There's nothing like the fear of a COBRA audit. As a result of revised IRS audit guidelines, audits have increased along with penalties. Be prepared with these items for your COBRA audit.

1. iGUIDE
Tips to Survive a COBRA Audit
Nothing can compare to the fear a COBRA administrator feels when they hear the words,
“COBRA audit.” No one wants to experience a COBRA audit, but as a result of revised IRS
audit guidelines, audits have increased significantly, along with the possibility of penalties.
The IRS guide, Audit Techniques and Tax Law to Examine COBRA Cases (Continuation of
Employee Heath Care Coverage), provides standards for IRS investigators to use for COBRA
audits to ensure that employers are in compliance.
Potentially, a COBRA audit could make a company’s profits disappear after an unreported
COBRA failure is detected. Follow these tips to make sure you’re prepared to pass your
COBRA audit.
Gather Information
If you are being audited, be prepared to have the following COBRA-related items for review:
Any information
on past or pending
lawsuits for COBRA
obligations
A copy of all
COBRA notices
mailed
Documentation of
premium amounts
collected from
each QB and
for each plan,
including any
health care tax
credit payments
Documentation
of all COBRA
dates, such as
employment
termination
and COBRA
termination of
coverage
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Documentation of
COBRA training for
those with COBRA
responsibilities
Documentation of
COBRA procedural
updates
Each QB’s
information on
what they elected,
how long they
were on COBRA
Information on any
wellness programs
offered by the
plan that might be
subject to COBRA
A copy of any
letters mailed
to QBs
A list of individuals
with qualifying
events during the
year
A written COBRA
procedure manual
with instructions
Methods used to
notify the plan
administrator of a
qualifying event
A copy of any
invoices mailed for
COBRA coverage
Methods the plan
administrator uses
to notify QBs of
COBRA rights
Method for
processing
insignificant
premium
underpayments
Health plan
enrollment
package,
including notices
and disclosures
provided to
employees at the
time of enrollment
(for example, the
COBRA general
notice)
A copy of any
contracts with
third-party
administrators that
handle COBRA
administration and
service providers
that provide
benefits subject to
COBRA
Documentation of
notices that were
mailed, including
proof of mailing
Documentation of
program design,
monitored by a
qualified third
party
Documentation
of COBRA-related
disclosures to
health care
providers
A copy of group
health plan
documents and
summary plan
descriptions
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2. Noncompliance Penalties
If a COBRA failure is discovered, the IRS
may impose an excise tax. The general
formula for calculating the COBRA excise
tax is $100 per QB, but not more than $200
per family, for each day of a noncompliance
period. This could be, for any one taxable
year, up to $500,000 or 10 percent of the
employer’s total expenditures on the group
health plan.
The noncompliance period begins on the
date the noncompliance failure takes place.
Depending on the circumstances, this might
be the first date that coverage is denied,
the date the notice is not sent as required
or another date. The noncompliance period
ends on the date that the compliance has
been corrected. Even if the failure to comply
is not corrected, the noncompliance period
will end on the date six months after the last
date for a QB’s COBRA coverage.
Correct Failures
The IRS provides that the excise tax does
not apply to any failure if it is due to
reasonable cause and not to willful neglect
and is corrected within 30 days after being
discovered, or would have been discovered
with reasonable due diligence. A failure is
considered to be corrected if the rules are
retroactively satisfied, and the QB is placed
in a financial position as good as without
the failure occurring.
In addition to the excise tax, each QB
affected by a COBRA notice violation can
potentially recover civil penalties of up to
$110 per day, in addition to attorney’s fees.
They may also recover lost benefits or be
reinstated to the plan retroactively.
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Audit Tips
• Take it seriously
• Don’t ignore or procrastinate
• Gather all information
immediately
• Contact the auditor to
establish cooperation
and glean reasons, other
pertinent information
• Consult with legal counsel as
needed
• Do not provide more
information than what the
audit letter requests
Don’t Be Scared, Be Prepared
Many employers wish they could turn back
time in order to process a forgotten notice or
make better documentation. Before the IRS
knocks on your door, make sure you have a
proper compliance program. It’s important
to conduct regular internal audits to monitor
operational compliance and procedures.
There’s nothing scary about a COBRA audit if
you are properly prepared.
800-300-3838