November 2009

Vo l . 1 • N o . 1 L
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COBRA Premium The Red Flags Rule

Assistance Payments
By Kerry Duvall
D oes your com-
pany have for-
mer employees
whose employment
has been involun-
tarily terminated
between September
1, 2008, and Decem-
Kerry Duvall
ber 31, 2009? Are
any of those em-
ployees eligible for health care cover-
age under the Consolidated Omn-
ibus Budget Reconciliation Act of
1985 (known as COBRA), and did
they elect the coverage? If you
answered “yes” to both of these
questions, you are eligible for a 65%
subsidy for the COBRA premium
payments paid for by your company.
Who is covered?
Assistance eligible individuals
(AEIs) include the former employee
mentioned above and any spouse or
dependent of that employee who
was covered immediately prior to
the involuntary termination.
Involuntary terminations include
layoffs, furloughs, or other suspen-
sions of employment that result in a
loss of health coverage. However, a
mere reduction in hours isn’t an
involuntary termination (unless the
reduction in hours causes the
employee to actually leave the com-
pany). The 65% subsidy remains in
for Fighting Fraud
by Deborah Crown
id you know
effect for each AEI until the earliest of
1) the date when he or she is eligible
D that if you work
at a company that
for coverage under another group
invoices vendors
health plan, 2) the date the maximum and others after
period for COBRA coverage ends; or
services are provid-
3) after nine months of premium ed or goods are sup-
reduction.
plied, you may have
Deborah Crown to put together a
How it works written plan addressing identity theft
The assistance eligible individuals prevention by November 1, 2009?
will pay 35% of their COBRA premi-
The Federal Trade Commission
ums to the former employer. The for-
(FTC) created the “Red Flags Rule”
mer employer then remits 100% of
as part of the Fair and Accurate
the premiums due to the insurer,
Credit Transactions Act of 2003. The
which consists of the employees’ 35%
Red Flags Rule is an anti-fraud regu-
plus the 65% paid for by the employ-
lation, requiring creditors and finan-
er. The employer is then effectively
cial institutions with covered accounts
reimbursed for the 65% paid by
to implement programs to identify,
reporting it as a credit on quarterly
detect, and respond to warning signs
payroll tax reports (Form 941). In
(red flags) that could indicate identi-
order to claim this credit, the
ty theft. The enforcement of this new
employer must actually collect the
rule has been delayed three times but
35% from the AEI and then timely
currently its enforcement is set to
remit the total premium to the insur-
er prior to claiming the credit. For continued on page 2
COBRA coverage provided under a
self-insured plan, the employer is
deemed to have paid the 65% sub- Be sure to visit
sidy when it receives the 35% premi- www.ftc.gov/redflagsrule
um from the AEI.
You can download a helpful
It is possible that some AEIs will have
publication called, Fighting
paid the full COBRA premium (rather
than the reduced 35% portion) for the Fraud with the Red Flags Rule:
first and/or second period beginning A How-to Guide for Business.
continued on page 2

UHY LLP brings specialists in for-profit solutions in accounting and tax.


COBRA Premium
Assistance Payments
continued from page 1
on or after February 17, 2009. For these
individuals, the employer must allow
the excess premium to either be
refunded or used as a credit against
subsequent premiums. However, if the
credit will not be used within 180 days,
it must be refunded within 60 days.
How to report the credit
The 65% premium payments made
by the former employer are reported
on line 12a of the Form 941. These
The Red Flags Rule
for Fighting Fraud
continued from page 1
begin on November 1, 2009.
The Red Flags Rule requires many
businesses and organizations to
implement a written identity theft
prevention program to detect the
warning signs of identity theft in
their operations.
So the question is Who must comply
with this new rule? The Red Flags
Rule applies to financial institutions
and creditors with covered accounts.
Let’s start with some definitions
under the Red Flags Rule:
FINANCIAL INSTITUTIONS A
state or national bank, savings and
loan association, mutual savings bank,
state or federal credit union, or any
other entity that holds a “transaction
account” belonging to a consumer.
CREDITOR An entity that regularly
extends, renews, or continues credit;
any entity that regularly arranges for
the extension, renewal, or continua-
The statements contained herein are provided for informational purposes only, are not intended to constitute tax advice which may be relied upon to avoid penalties under any federal,
state, local or other tax statutes or regulations, and do not resolve any tax issues in your favor. Furthermore, such statements are not presented or intended as, and should not be taken
or assumed to constitute legal advice of any nature, for which advice it is recommended that you consult your own legal counselors or professionals.
UHY Advisors, Inc., provides tax and business consulting services through wholly owned subsidiary entities that operate under the name of “UHY Advisors.” UHY Advisors, Inc.,
and its subsidiary entities offer services from offices across the United States. UHY Advisors, Inc., and its subsidiary entities are not licensed CPA firms. UHY LLP is a licensed independent
CPA firm that performs attest services. UHY Advisors, Inc., and UHY LLP are independent U.S. members of Urbach Hacker Young International Limited.
payments are added to the payroll
tax deposits actually made and com-
pared to the payroll taxes due to
determine an overpayment or bal-
ance due for the quarter. Any over-
payment is then either refunded or
credited to the next quarter’s pay-
roll taxes. The employer may claim
this credit in the quarter actually
paid, or can choose to report the
credit in a later quarter. Just be sure
that if you are reducing the payroll
tax deposits for the credit, the reduc-
tion is done in the same quarter that
the credit is claimed. The number of
AEIs are required to be reported on
line 12b of the Form 941 in which
tion of credit; or any assignee of an
original creditor that is involved in
the decision to extend, renew, or
extend credit. Accepting credit cards
as payment does not in and of itself
make an entity a creditor. When an
organization or a government entity
defers payment for goods or services,
it would be considered a creditor.
COVERED ACCOUNT Accounts
that involve multiple payments or
transactions, or accounts that present
a reasonably foreseeable risk from
identity theft.
Once you have determined whether
your company or organization is a
creditor, then the next step is to
determine if you have covered
accounts. If you determine that your
company or organization has cov-
ered accounts, you must develop and
implement a written program to
detect and respond to the red flags of
identity theft. Your program should
take into consideration the nature of
your business and the risks you face.
If you don’t have any covered
accounts then you are not required to
November 2009
Vol. 1 • No. 1
the credits are claimed. If employ-
ers have not claimed a credit on an
original Form 941, an amended
Form 941-X may be filed.
High income recapture
It’s important to note that if the AEI’s
modified adjusted gross income for
the tax year exceeds $125,000, the
personal income tax for that AEI is
increased by the subsidy received.
There are several record-keeping
requirements related to the credit,
which are not submitted with the
Form 941, but should be retained by
the entity.
write a program, but you do need to
conduct periodic risk assessments to
determine if you have acquired cov-
ered accounts through changes in
your business over time. This is not
just a one-time test.
The best way to proceed to deter-
mine if these rules apply to your
company or organization is by going
to the FTC website and check out
“Fighting Fraud with the Red Flags
Rule.” There is a how-to guide and
frequently asked questions sections
that will provide additional informa-
tion and guidance. If you determine
you will need to write a program, the
site has a Create your Program guide
to help you.
Before you dismiss this as something
you will take care of later—or just
decide it doesn’t apply to you—be
warned: there are penalties related to
violations of the Red Flags Rule.
Currently, the law sets $3,500 as the
maximum civil penalty per violation.
Each instance in which the company
or organization has violated the rule
is a separate violation.