Former Employer Cobra Payment on 1099-MISC

[Chriszjl]

Dear all, 

My former employer gave me a compensation to assist with cobra related costs upon separation last year (no proof from my side is required). I ended up only signing up for Cobra dental and purchased the medical plan through healthcare marketplace (much more affordable). The former employer reported the Cobra payment on 1099-MISC, but the rest of the severance pay on W-2. 

My questions are -

1. Since I only used part of this cobra payment on Cobra premiums, what are the tax implication?

2. Is the cobra payment considered "job-related" or "non-job related" income? (a TurboTax question)?

3. Is the payment only subject to income tax or social security and Medicare taxes as well? Thanks!

[AmyC]

1.The 1099-MISC must be filed with the income listed. You can claim medical expenses under deductions.

2. Select not job related

3. Only income tax so you must mark no intention to earn money and for 2023 only. Otherwise, the program will try to to make it a business and charge the Social Security and Medicare taxes.

[Opus 17]

If the payment was made in the year you separated, it probably should have been included on your W-2.  (A 1099-MISC would be appropriate if the payment was made in the year after you separated when you are not getting a W-2.)  However, unless you voluntarily want to pay more taxes, you can report it as miscellaneous income as described, and as it was reported to you.  

(I would have to do more research to see if this should be counted as wages.  The difference to you is that if you count it as wages, you pay an extra 7.65% for social security and medicare tax by using a "substitute W-2 form".  This would never be self-employment income. ) 

[Chriszjl]

Both the severance pay and cobra compensation were given at the same year of separation. In the separation agreement, they specifically mentioned that a 1099 will be issued to the cobra payment.

[Opus 17]

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@Chriszjl wrote:

Both the severance pay and cobra compensation were given at the same year of separation. In the separation agreement, they specifically mentioned that a 1099 will be issued to the cobra payment.

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Just because the employer said so, doesn't make it correct.  However, health insurance could be handled differently than severance.  Without some specific research, I can't tell you that the employer was definitely wrong to not put the insurance  on the W-2, only they may have been wrong.  

I do agree that if the employer is correct that this is not counted as "compensation" for your services, then it is not self-employment and should be reported as miscellaneous income.  However, if the employer was incorrect and this should have been counted as "compensation", then it would be added to your W-2, and also not be reported as self-employment.