Leveraging COVID Relief: Using Employee Retention Credits for COBRA Premium Assistance

The COVID-19 pandemic sparked widespread job loss, leaving many unemployed individuals unable to afford continuing health insurance coverage. To expand access, federal COBRA premium subsidies were introduced to reduce this cost burden for those recently terminated.

Fortunately, employers who fund COBRA coverage can potentially offset these premium costs through the Employee Retention Credit (ERC) – a valuable COVID relief program that helps businesses keep and support workers during the crisis.

This in-depth guide examines the ins and outs of coordinating ERC with COBRA subsidy rules to maximize credits. We’ll cover COBRA premium assistance provisions, how subsidized premiums can qualify for ERC, documentation requirements, claim procedures, pitfalls to avoid, and expert planning considerations.

Background on COBRA Continuation Coverage

The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires employers to offer temporary continued health insurance after termination, with beneficiaries paying full premium costs. Key aspects include:

  • Applies to employers with 20 or more employees
  • Requires offering continued group plan coverage for 18-36 months post-termination
  • Beneficiaries pay the entire premium plus a 2% administrative fee
  • Timely election and payments required to maintain COBRA rights

By enabling short-term coverage continuation, COBRA guards against gaps in health insurance following job loss. However, high costs often prevent take-up without subsidies.

COBRA Premium Assistance Provisions

To facilitate affordable coverage, recent COVID relief legislation created temporary COBRA subsidies:

  • 100% premium subsidy from April 1, 2021 through September 2021
  • Available to employees (and dependents) terminated involuntarily or due to reduced hours
  • Subsidy is tax-free to beneficiaries
  • Employers or carriers provide subsidized coverage, then claim a payroll tax credit

This unprecedented aid makes COBRA far more accessible to involuntarily unemployed individuals.

Using COBRA Premium Credit for Employee Retention Credit

Importantly, the IRS clarified that employers can treat COBRA premium amounts paid on behalf of eligible terminated employees as qualified wages for the purpose of the ERC during the subsidy period.

In Notice 2021-31, the IRS outlined the requirements employers must satisfy to claim the ERC on COBRA premium assistance provided to separated employees.

By pairing both programs, employers can offset the costs of offering subsidized COBRA coverage through the pandemic.

Qualifying for the ERC on COBRA Premiums

To qualify for the valuable ERC on COBRA premium amounts, employers must meet all the following:

  • Originally provided group health plan coverage for the terminated employees
  • Provide COBRA coverage per federal eligibility and election requirements
  • Subsidize COBRA premiums under the 100% assistance provisions
  • Satisfy one of the usual ERC eligibility criteria, like a 20%+ decline in gross receipts or a full or partial suspension of operations due to a governmental COVID-19 order

Properly documenting compliance with these requirements is essential.

Calculating the ERC on COBRA Premiums

Employers must follow precise steps to determine the amount of ERC-qualified wages related to subsidized COBRA premiums:

  • Identify employees terminated involuntarily or due to reduced hours who elected COBRA coverage
  • Determine the COBRA premium amounts paid to the insurer under the 100% subsidy on behalf of each eligible terminated employee
  • Include subsidized COBRA premium payments from April 1, 2021, through September 2021 only
  • Aggregate the total subsidized premiums paid for all eligible terminated employees for each quarter
  • The total amount of subsidized premiums paid constitutes qualified wages for calculating the ERC, subject to statutory limits

Meticulous computations substantiated by reliable payroll records are vital to validate credit claims.

Claiming Process Overview

The general process to claim the ERC on subsidized COBRA premiums involves:

  • Calculating the total dollar amount of subsidized COBRA premium payments for involuntarily terminated employees during each quarter
  • Ensuring at least one ERC eligibility criterion was also met for that quarter
  • Reporting COBRA premium amounts paid as qualified wages on Form 941 payroll tax returns
  • Claiming the computed ERC amount to offset the employer portion of payroll taxes
  • If the ERC exceeds the quarterly Form 941 tax bill, filing Form 7200 to receive the excess as an advance refund
  • Retaining detailed documentation on former staff electing subsidized COBRA and premium amounts paid

Proper documentation validating eligibility criteria, COBRA elections, subsidy conditions, and premium payment amounts is imperative to support ERC claims.

