COBRA Premium Payment Accounts

(a)

In General

Subchapter F of chapter 1 of the Internal Revenue Code of 1986 (relating to exempt organizations) is amended by adding at the end the following new part:

COBRA Premium Payment Accounts

Sec. 530A. COBRA Premium Payment Accounts.

530A.

COBRA Premium Payment Accounts

(a)

General Rule

A COBRA premium payment account shall be exempt from taxation under this subtitle. Notwithstanding the preceding sentence, any COBRA premium payment account shall be subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable, etc., organizations). (b)

COBRA Premium Payment Account

For purposes of this title, the term COBRA premium payment account means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements: (1)Except in the case of a qualified rollover (as defined in subsection (f)(3)), no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 224(b). (2)The trustee is a bank (as defined in section 408(n)). (3)The trust funds may only be invested in interest-bearing securities of the United States. (4)The requirements of paragraphs (3) through (6) of section 408(a) are met. (c)

Tax Treatment of Distributions

(1)

Inclusion of amounts in gross income

Except as otherwise provided in this subsection, any amount paid or distributed out of a COBRA premium payment account shall be includible in the gross income of the payee or distributee, as the case may be, in the manner as provided in section 72. (2)

Distributions for COBRA premium payments

No amount shall be includible in gross income under paragraph (1) if the qualified COBRA premium payments of the designated beneficiary during the taxable year, reduced by any credit allowed under this chapter with respect to such payments for the taxable year, are not less than the aggregate distributions during the taxable year. (3)

Distributions in excess of payments

If such aggregate distributions exceed such payments (as so reduced) during the taxable year, the amount otherwise includible in gross income under paragraph (1) shall be reduced by the amount which bears the same ratio to the amount which would be includible in gross income under paragraph (1) (without regard to this paragraph) as the qualified COBRA premium payments (as so reduced) bear to such aggregate distributions. (4)

Medicare eligibility

Paragraph (2) shall not apply to any distribution to a beneficiary after the date on which such individual is entitled to benefits under part A of title XVIII of the Social Security Act or is enrolled under part B of such title. (d)

Qualified COBRA premium payments

For purposes of this section— (1)

In general

The term qualified COBRA premium payments means any premium paid for COBRA continuation coverage. (2)

COBRA continuation coverage

The term COBRA continuation coverage means continuation coverage provided pursuant to part 6 of subtitle B of title I of the Employee Retirement Income Security Act of 1974 (other than under section 609), title XXII of the Public Health Service Act, section 4980B of this title (other than subsection (f)(1) of such section insofar as it relates to pediatric vaccines), or section 8905a of title 5, United States Code, or under a State program that provides comparable continuation coverage. Such term includes coverage under a health flexible spending arrangement under a cafeteria plan within the meaning of section 125 of the Internal Revenue Code of 1986 if, at the time of the qualifying event (as defined in section 4980B(f)(3)), the taxpayer was covered under such coverage. (e)

Tax Treatment of Accounts

(1)

Loss of exemption in case of prohibited transactions

For purposes of this section, rules similar to the rules of section 408(e) shall apply. (2)

Other rules to apply

Rules similar to the rules of paragraphs (4), (5), and (6) of section 408(d) shall apply for purposes of this section. (f)

Other Definitions and Special Rules

For purposes of this section— (1)

All accounts treated as one account

All COBRA premium payment accounts of a qualified individual shall be treated as 1 account. (2)

Time when contributions deemed made

A taxpayer shall be deemed to have made a contribution to a COBRA premium payment account on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof). (3)

Qualified rollovers

The term qualified rollover means any amount paid from a COBRA premium payment account of a taxpayer into another such account established for the benefit of— (A)such taxpayer, or (B)any qualified individual who is— (i)the spouse of such taxpayer, or (ii)any dependent (as defined in section 152) of the taxpayer.

Rules similar to the rules of section 408(d)(3) shall apply for purposes of this paragraph.

(4)

Custodial accounts

Rules similar to the rules of section 408(h) shall apply. (5)

Reports

The trustee of a COBRA premium payment account shall make such reports regarding such account to the Secretary and to the individual for whom the account is maintained with respect to contributions (and the years to which they relate), distributions, and such other matters as the Secretary may require under regulations. The reports required by this paragraph— (A)shall be filed at such time and in such manner as the Secretary prescribes in such regulations, and (B)shall be furnished to individuals— (i)not later than January 31 of the calendar year following the calendar year to which such reports relate, and (ii)in such manner as the Secretary prescribes in such regulations. (6)

Investment in collectibles treated as distributions

Rules similar to the rules of section 408(m) shall apply. (g)

Penalty for distributions not used for Qualified COBRA premium payments

(1)

In general

If any amount distributed from a COBRA premium payment account is includible in gross income under subsection (c), the tax imposed by this chapter for the taxable year of such distribution shall be increased by 20 percent of such amount which is includible in gross income. For purposes of the preceding sentence, distributions which are includible in gross income shall be treated as first attributable to amounts contributed under subsection (d) to the extent thereof. (2)

Exception for certain distributions

Paragraph (1) shall not apply to distributions which are— (A)made to a beneficiary (or the estate of the account holder) on or after the death of the account holder, or (B)attributable to the account holder’s being disabled within the meaning of section 72(m)(7).

