folks.

[FDNY]

What a wonderful story, thanks Elrod.   

Have a great day everyone and let's hope the balloons get to fly.  

As I've said before, I know I could do this.  

[Catherine]

8 hours ago, FDNY said:

subsidized health plan

That is pretty much the key, I think.  If there is a subsidy, you're SOL.  No subsidy, you're OK.

We don't have a big crowd for dinner (just for dessert) and I couldn't get a turkey breast small enough!  They only had big whole birds and a couple of 10+ pound breasts; too large.  So we're having a pork loin.  And cornbread stuffing.  Because stuffing.

And for the turkey people:

[DANRVAN]

4 hours ago, FDNY said:

Have a great day everyone and let's hope the balloons get to fly.  

And Happy Thanksgiving to you Bill.  Thanks for the invite!

[DANRVAN]

5 hours ago, Elrod said:

Happy Thanksgiving to all

And Happy Thanksgiving to you Elrod, and to to everyone on the board!

 

5 hours ago, Elrod said:

Up early to hunt it down.....

We have a wild herd of those hanging around our barn, you are welcome to one.

 

[Elrod]

15 hours ago, FDNY said:

What a wonderful story, thanks Elrod.   

Have a great day everyone and let's hope the balloons get to fly.  

As I've said before, I know I could do this.  

Great picture of a fantastic CHEF....

[FDNY]

Thanks Elrod, I'm just an old firehouse cook, my secret was making sure the meal was served late when everyone was so hungry they would eat anything.

Last week we did a "Big Night" meal for friends (a must see movie with Tony Shaloub and Stanley Tucci) and we ate for hours.  That's why I love this season, friends, family, and food and as the cook, you don't have to clean up.

[Catherine]

16 hours ago, DANRVAN said:

We have a wild herd of those hanging around our barn, you are welcome to one.

We have flocks of them in our area these last several years.  They're huge!

[FDNY]

1 hour ago, Catherine said:

We have flocks of them in our area these last several years.  They're huge!

That's right, I'm not far away from Catherine and they're around all the time.  Yesterday there was a lone one standing in the middle of the crosswalk like a traffic cop.  I kept inching up hoping he would go around me but he was more interested in my tire and kept pecking it.  I took this picture from the porch the other day.

[Edsel]

The rock-ribbed, inpenetrable official interpretation would be the insurance policy has to be purchased in the name of the business itself.  What's worse, I think they want it to be deducted as an "adjustment" rather than a business expense - the effect being the client has to pay self-employment tax rather than deducting as a business expense.

Software companies have allowed a great deal of leeway on the official interpretation.  Drake allows medicare deducted from SS checks to be designated as SEHI.  Clearly, medicare is not "purchased" in the "name of the business."  In fact, it is not purchased at all.  I have been advised that Cobra qualifies, although it is not in the name of the business, but in the name of the prior employer.

Simply put, I allow practically any kind of medical insurance to be deducted as SEHI, unless it is a second policy.  As usual, I may hear howls of disagreement from purists, but I would need to be given clear-cut examples of disallowance from the IRS to stop.

Sorry, Elrod, no pictures...

[jklcpa]

8 hours ago, Edsel said:

In fact, it (medicare) is not purchased at all. 

Really?  It's paid by the taxpayer, either by paying directly to the government for those not receiving SS benefits or by choice, or it is withheld from benefits. Either way, the taxpayer is paying premiums out of otherwise available resources.

 

8 hours ago, Edsel said:

Clearly, medicare is not "purchased" in the "name of the business."  As usual, I may hear howls of disagreement from purists, but I would need to be given clear-cut examples of disallowance from the IRS to stop.

It hasn't been an issue in years and won't be challenged.   IRS Chief Counsel issued its legal interpretation for use by IRS personnel back in 2012 that addressed this and stated that Medicare coverage for the self-employed person AND spouse are eligible. Chief Counsel Advice (CCA) 201228037  http://www.irs.gov/pub/irs-wd/1228037.pdf

JoA article from 2012 in explanation. https://www.journalofaccountancy.com/news/2012/jul/20126051.html

Also, it's now clearly addressed in the Form 1040 instructions for line 29 that this IS eligible for inclusion in the calculation of SEHI.

 

IRS statement on use of CCAs from IRS website:

Quote

These documents are legal advice, signed by executives in the National Office of the Office of Chief Counsel and issued to Internal Revenue Service personnel who are national program executives and managers. They are issued to assist Service personnel in administering their programs by providing authoritative legal opinions on certain matters, such as industry-wide issues. See CCDM 33.1.2, Chief Counsel's Legal Advice Program.

NOTE: These documents cannot be used or cited as precedent.

 

Quote

  8 hours ago, Edsel said:

I allow practically any kind of medical insurance to be deducted as SEHI, unless it is a second policy.

 

 

If by second policy you mean that a TP has 2 (non-medicare, non-medigap) health policies, then there are specific rules and 2 separate worksheets need to be completed for the SEHI.

If, by the above statement that you are referring to MediGAP as secondary coverage to Medicare, that is eligible for inclusion in the SEHI calculation, as are other policies for dental, vision, drugs, and long-term care.

 

Edited December 1, 2019 by jklcpa
consolidate 2 posts into one

[Edsel]

On 12/1/2019 at 10:14 AM, jklcpa said:

[Edsel]In fact, it (medicare) is not purchased at all.

[jklcpa] Really?  It's paid by the taxpayer, either by paying directly to the government for those not receiving SS benefits or by choice, or it is withheld from benefits. Either way, the taxpayer is paying premiums out of otherwise available resources.

Yes it is paid, but not purchased.  Purchased implies a conscious decision to buy or enroll in such a program.  Medicare is not optional, but becomes mandatory at age 65.  There is no decision to "purchase" medicare.  Exception:  there are a number of "medigap" plans which can be elected and in that sense can be purchased.

 

The remainder of the post by jklcpa is very helpful, and ratifies per IRS pronouncements, the deductibility of various plans as SEHI.