The DOL and the IRS Can assess penalties for COBRA violations. Employers and plan administrators ALSO are subject to tax penalties for violations of the regulations.
The Department of Labor (DOL) and the Internal Revenue Service (IRS) each have authorization to independently assess penalties for COBRA noncompliance. As an employer, you must properly implement federally mandated procedures for COBRA administration. The DOL assesses "ERISA statutory penalties," and IRS penalties are labeled "excise taxes." Each agency has its own rules for setting the amounts assessed for COBRA noncompliance, which depend on the type, duration and willfulness of each violation.
IRS COBRA Excise Taxes
The IRS is authorized by TAMRA (Technical and Miscellaneous Revenue Act of 1988) to assess COBRA excise taxes for failure to follow COBRA rules. Before passage of TAMRA, the IRS punished employers for COBRA noncompliance by not allowing all deductions for expenses paid for group health plans in the first year in which the failure first occurred through to the year in which the failure was corrected. IRS section 4980B defines the IRS' COBRA provisions and excise tax penalties to violations after 1988.
In a single employer plan, the employer and each person responsible for administering benefits under the plan who caused the violation is liable for the excise tax penalty. Employees are exempt from liability. In some cases, employers can even be held liable for failures in COBRA administration made by previous employers, in the case of a takeover or company buyout. In the case of a plan covering multi-employers, the plan is liable for the COBRA IRS excise penalties.
IRS form 8928 and Instructions
COBRA excise taxes may not apply if:
There is a reasonable cause for the violation
The violation is not the result of willful neglect
Correction is made within 30 days of the violation
The victims are returned to a financial position that is at least comparable to the position they would have been in if the violation not occurred
Third Party Administrator Liability
Hiring COBRA third-party administrators (TPAs) does not insulate employers from liability for COBRA violations. Employers cannot contract away an obligation specifically assigned to it under the COBRA statute. So even if you hire an agent to administer COBRA, you are still responsible for the actions or inaction of that agent.
The excise tax penalty is $100 per day per day of noncompliance, but if there is over one qualified beneficiary with respect to the same violation, the maximum amount of tax per day is $200 per family.
Huge penalties can be assessed for violations that are not corrected even before the employer is notified by the IRS of an impending COBRA audit, or that occur or continue during the Health Plan examination period. Penalties can be up to $2500 for each beneficiary affected by non compliance, or the total amount based on the number or days of noncompliance, whichever is less. If the IRS finds a violation that it considers to be more than minimal, employers may be subject to a penalty up to $15,000. The maximum any employer could be taxed in a given year is ten percent of the health plan costs in the previous year or $500,000, whichever is less.
What determines the number of days of noncompliance? The period of noncompliance for purposes assessing penalties is computed from the date on which the violation first occurred and ends on the date the failure is corrected, or six months after the last day that continuation coverage for that beneficiary would have ended, whichever is sooner.
The IRS will not assess a tax only if the COBRA violation proves to be inadvertent or negligent and the employer corrects the violation within a 30 day grace period of discovering the violation. There is no 30-day grace period if the IRS concludes that the violation was willful. IRS agents can reduce or waive excise taxes based on their perception of inadvertent or willful noncompliance.
IRS COBRA / Health Plan Audits
Generally, COBRA audits occur because a complaint or lawsuit has been filed by a former employee may have been wrongfully denied benefits. An examination of COBRA procedures may be included as part of a general business audit by the IRS.
Calculating correct COBRA Fines & penalties:
To determine the correct tax liability after an IRS examination or compliance review, the company will be expected to produce:
Records and documents relating to your COBRA compliance procedures
A copy of a written COBRA administration procedures manual
Proof individuals responsible for COBRA compliance were trained and their names
Copies of notices, letters and other documents used to administer COBRA
Info about any past or current lawsuits against the employer for violations of COBRA procedures
Documents relating to a specific qualified beneficiary, particularly if they notified the IRS
There is no rule or regulation requiring an employer or administrator to maintain a written COBRA procedures manual. But the IRS will expect to see documentation describing your internal administrative procedures. Having an up-to-date procedures manual will help prove you are administering COBRA correctly.
Employers can avoid IRS COBRA audits and fines by:
Accurately documenting everything
Always send COBRA notices on time and to the proper parties
Carefully maintain memos and records that accurately track and document Company COBRA implementation
Staying current with COBRA rules and case regarding COBRA issues
Maintaining a Summary Plan Description (SPD)
Keeping a COBRA procedures manual
Keeping COBRA continuation notices to show current changes in COBRA rules
Non current compliance documents prove the employer failed to adequately administer COBRA. You can avoid COBRA audits and penalties by staying current on COBRA rules and keeping a watchful eye on third party administrators.Written by Craig J. Casey
Craig Casey is an Writer, Coach, Blogger, Husband, and Former Health Insurance Agent helping people on the web since 1999 with their health insurance problems.
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