If not, it's time to start spring cleaning; the IRS may be visiting your office soon to confirm that you are complying with all of the requirements under COBRA. Our Employee Benefits lawyers can help you prepare. We regularly advise employers with respect to COBRA compliance, perform COBRA operational reviews, assist with the implementation and update of COBRA procedures and documentation, and train and educate responsible individuals on COBRA administration.
By recently posting updated standards for COBRA audits on its website, the IRS may be indicating that an audit initiative is under way relating to COBRA continuation coverage requirements. If so, such an initiative is likely intended to encourage plan sponsors to self-identify and report COBRA failures and pay the associated excise taxes. Plan sponsors are required to report COBRA failures on IRS Form 8928 and pay an excise tax generally equal to $100 per qualified beneficiary per day of noncompliance.
The COBRA audit standards provide a preview of what an IRS auditor will do to determine whether a plan sponsor has complied with the COBRA continuation coverage requirements, including documents that will be requested and questions that may be asked.
What Documents Will an Auditor Request?
In every COBRA audit, an IRS auditor will review the plan sponsor's COBRA procedures by requesting and reviewing the following documents:
- A copy of the COBRA coverage procedures manual.
- Copies of standard COBRA coverage form letters sent to qualified beneficiaries.
- A copy of the plan sponsor's internal audit procedures for COBRA coverage.
- Copies of all of the plan sponsor's group health care plans.
- Details pertaining to any past or pending lawsuits filed against the plan sponsor alleging COBRA failures.
Many plan sponsors do not maintain COBRA coverage procedures manuals or internal audit procedures for COBRA coverage; however, the audit standards indicate that the five documents listed above will be requested in every COBRA audit. In addition, an auditor may request and review additional documentation, including copies of federal and state employment tax returns, a list of all individuals affected by qualifying events during the year under audit, and personnel records (including, name and address of each qualified beneficiary, the qualifying event date, copies of COBRA notices, the type of COBRA coverage received and the premium payments required under COBRA).
What Questions Might an Auditor Ask?
During an audit, an IRS auditor may interview responsible individuals regarding:
- The number of qualifying events that occurred during the year under audit through the current date.
- The method of notifying participants of their COBRA rights.
- The method of notifying the plan administrator that a qualifying event has occurred.
- The COBRA elections made by qualified beneficiaries.
- The premiums paid by qualified beneficiaries for COBRA coverage.
How To Prepare for a COBRA Audit
Every employer that sponsors a group health plan that is subject to COBRA should review its current COBRA procedures to determine the level of compliance. This may require a discussion with a third party administrator and review of its processes and procedures. If a COBRA violation is discovered, the plan sponsor should determine whether a Form 8928 should be filed and the associated excise tax paid. Plan sponsors need to ensure that COBRA procedures are accurately documented and followed and that responsible individuals are knowledgeable with respect to COBRA requirements. If it has been a while since you reviewed your compliance in this area, now is the time to conduct a review and get your COBRA house in order.
Excise Tax for Failures Discovered on Audit
If COBRA failures are not self-reported, but discovered after the IRS issues an audit notice, the applicable excise tax will likely increase. Moreover, the IRS will likely impose additional interest, understatement penalties and penalties for failure to timely report excise taxes on Form 8928.
For More Information
Please contact your Thompson Hine lawyer or any member of our Employee Benefits & Executive Compensation practice group for more information.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that nothing contained herein is intended to be used, or can be used, to avoid penalties imposed under the Internal Revenue Code.
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