IRS Updated COBRA Audit Guidelines

March 2017

In 1994, the IRS prepared audit guidelines for COBRA compliance, but never released them publicly. Now, after a 10-year task force study, the IRS has published revised audit guidelines (the "Guidelines") for COBRA compliance. The stated purpose of revising the COBRA audit guidelines was to incorporate changes to account for new laws that have affected COBRA since the 1994 Guidelines, such as the Health Insurance Portability and Accountability Act (HIPAA) and the Family and Medical Leave Act (FMLA). The updated Guidelines apparently herald a new COBRA compliance audit effort by the Service.
The Guidelines provide a general overview of the requirements of COBRA and the excise tax associated with COBRA non-compliance, including limitations and exceptions. In some cases, the Guidelines lend some insight into the IRS's approach to COBRA enforcement. For example, the IRS will examine the issue of whether an employee was ineligible for COBRA rights because he or she was terminated for "gross misconduct" by determining whether the employee was granted or denied unemployment benefits, and may interview other employees with knowledge of the circumstances of the employee's termination, or, in the case of a collective bargaining agreement, review any arbitration proceedings if the termination was grieved.
The Guidelines provide an advance look at the extensive nature of future COBRA audits, including the list of documents reviewing agents will call for, which in turn suggests that employers and administrators will want to have those documents and procedures as part of their compliance arsenal. This document list includes:

  • COBRA compliance procedures manual;
  • COBRA form letters and notices;
  • Internal audit procedures for COBRA continuation coverage;
  • All group health care plan documents; and
  • Documentation of any past or pending lawsuits claiming COBRA violations

The Guidelines suggest methods the IRS examiners may use to "probe" for noncompliance. For example, the Guidelines instruct IRS agents to compare the list of covered individuals under the plan on the first and last day of the plan year to identify those dropped from coverage during the year and then check that list against records of COBRA notices and elections, or to make a similar comparison of succeeding years' state and federal employment tax returns. Auditors are also advised to examine personnel records for dates of qualifying events such as termination of employment or death, dates COBRA notices were provided, type of coverage received, notices to insurers or COBRA administrators, reasons for termination of COBRA coverage and reasons for employment termination. Based on a reading of the Guidelines, COBRA audits conducted under them can be expected to be rigorous.
What You Should Do Now
Every employer who is subject to the COBRA excise tax should review their plan documentation to ensure it is current with applicable requirements, and establish or review their COBRA compliance procedures. They should train all personnel responsible for COBRA compliance on those procedures, and make sure that all aspects of their COBRA compliance program has been reviewed by counsel, that their COBRA premiums charged are supported by insurance premium data or actuarial calculations, and that they can support a good faith effort to comply with COBRA.

Finally, employers should conduct periodic COBRA compliance audits using a well-designed COBRA audit manual or using the IRS Guidelines to monitor their COBRA compliance efforts. We appreciate your business and hope you continue to look to us for your employee benefits services.

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Disclaimer: The information provided is not intended to be legal advice, but merely conveys general information related to Health Care Reform. You should always consult appropriate legal counsel and tax advisors for direction in these matters.

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