Nothing Is Scarier Than A COBRA Audit By Juli Hanshaw

Halloween brings to mind images of scary • A copy of any invoices mailed for things like and goblins. However, COBRA coverage nothing can compare to the fear that COBRA • A copy of group health plan documents administrators feel when they hear the words, and summary plan descriptions “COBRA audit.” • Any information on past or pending Some may wish a COBRA audit could be Juli Hanshaw has lawsuits for COBRA obligations a rare, paranormal experience, but as a result more than 15 years • Documentation of notices that were of experience with of revised audit guidelines from the IRS, COBRA and works chances of the COBRA Reaper showing up mailed, including proof of mailing directly for the president for noncompliant employers have increased • Documentation of all COBRA dates, of Infinisource, Inc., which provides payroll, significantly, along with the possibility of such as employment termination and penalties. COBRA, flexible benefit COBRA termination of coverage and other administrative services to more than Earlier this year, the IRS published a • Documentation of COBRA procedural guide, “Audit Techniques and Tax Law to Ex- 17,000 employers updates nationwide. amine COBRA Cases (Continuation of Em- ployee Health Care Coverage),” designed to • Health plan enrollment package, ensure that employers comply with COBRA including notices and disclosures by providing standards that IRS investigators provided to employees at the time of can use for a COBRA audit. (See the Guide, enrollment (for example, the COBRA ¶1373.) general notice) Potentially, a COBRA audit can be like • Information on any wellness programs a haunted house where a company’s profits offered by the plan that might be sub- disappear after an unreported COBRA failure ject to COBRA is detected. What can you do to keep the evil • Each QB’s information on what spirits of COBRA audits away? You could try they elected, how long they were on a garlic necklace, but the next best thing is to COBRA follow these tricks. • Documentation that provides how Be Prepared With Information much premium was collected from If you are being audited, be prepared to each QB and for each plan, including have the following COBRA-related items any health care tax credit payments for review: • Method for processing insignificant • A copy of any contracts with third-party premium underpayments administrators that handle COBRA ad- • Documentation of COBRA-related dis- ministration and service providers that closures to health care providers provide benefits subject to COBRA • A list of individuals with qualifying • Methods used to notify the plan admin- events during the year istrator of a qualifying event • A written COBRA procedures manual • Methods the plan administrator uses with instructions to notify qualified beneficiaries of COBRA rights • Documentation of program design, monitored by a qualified third party • A copy of all COBRA notices mailed • Documentation of COBRA training for • A copy of any letters mailed to QBs those with COBRA responsibilities See Audit, p. 6

October 2012 | Mandated Health Benefits — The COBRA Guide 5 Audit (continued from p. 5) QB is placed in a financial position as good as without the failure occurring. Be Prepared to Face Penalties In addition to the excise tax, each QB affected by a If Noncompliance Is Found COBRA notice violation can potentially recover civil If a crosses your path and a COBRA failure penalties of up to $110 per day, in addition to attorney’s is discovered, the IRS may impose an excise tax. (See fees. They may also recover lost benefits or be reinstated ¶1511.) The general formula for calculating the COBRA to the plan retroactively. excise tax is $100 per QB, but not more than $200 per family, for each day of a noncompliance period. This Be Prepared to Take All Necessary Steps could be, for any one taxable year, up to $500,000 or Things that go bump in the can scare you; how- 10 percent of the employer’s total expenditures on the ever the knock on the door for a COBRA audit could group health plan. turn you ghostly white. With the eye of newt and toe of The noncompliance period begins on the date the frog, make sure you are prepared with the proper ingre- noncompliance failure takes place. Depending on the dients for the audit: circumstances, this might be the first date that coverage • Take it seriously. is denied, the date the notice is not sent as required or another date. The noncompliance period ends on the date • Don’t ignore or procrastinate. that the compliance has been corrected. Even if the fail- • Gather all information immediately. ure to comply is not corrected, the noncompliance period will end on the date six months after the last date for a • Contact the auditor to establish cooperation and QB’s COBRA coverage. glean reasons, other pertinent information. • Consult with legal counsel as needed. Be Prepared to Correct Any Failures The IRS provides that the excise tax does not apply • Do not provide more information than what the au- to any failure if it is due to reasonable cause and not dit letter requests. to willful neglect and is corrected within 30 days after being discovered, or would have been discovered with Don’t Be Scared, Be Prepared reasonable due diligence. A failure is considered to be Many employers find themselves wishing for hocus corrected if the rules are retroactively satisfied, and the pocus that could restore forgotten items that pertain to COBRA. Some may have forgotten to send the general notice; others may have neglected the notice of unavail- ability. A forgotten notice or procedure is the worst of all. Pin Compliance (continued from p. 4) Don’t let the terror of COBRA noncompliance and “COBRA coverage.” Often the coverage might not last IRS audits get the best of you. Before the witching hour as long as federal COBRA coverage or other terms and arrives and the IRS knocks on your door, make sure you conditions may be different from the federal rules. have a proper compliance program. It’s important to Given the analysis of the Hanysh court, it is clear that conduct regular internal audits to monitor operational employers are well-advised to make sure they have a compliance and procedures. There’s nothing scary about basic understanding of the applicable rules. Otherwise, a COBRA audit if you are properly prepared. they could face claims based on estoppel principles from former employees who thought they had broader rights. As discussed in detail in ¶1942, claims of equitable When it’s time to renew estoppel have varying levels of success. In general, an your subscription ... employer’s mistaken understanding or ignorance of the law would not be a defense to an estoppel claim. Go to Further, as in Hanysh, this ignorance could even be www.thompson.com/renew evidence of gross negligence that could help prove an We’ll walk you through the process. estoppel claim. Therefore, it is imperative that employ- ers have a basic understanding of the laws affecting their businesses to effectively avoid costly mistakes. It’s that easy!

6 October 2012 | Mandated Health Benefits — The COBRA Guide