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April 10, 2012

The COBRA cops may come knocking…Are you ready?

The Consolidated Omnibus Budget Reconciliation Act (COBRA) enacted in 1985 provides health coverage continuation rights in the event of certain qualifying events; specifically, termination or reduction in hours of employment, death, divorce or legal separation, entitlement to Medicare and loss of dependent child status.  COBRA applies to employers employing 20 or more employees on at least 50% of the typical business days in the preceding calendar year, unless an exception applies. 

In its close to 30-year history, COBRA has been fraught with challenges.  In the event there is a violation of any COBRA provision, an employer sponsoring the affected group health plan is required to self-report the violation to the Internal Revenue Service’s Department of Treasury by way of the Form 8928, Return of Certain Excise Taxes Under Chapter 43 of the IRC.  Failure to self-report a violation can result in an excise tax penalty and interest.

On March 26, 2012, the IRS posted COBRA Audit Techniques and Guidelines for its agents who review COBRA challenges.  These guidelines are useful in that they give a plan sponsor or plan administrator some ideas about what the IRS might be looking for in the way of COBRA compliance.  Of particular note, the following documentation may be requested of the plan sponsor or administrator:

  1. A copy of the plan’s COBRA policies and procedures;
  2. Copies of the form letters, including but not limited to the initial COBRA notice and the qualifying event notice and election form provided to qualified beneficiaries;
  3. The internal audit procedures that the employer uses to ensure compliance;
  4. The health plan document(s) sponsored by the employer to which COBRA applies; and
  5. Any past or pending COBRA challenges against the plan, including any COBRA lawsuits.

In addition, auditors may request information to help identify qualifying events that may have occurred, and how the COBRA notices, elections forms, and premium payment process is working.  Other substantiation records, such as personnel records or state and federal employment tax returns, could likewise be requested to identify COBRA issues.  Of particular note, the guidelines suggest that if COBRA is denied due to gross misconduct, the IRS has the ability to review whether the gross misconduct standard has likewise been consistently followed for state unemployment purposes.

The important takeaway from the list of audit guidelines is that the employer should regularly review and update its COBRA policies and procedures.  If it has strong policies and procedures in place, it may well avoid a challenge, including but not limited to, penalties.

 

The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.

As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

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