In March of 2012, the Internal Revenue Service (IRS) published revised audit guidelines for COBRA compliance. The revised COBRA guidelines are intended to encompass laws enacted over the last decade that overlap with COBRA administration such as the Family and Medical Leave Act (FMLA) and the Health Insurance Portability and Accountability Act (HIPAA).
Employers’ healthcare requirements may be changing, but COBRA administration requirements remain intact. In fact, with these new COBRA guidelines in place, employers may see that future audits are more rigorous and extensive than those in the past. Employers with 20+ employees who offer employer-provided group health plans are still required to provide appropriate COBRA notices and election opportunities to those who would otherwise lose their coverage due to qualifying events.
The new guidelines summarize employers’ COBRA obligations as well as the penalties for non-compliance. Below are a few of the highlights – this is a summary only, so please read the COBRA guidelines and consult your attorney for complete information.
Documents that employers should have ready in case of COBRA audit include:
- COBRA compliance procedures manual
- COBRA form letters and notices
- Internal COBRA audit procedures
- Group healthcare plan documents
- Documentation of any past or pending COBRA violation lawsuits
According to the new COBRA guidelines, future COBRA audits may include review of:
- Personnel records to confirm dates of qualifying events and the coordinating notices sent
- Unemployment records to verify if unemployment benefits were granted in cases where a former employee was deemed ineligible for COBRA benefits because of a “gross misconduct” termination
- Participant data between one year’s plan ending date and the next plan year’s beginning date, to check for participants who dropped off and to verify they received appropriate election notices
- State and federal tax returns
Excise Taxes That May Be Assessed for Failure to Follow COBRA Rules
The IRS is authorized to assess excise taxes for failure to follow COBRA rules. While there are some stipulations and special rules, the general formula for calculating the COBRA excise tax is:
# of days in non-compliance X # of qualified beneficiaries for which failure occurred X $100
So, for example, if the non-compliance period was 540 days (roughly 18 months) and two qualified beneficiaries were impacted, the COBRA excise tax could be $108,000. If a COBRA failure is discovered during an IRS audit, the IRS may impose a maximum COBRA excise tax for failures in any one taxable year of up to $500,000, or, if less, 10% of the employer's total expenditures on the group health plan.
In addition to the excise tax, each qualified beneficiary who is impacted by a COBRA notice violation can recover civil penalties of up to $110 per day, in addition to attorney fees. They may also recover lost benefits or be reinstate to the plan retroactively.
A COBRA audit has the potential to take a big bite out of many employers’ profits. Employers should shore up COBRA administration practices now, so that they’re ready if and when the IRS or U.S. Department of Labor arrives.
- Review plan documentation against the updated COBRA requirements to ensure procedures and notices are current.
- Keep all the documents listed above in an accessible location.
- Audit COBRA procedures and triggers for sending notices.
- Make sure COBRA premium charges are accurate.
Finally, if you don’t have time to really manage COBRA compliance internally, considering outsourcing COBRA administration and getting an expert involved. The cost of non-compliance is too high to take chances.