Avoiding Pitfalls with COBRA Premium ERC

Complexities integrating COBRA subsidies with the ERC create compliance risks, including:

  • Claiming ERC for non-eligible individuals, like those not terminated involuntarily
  • Failing to obtain employee documentation of qualifying terminations and subsidy period COBRA elections
  • Incorrectly calculating subsidized COBRA premium amounts that qualify
  • Claiming ERC for premium costs outside the April 1 to September 30, 2021 subsidy period
  • Lacking documentation to prove a 20%+ decline in gross receipts or COVID-19 caused the suspension of operations
  • Insufficient evidence to support the amount of subsidized COBRA premiums claimed as qualified wages

Robust processes and controls can mitigate these risks when coordinating the programs.

Maximizing COBRA Premium Credit Potential

Employers looking to capitalize on the ERC based on subsidized COBRA premiums should:

  • Review terminations and COBRA elections to identify eligible former staff
  • Verify proper documentation of involuntary exits or hour reductions
  • Confirm prior group health plan enrollment and costs to determine subsidized premium amounts
  • Rigorously compute ERC-qualifying subsidized premiums paid for each quarter
  • Claim credible amounts on Form 941 promptly for every quarter
  • Implement strong documentation procedures and audit controls

Significant relief may be available but requires diligent execution.

Why Coordinating COBRA and ERC Makes Sense

Paired together strategically, these programs provide robust relief on multiple fronts:

  • COBRA subsidies expand health insurance access for those unemployed due to COVID-19 fallout.
  • ERC allows employers to offset the costs of providing this vital coverage.
  • Coordination amplifies support during the health and economic crisis.
  • Continued coverage facilitates workforce rehiring when conditions improve.

However, integrating the programs heightens documentation and compliance requirements.

Advisor Guidance Recommended

Due to the complex coordination involved, expert guidance is highly recommended:

  • Payroll specialists can identify eligible former staff and associated health premium costs
  • Benefits advisors can ensure compliance with COBRA subsidy requirements
  • Tax attorneys can provide guidance on ERC rules and integration
  • Public accountants can compile and review documentation
  • Enrolled agents can amend returns and handle IRS examinations

Their combined input will facilitate properly executed ERC claims based on subsidized COBRA premiums.


By subsidizing COBRA coverage for terminated employees, recent COVID relief legislation created enticing ERC opportunities for employers electing to provide this assistance. However complex eligibility and documentation rules require meticulous coordination. With ample preparation and guidance, employers can leverage premium subsidies to expand healthcare access while recouping costs through the strategic application of the Employee Retention Credit.


Q: Who qualifies for COBRA premium subsidies?

A: Employees (and dependents) terminated involuntarily or due to reduced hours from April 1, 2021, through September 2021.

Q: What documentation is needed?

A: Proof of involuntary termination, COBRA election forms, and invoices showing premium amounts paid.

Q: Can the ERC be claimed on all COBRA premiums?

A: No, only the subsidized premium amounts paid from April 1 to September 30, 2021 qualify.

Q: How are subsidized COBRA premiums treated for ERC?

A: The total subsidized premium amounts are considered qualified wages for calculating the credit.

Q: How is the ERC claimed on COBRA subsidies?

A: The premium amounts are reported as qualified wages on IRS Form 941 quarterly payroll tax returns.


IRS Notice 2021-31 on COBRA Premium Subsidies and ERC: https://www.irs.gov/pub/irs-drop/n-21-31.pdf

DOL COBRA Premium Subsidy Guidance: https://www.dol.gov/agencies/ebsa/laws-and-regulations/laws/cobra/premium-subsidy

IRS Instructions for Form 941: https://www.irs.gov/pub/irs-pdf/i941.pdf

AICPA Guide on Coordinating COBRA and ERC: https://www.aicpa.org/content/dam/aicpa/interestareas/employeebenefitplancpa/resources/coordination-of-cobra-and-employee-retention-credits.pdf

IRS FAQs on COBRA Premium Assistance Provisions: https://www.irs.gov/newsroom/faqs-on-the-cobra-premium-assistance-provisions-under-the-american-rescue-plan-act-of-2021

Leveraging subsidized COBRA and ERC in tandem requires meticulous coordination. Consult qualified tax and benefits advisors to ensure full compliance.

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