How to Conduct a COBRA Self Audit
To help avoid an audit, or to be prepared in case an audit is ordered, it’s best to conduct a self audit.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) offers employees who lose health coverage due to certain life events an opportunity to temporarily continue their coverage. To ensure that employers are following the correct COBRA administration practices, policies and procedures, the Internal Revenue Service (IRS) may conduct an audit of an employer’s program. To help avoid an audit, or to be prepared in case an audit is ordered, it’s best to conduct a self audit.
COBRA guarantees that employees, who were covered under an employer-sponsored group health plan (medical, dental and vision), and their families, will not lose coverage due to a qualifying event. A qualifying event for an employee could include retirement, termination of employment (other than by reason of gross misconduct), reduction in hours, death or entitlement to Medicare benefits. A qualifying event for family members could include divorce or legal separation from the covered employee or loss of dependent child status. Coverage is generally continued for 18 to 36 months, depending on the circumstances.
COBRA rules apply to employers who have 20 or more full-time employees or a combination of full- and part-time employees on more than 50 percent of typical business days in the prior year. COBRA rights are offered to employees, their spouses and dependent children. To determine whether you technically have 20 employees, experts recommend counting each part-time employee as a fraction of a full-time employee and adding those part-time hours to get a total, then dividing by the number of hours required to be deemed full time (usually 30 hours). Some states, however, have laws that are similar to COBRA and include companies with fewer than 20 employees. Your state labor agency will be able to advise you of these rules.
It can be a challenge to stay in compliance with COBRA. The law requires an extensive knowledge of COBRA rules, as well as managing time-intensive manual processes; dealing with data errors; and staying current with mandatory deadlines.
Failing to comply with the rules can be costly. The IRS imposes an excise tax of $100 per qualified beneficiary, but not more than $200 per family, for each day an employer is in the noncompliance period. This period begins on the day of failure and ends on the day of correction, or, if earlier, six months after the last day of the applicable COBRA maximum coverage period.
For instance, if you failed to tell three families they were eligible for COBRA coverage and the maximum coverage period is 18 months, you could face a potential excise tax penalty of $438,000 ($200 per family multiplied by three families for 24 months (18 months plus six months).
Additionally, employers may be subject to statutory penalties of $110/day under ERISA, as well as civil lawsuits and attorney’s fees.
Here is a checklist of items to keep on file to be sure you are prepared in the event of a COBRA audit:
• Copy of the employer’s COBRA coverage procedures manual
• Copies of standard COBRA coverage form letters sent to qualified beneficiaries
• Copy of the employer’s internal audit procedures for COBRA coverage
• Copies of all group health care plans
• Details of past or pending lawsuits filed against the employer for failing to provide appropriate COBRA coverage
Here is the information you need to produce if you are being audited:
• Number of qualifying events which occurred during the year being examined.
• How qualified beneficiaries are notified of their COBRA rights.
• How the plan administrator is notified that a qualifying event occurred.
• The election made by qualified beneficiaries to continue health coverage.
• The premium paid by qualified beneficiaries for COBRA coverage.
• Copies of federal and state employment tax returns filed during the current period under examination and the preceding year.
• A list of all individuals affected by a qualifying event (for example, termination, death, etc.) during the current year.
• A list of all individuals covered on the current and preceding years for each plan (this list also must include all qualified beneficiaries).
• Personnel records with information that includes the name and address of each beneficiary and their qualifying event date, reasons for employment termination, etc.
• If the employer is denying coverage due to an employee’s gross misconduct, the examiner can check to determine if that employee was denied unemployment benefits for the same reason.
It’s always prudent to work with your plan administrator or an employment law attorney if you have questions.