Preventive Care For COBRA Compliance
The IRS recently updated its COBRA audit procedures and posted them on its website. In an article entitled “Audit Techniques and Tax Law to Examine COBRA Cases (Continuation of Employee Health Care Coverage)” (available here), the IRS explains, among other things, the process an auditor should follow when reviewing an employer’s compliance with COBRA. If these are the directions being given to auditors, employers can best prepare for the possibility of such an audit by following the same directions.
Audit Procedures. As a first step, the guidelines suggest the agent should request the following documents:
- A copy of the COBRA procedures manual
- Copies of standard COBRA form letters sent to the qualified beneficiaries
- A copy of the taxpayer’s internal audit procedures for COBRA
- Copies of all group health care plans
- Details pertaining to any past or pending lawsuits filed against the taxpayer for failing to provide appropriate continuation coverage
The agent is also advised to “probe specific areas for noncompliance” based upon the procedures in place (as reflected in the documents identified above). To do so, the agent should request information regarding:
- The number of qualifying events (for example, terminations, reduced hours, etc.) occurring in the year under examination
- The method by which qualified beneficiaries are notified of their rights to continue health care coverage under COBRA
- The method by which the plan administrator is notified that a qualifying event has occurred
- The election made by qualified beneficiaries to continue health care coverage
- The premium paid by qualified beneficiaries for continuing coverage under the Plan
The agent may also request additional documentation, including:
- Copies of Federal and state employment tax returns filed during the current period under examination and the preceding year
- List of all individuals affected by a qualifying event (for example, termination, death, etc.) during the current year
- List of all individuals covered on 1-1-YY and 12-31-YY of the current and preceding years for each plan; this list should include all qualified beneficiaries (in other words, covered employee, spouse and dependent children)
- Personnel records, including:
- Name and address of each beneficiary (for purposes of third party confirmation if necessary)
- Date the qualifying event took place
- Copies of the notification letters sent to qualified beneficiaries (to determine the period they were eligible to elect coverage, and in fact were offered coverage, and also to confirm they received their notice of rights under COBRA)
- Type of coverage received under COBRA (to determine if the qualified beneficiary received the proper coverage)
- Premium payments required under COBRA (review of health plan documents previously requested may indicate whether the premium charged was excessive)
- Copy of employer’s letter to the insurance company/plan administrator notifying them of a qualifying event
- Reasons for termination of COBRA coverage properly elected by the beneficiary
- Reasons for employment termination
Significance. The posting of these updated audit procedures follows on the heels of the publication, in 2010, of IRS Form 8928. Form 8928 is used by non-governmental employers to, among other things, self-report COBRA violations and pay applicable excise taxes. Failure to self-report and pay applicable excise taxes triggers another level of possible penalties. For more information regarding Form 8928 and the excise taxes, see the instructions available here.
The recent issuance of Form 8928, combined with updating the audit procedures, could signal that the IRS intends to step up its efforts to audit compliance with COBRA.
Action Items. To minimize the likelihood of an excise tax being imposed due to a violation of COBRA, employers sponsoring group health plans should take this opportunity to evaluate their COBRA compliance. As part of this process, employers should pay particular attention to the following issues:
- Identify the benefit plans or programs that are subject to COBRA. Keep in mind COBRA applies to more than just the major medical coverage. It also applies to dental coverage, vision coverage, health flexible spending accounts, health reimbursement arrangements (HRAs), on-site medical clinics, most employee assistance programs, and many wellness programs.
- Does a COBRA procedures manual exist? Although there is no specific obligation under COBRA to adopt written COBRA procedures, we recommend employers adopt such procedures to assist with COBRA compliance and to ensure COBRA is applied uniformly among different group health plans sponsored by the employer. Furthermore, having such procedures may narrow the scope of an IRS audit.
- Has the employer adopted and implemented COBRA audit procedures? Have such procedures been followed? There is no specific requirement that employers conduct audits of COBRA compliance or adopt written procedures regarding such audits. However, implementing audit procedures should minimize the situations in which an excise tax could be imposed because the employer will be able to discover and correct errors in a timely manner. Furthermore, having and following audit procedures may narrow the scope of an IRS audit.
- Are all of the notices required by COBRA being provided in a timely manner and is the content of the notices up-to-date? Key notices required by COBRA include the initial notice, the election notice, the notice of unavailability, and the notice of termination.
- How often is a group health plan’s premium for COBRA (i.e., applicable premium) determined? How is a change in the applicable premium communicated? COBRA premiums are supposed to be determined on a 12 month cycle. In general, changes to the COBRA premium are not allowed during the 12 month cycle.
- Are there people on COBRA that never elected it (e.g., people who have just been provided coverage without interruption after ceasing to be eligible for the coverage)? Are there people on the health plan that should have elected COBRA in order to stay covered (e.g., children over 25, former spouses, etc.)?
- To what degree does the employer actually track those who are covered through the employee? For example, does the employer track the addresses of all the dependents? Many employers only know if the coverage elected by the employee is single or family, not the names of those that make up the family and not their addresses, if different from the employee.
- Are the employer’s record retention policies adequate to allow it to adequately respond to an IRS audit?
- How do the COBRA procedures and documents address state law continuation requirements? Because state continuation requirements often differ from COBRA requirements, to be able to demonstrate clear compliance with COBRA during an IRS audit, employers should take care to describe and administer COBRA separately from state continuation requirements.
Important: Employers that outsource COBRA administration typically rely on the third party administrator for compliance with the requirements of COBRA. However, in most cases employers (in their roles as plan administrators) are ultimately responsible for complying with COBRA, filing Form 8928, and paying the excise tax imposed for COBRA violations. It is important that employers (1) carefully review their administrative service agreements, including the indemnification and hold harmless provisions, and (2) monitor the performance of their third party administrators to ensure that between them, they have adequate documentation to respond to an IRS audit.
If you would like assistance reviewing and/or preparing COBRA documentation, please contact us.
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The information contained in this ALERT is intended for general information purposes only and does not constitute legal advice relative to a specific situation.