We are reimbursing a prior executive at our company for COBRA payments. Is this 1099 reportable?


First, it's important to understand that the executive is still defined as an employee by the IRS as far as fringe benefits go, according to IRS publication 15-B, page 5, including "A former employee you maintain coverage for based on the employment relationship." This is also supported by regulation 26 CFR, which says: "Section 31.3121(a)-1(i) provides that remuneration, unless specifically excepted, constitutes wages even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them." Therefore, any reporting you do for the former executive would not be on a 1099, but rather on a W-2.

However, IRS Publication 15-B goes on to say that employee accident and health benefits are not subject to income tax withholding, Social Security or Medicare tax, or Federal Unemployment Tax (FUTA), and would not need to be reported. This includes COBRA; the publication specifically addresses COBRA on page 7: "COBRA premiums. The exclusion for accident and health benefits applies to amounts you pay to maintain medical coverage for a current or former employee under the Combined Omnibus Budget Reconciliation Act of 1986 (COBRA). The exclusion applies regardless of the length of employment, whether you directly pay the premiums or reimburse the former employee for premiums paid, and whether the employee's separation is permanent or temporary."

(Do note that the reimbursements must meet the criteria for an accountable plan, however, meaning you must be supplied receipts or other supporting documentation, and are reimbursing only for the amounts the employee paid the COBRA provider.)

Therefore, the COBRA reimbursements would not be reportable, but there is an exception:

If the former executive is or was "highly compensated," then there IS a withholding-reporting obligation. See page 7 of Publication 15-B for the criteria that constitute "highly compensated." If any of the three conditions listed there are true (more than 10% stock ownership, etc.), you would need to withhold income taxes (but only income taxes) and report on a W-2.

This information was confirmed with IRS information agent Mr. Hull (ID# 1002444893).

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