Multiple events enhance COBRA flexibility
Q: I reached my social security full retirement age last year and started my benefits. After starting a new job earlier in the year, I have now decided to defer my benefit until age 70. We paid taxes on 85% of my benefits on the 2022 tax return. How do I recover the taxes paid on the benefits that I have to return?
A: You can suspend and return social security benefits if you do so within 12 months of first receiving benefits. Social Security has its own form, an SSA-521, to do so.
The Social Security Administration (SSA) was once much more flexible in the file-and-suspend decision. In the past I had a few clients who returned more than one year’s benefits.
I don’t know the start and stop dates for your benefits. If you are making the decision now, I will assume more than 6 months benefits in 2023 and less than 6 months in 2022.
Last year you received an SSA1099 form to report the benefits received. You will receive the same form this year.
This form has a box for the gross benefits paid, and another for the amount that you repaid during 2023. In 2023 it will show a net amount subject to tax.
To illustrate, let’s say that you received $12,000 in 2022 and $21,000 in 2023. You will repay $33,000 in 2023. The SSA1099 will show a net of negative $12,000 benefits.
You will be entitled to a special tax computation in 2023 to determine the tax effect of the net $12,000 repayment.
Section 1341 of the tax law allows this computation when an amount is included in income in an earlier year and the repayment deduction exceeds $3,000.
The special computation allows you to compute the tax effect of the $12,000 repayment using your 2023 tax rates or the 2022 rates.
If you find that the 2022 rates provide a greater benefit, an explanation must be provided on the 2023 tax return.
Most tax preparers have seen this a few times and will be able to help you. A good preparer could easily find the rules even if he or she has never used them.
Q: I will retire at the end of August. At that time, I will be 64 years and 8 months old. My wife will be 63 years and 4 months old when I retire. We both rely on my employer’s health plan so I will apply for COBRA benefits under the employer’s plan. It is my understanding
that COBRA can last only for 18 months. My wife will require 20 months of coverage before she starts Medicare. A co-worker told me that COBRA will cover her for that entire time because of my Medicare start date. My HR department has provided me with a link to a website that explains COBRA, but they are not being helpful in confirming that my co-worker’s explanation is correct. Do you know?
A: I am not a COBRA expert so I will hedge a bit just like the HR people. However, what your co-worker says has always been my understanding of COBRA.
The reason you can cover your wife for more than 18 months is that you have two separate COBRA events. The first is your separation from service at work, the second is your Medicare eligibility.
With only the first event the COBRA coverage would end 18 months after your separation.
But 4 months after the first event you become eligible for Medicare.
The Medicare start for you triggers a second event. Your wife can then be covered an additional 18 months after the second event.
In total your wife cannot be covered for more than 36 months. That full period would apply only if the second event occurred at the end of the first.
So, I believe that you will be able to cover your wife for as long as 22 months – the first 4-month period plus 18 months. She will be Medicare-eligible before that 22 months ends.
I’m not surprised the HR people do not want to give you specific advice. But I’m sure they can give you a contact person at your provider who can give a definitive answer.