The IRS recently issued revised guidelines for field agents who are conducting reviews of employers' COBRA compliance.
Executive Summary: The IRS recently issued revised guidelines for field agents who are conducting reviews of employers' COBRA compliance. The new guidelines can be found on the IRS' website at http://www.irs.gov/businesses/small/article/0,,id=255893,00.html.
Under the new guidelines, the IRS requires that any COBRA audit should at least consist of a review of the following: (i) the employer's COBRA procedure manual (or its equivalent); (ii) form letters used by the employer in its COBRA administration; (iii) the underlying group health plan documents; (iv) the employer's internal audit procedures; and (v) identification of, and details of, any COBRA-related litigation involving the employer. Furthermore, if any of these materials are not available, or are deficient, the examining agent is advised to follow-up by inquiring about the number and type of qualifying events incurred by covered employees, the employer's method of notifying qualified beneficiaries of qualifying events, the method used for notifying the plan administrator of qualifying events (when required), elections actually made by qualified beneficiaries and the level of premiums paid for COBRA coverage. If necessary, the guidelines instruct agents to obtain copies of the employer's federal (and state) employment tax returns, as well as names of the individuals who are covered by each of the employer's group health plans and those who have been affected by qualifying events.
The expectation of the IRS is that agents will be able to confirm that COBRA coverage is being offered under all of the group health plans that are legally required to do so, that all qualified beneficiaries are being offered COBRA coverage on the occurrence of a qualifying event, and that the notice and election procedures prescribed by COBRA are being followed. If any qualified beneficiaries are denied COBRA coverage because of "gross misconduct," the agents are supposed to review unemployment insurance records in order to find out whether the employer took a consistent position regarding the reason for the employee's termination for purposes of collecting unemployment benefits.
The guidelines prescribe conditions that may constitute "reasonable cause" for which the COBRA excise tax penalties may be waived. Those conditions are that the employer (i) maintains an active COBRA compliance program, (ii) relies on professional advice when needed, and (iii) monitors its own compliance through an internal audit process. They also set maximum amounts for penalties in cases of inadvertent violations (due to reasonable cause and not due to willful neglect):
(i) for single employer plans, the lesser of $500,000 or 10% of the employer's total expenditure for the year on group health plans;
(ii) for multiemployer plans, the lesser of $500,000 or 10% of the plan's total expenditure for the year on health care; and
(iii) for third parties, such as insurance companies or TPAs, $2,000,000 in the aggregate for all inadvertent failures during a taxable year.
If the person(s) responsible for the inadvertent failure become aware of the failure, and make no effort to correct it, the failure becomes one due to willful neglect, and the maximum limitations cease to apply.
Employers' Bottom Line:
The revised audit guidelines reflect various changes that have occurred since the issuance of the last set of guidelines, including restructuring within the IRS as well as statutory and regulatory changes. With the IRS instituting an initiative to increase COBRA compliance, employers should anticipate the possibility of such audits and should take action to reduce their risks, e.g., by making sure either they or their third party recordkeepers and administrators maintain a detailed procedures manual that complies with applicable law and regulations, and that they conduct regular internal audits to monitor their operational compliance with those procedures.
If you have any questions regarding the guidelines or other employee benefits related questions, please contact Jeffrey Ashendorf, jashendorf@fordharrison.com, any member of Ford & Harrison's Employee Benefits practice group, or the Ford & Harrison attorney with whom you usually work.