(b)

Deduction for contributions

(1)

In general

Part VII of subchapter B of chapter I of the Internal Revenue Code of 1986 (relating to additional itemized deductions for individuals) is amended by redesignating section 224 as section 225 and by inserting after section 223 the following new section:

224.

Contributions to COBRA Premium Payment Account

(a)

Allowance of Deduction

In the case of an individual, there shall be allowed as a deduction for the taxable year an amount equal to the contributions of the individual to a COBRA premium payment account. (b)

Maximum amount of deduction

(1)

Dollar limitation

The amount allowable as a deduction under subsection (a) for a taxable year shall not exceed the lesser of— (A)$2,500, (B)the amount equal to the excess of— (i)the aggregate contributions to all COBRA premium payment accounts of the individual for all prior taxable years, over (ii)$11,814 ($27,286 in the case of a joint return), or (C)an amount equal to the compensation includible in the individual’s gross income for such taxable year. (2)

Limitation based on adjusted gross income

(A)

In general

Each of the dollar limitations contained in subparagraphs (A) and (B) of paragraph (1) for such taxable year shall be reduced (but not below zero) by the amount determined under subparagraph (B). (B)

Amount of reduction

(i)

In general

The amount determined under this subparagraph with respect to any dollar limitation shall be the amount which bears the same ratio to such limitation as— (I)the excess of— (aa)the taxpayer’s adjusted gross income for such taxable year, over (bb)the applicable dollar amount, bears to (II)$10,000 ($20,000 in the case of a joint return). (ii)

No reduction below $200 until complete phase-out

No dollar limitation shall be reduced below $200 under paragraph (1) unless (without regard to this subparagraph) such limitation is reduced to zero. (iii)

Rounding

Any amount determined under this subparagraph which is not a multiple of $10 shall be rounded to the next lowest $10. (C)

Adjusted gross income; applicable dollar amount

For purposes of this paragraph— (i)

Adjusted gross income

Adjusted gross income of any taxpayer shall be determined— (I)after application of sections 86 and 469, and (II)without regard to sections 135, 137, 199, 221, 222, and 911 or the deduction allowable under this section. (ii)

Applicable dollar amount

The term applicable dollar amount means, with respect to a taxable year, the applicable amount determined under section 219(g)(3)(B) for the taxable year. (c)

Other limitations and restrictions

(1)

Beneficiary must not be Medicare eligible

No deduction shall be allowed under this section with respect to any contribution to a COBRA premium payment account for the benefit of an individual after the date on which such individual is entitled to benefits under part A of title XVIII of the Social Security Act or is enrolled under part B of such title. (2)

Recontributed amounts

No deduction shall be allowed under this section with respect to a rollover contribution described in section 530A(f)(3). (3)

Denial of deduction for amount contributed to inherited accounts

No deduction shall be allowed under this section with respect to any amount paid to an inherited COBRA premium payment account (within the meaning of section 408(d)(3)(C)(ii)) by reason of the last sentence of section 530A(f)(3). (d)

COBRA Premium Payment Account

For purposes of this section, the term COBRA premium payment account has the meaning given such term by section 530A. (e)

Applicable definitions and rules

For purposes of this section, definitions and rules similar to the definitions and rules of section 219(f) (other than paragraphs (5) and (8)) shall apply. (f)

Inflation adjustment

In the case of any taxable year beginning after December 31, 2011, each dollar amount in subsection (b)(1) shall be increased by an amount equal to the product of— (1)such amount, and (2)the cost-of-living adjustment determined under section 213(d)(10)(B) for the calendar year in which the taxable year begins by substituting calendar year 2010 for calendar year 1997 in clause (i) thereof.

If any amount as adjusted under the preceding sentence is not a multiple of $100, such amount shall be rounded to the nearest multiple of $100.

(g)

Regulations

The Secretary shall issue such regulations as may be necessary or appropriate to carry out this section.

(2)

Clerical amendment

The table of sections for part VII of subchapter B of chapter 1 of such Code is amended by striking the item relating to section 224 and inserting the following:

Sec. 224. Contributions to COBRA premium payment account.

Sec. 225. Cross reference.

