In 1993, the IRS assembled a task force to develop guidelines for field agents to conduct COBRA examinations and compliance checks. However, these guidelines were not released to the general public. More recently, the IRS updated those guidelines to reflect certain changes in the laws that were not incorporated into the original guidelines including the Family Medical Leave Act of 1993 (FMLA) and HIPPA. The updated guidelines were published in March 2012.
This effort suggests that the IRS may be planning to be more aggressive in pursuing excise tax penalties under Code Section 4980B. That penalty provides for a $100 per day per qualified beneficiary during the non-compliance period, which can run for the duration of the maximum COBRA period (either 18, 29 or 36 months). This may not seem like a large amount but in the case of large scale non-compliance, an employer could be subject to penalties for up to $500,000 in excise taxes in one taxable year or if less, ten percent of the total expenditures on the group health plan.
In order to be prepared for such an examination, the plan sponsor should maintain the followings records which will be requested by IRS reviewers:
- A copy of the health care continuation coverage procedures;
- Copies of standard form letters sent to qualified beneficiaries;
- Copies of internal audit procedures for compliance with COBRA;
- Copies of all the plans and summary plan descriptions, certificates of coverage, etc.; and
- Details on claims pending and past lawsuits filed against the employer by former employees which included claims for failing to provide required continuation coverage.
It is anticipated that examiners will review the above documents as well as payroll and plan coverage change reports trying to match with COBRA notifications and elections.
It has been almost 30 years since COBRA was passed by Congress. It may be time to review your internal or (if outsourced) external procedures to make sure that you are not vulnerable in a COBRA excise tax audit.