(c)

Tax on Excess Contributions

(1)

Tax imposed

Subsection (a) of section 4973 of such Code is amended by striking or at the end of paragraph (4), by redesignating paragraph (5) as paragraph (6), and by inserting after paragraph (4) the following new paragraph:

(5)a COBRA premium payment account (within the meaning of section 530A(b)), or

(2)

Excess contributions

Section 4973 of such Code is amended by adding at the end the following subsection:

(h)

COBRA Premium Payment Accounts

For purposes of this section, in the case of COBRA premium payment accounts, the term excess contributions means the sum of— (1)the excess (if any) of— (A)the amount contributed for the taxable year to the accounts (other than a qualified rollover, as defined in section 530A(f)(3)), over (B)the amount allowable under section 224 for such contributions, and (2)the amount determined under this subsection for the preceding taxable year reduced by the sum of— (A)the distributions out of the accounts for the taxable year which were included in the gross income of the payee under section 530A(c)(1), (B)the distributions out of the accounts for the taxable year to which rules similar to the rules of section 408(d)(5) apply by reason of section 530A(e)(2), and (C)the excess (if any) of the maximum amount allowable as a contribution under section 224 for the taxable year over the amount contributed to the account for the taxable year (other than a contribution under section 530A(f)(3)).

For purposes of this subsection, any contribution which is distributed from the COBRA premium payment account in a distribution to which rules similar to the rules of section 408(d)(4) apply by reason of section 530A(e)(2) shall be treated as an amount not contributed.

(d)

Tax on Prohibited Transactions

Section 4975 of such Code is amended— (1)by adding at the end of subsection (c) the following paragraph:

(7)

Special rule for COBRA premium payment accounts

An individual for whose benefit a COBRA premium payment account is established and any contributor to such account shall be exempt from the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if, with respect to such transaction, the account ceases to be a COBRA premium payment account by reason of the application of section 530A(e)(1) to such account.

, and

(2)in subsection (e)(1), by striking or at the end of subparagraph (F), by redesignating subparagraph (G) as subparagraph (H), and by inserting after subparagraph (F) the following new subparagraph:

(G)a COBRA premium payment account described in section 530A(b), or

(e)

Failure To provide reports on COBRA Premium Payment Accounts

Paragraph (2) of section 6693(a) of such Code is amended by striking and at the end of subparagraph (D), by striking the period and inserting , and at the end of subparagraph (E), and by inserting after subparagraph (E) the following new subparagraph:

(F)section 530A(f)(5) (relating to COBRA premium payment accounts).

(f)

Penalty not part of regular tax

Paragraph (2) of section 26(b) of such Code is amended by striking and at the end of subparagraph (W), by striking the period at the end of subparagraph (X) and inserting , and, and by inserting after subparagraph (X) the following new subparagraph:

(Y)section 530A(g) (relating to penalty for distributions not used for Qualified COBRA premium payments).

(g)

Clerical Amendment

The table of parts for subchapter F of chapter 1 of such Code is amended by adding at the end the following new item:

Part IX. COBRA Premium Payment Accounts.

(h)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

COBRA election of different coverage

(a)

In general

Paragraph (2) of section 4980B(f) of the Internal Revenue Code of 1986 is amended by adding at the end the following:

(F)

Election of different coverage

(i)

In general

In lieu of subparagraph (A), coverage meets the requirements of this subparagraph if the qualified beneficiary may elect to enroll in coverage under a plan offered by the employer involved, or the employee organization involved (including, for this purpose, a joint board of trustees of a multiemployer trust affiliated with one or more multiemployer plans), that is different than coverage under the plan in which such individual was enrolled at the time the qualifying event occurred. (ii)

Requirements

A qualified beneficiary may make an election under clause (i) only if— (I)the employer involved has made a determination that such employer will permit qualified beneficiaries to enroll in different coverage as provided for this subparagraph, (II)the premium for such different coverage does not exceed the premium for coverage in which the individual was enrolled at the time the qualifying event occurred, (III)the different coverage in which the individual elects to enroll is coverage that is also offered to the active employees of the employer at the time at which such election is made, and (IV)the different coverage is coverage other than nonqualifying coverage. (iii)

Nonqualifying coverage described

For purposes of clause (ii)(IV), the term nonqualifying coverage means coverage which is— (I)coverage that provides only dental, vision, counseling, or referral services (or a combination of such services), (II)a flexible spending arrangement (as defined in section 106(c)(2)) in which the individual is not a participant on the date of the qualifying event, or (III)coverage that provides coverage for services or treatments furnished in an on-site medical facility maintained by the employer and that consists primarily of first-aid services, prevention and wellness care, or similar care (or a combination of such care). (iv)

FSA contributions

For purposes of this paragraph, an employer making contributions to a flexible spending arrangement (as so defined) of an employee prior to the qualifying event is not obligated to continue making contributions to such arrangement of such employee after the qualifying event.

(b)

Effective date

(1)

In general

The amendment made by this section shall apply with respect to qualifying events occurring on or after the date of the enactment of this Act. (2)

Qualifying events before enactment

In the case of a qualifying event occurring before the date of the enactment of this Act, if the election period specified in section 4980B(f)(5) of the Internal Revenue Code of 1986 with respect to such qualifying event has not expired on the date of the enactment of this Act, then the amendment made by this section shall apply with respect to such qualifying event and such election period shall not expire until the later of— (A)the 60-day period beginning on the date of the enactment of this Act, or (B)the date on which such election would expire under section 4980B(f)(5) without regard to subparagraph (A).