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There is now a March 2012 version of the IRS guide called "Audit Techniques and Tax Law to Examine COBRA Cases (Continuation of Employee Health Care Coverage)" on the IRS website.

Background. Title 10 of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), requires employers with 20 or more employees to offer COBRA coverage and to notify their employees of the availability of such coverage. COBRA applies to plans maintained by private-sector employers and by most state and local governments. COBRA requires employer group health plans to offer qualified beneficiaries (certain employees, ex-employees, their spouse/ex-spouse and dependents) the option to continue their health care insurance despite "qualifying events" that would otherwise cause the loss of that coverage.

A "qualifying event" includes:

1. the "covered employee's" death; 
2. the termination of the "covered employee" (for reasons other than gross misconduct on the part of the employee), or a reduction in the "covered employee's" employment hours; 
3. the divorce or legal separation of a "covered employee" from his or her spouse; 
4. the "covered employee" becoming entitled to Medicare benefits under Title XVIII of the Social Security Act. 

A "covered employee" is an individual who is, or was, provided coverage under a group health plan by virtue of his or her performance of services for one or more employers maintaining the plan.

The COBRA provisions in the Internal Revenue Code (IRC) consist of:

1. operating requirements (what an employer/plan administrator and its group health plans must do to be in compliance) 
2. tax sanctions (what happens in the event of noncompliance). 

The operating requirements are in Code Sec. 4980B(f). A group health plan meets the continuation coverage requirements of Code Sec. 4980B(f) if each qualified beneficiary who would lose coverage under the plan due to a qualifying event is entitled to elect, within the election period, health care continuation coverage under the plan. The group health plan should offer the beneficiary health care coverage that is provided to non-COBRA individuals similarly situated. Normally, it would be the same coverage that the qualified beneficiary had on the day before the qualifying event happened.

Code Sec. 4980B(f)(6) provides the notice requirements that must be followed to ensure that qualified beneficiaries are aware of their rights to health care continuation coverage. Employers must notify the plan administrator within 30 days after the occurrence of most qualifying events. The plan administrator is then required to notify the employee of their eligibility.

The tax sanctions for noncompliance are covered in the rest of Code Sec. 4980B. Employers not in compliance with the COBRA rules will be subject to an excise tax of $100 per day, per qualified beneficiary, for each day of the noncompliance period. Generally, the employer who maintains the plan is the person liable for the excise tax; however, if the plan is a multi-employer plan (that is, a plan of more than one employer covering union employees), then the plan is the liable person. Certain third parties (in other words, insurance companies and third party administrators), in some cases, may also be liable for the excise tax.

The Guide. The guide has separate sections on: the continuation coverage requirements, computing the excise tax, and definitions. In addition, there are links to revenue rulings on COBRA, and Form 8928, Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code.

IRS examination procedures. The guide also has a separate section on IRS examination procedures. The IRS recommends that its examiners look at the continuation coverage procedures that the taxpayer currently has in place. Examiners are advised to obtain the following information from the taxpayer: (i) a copy of the health care continuation coverage procedures manual; (ii) copies of standard health care continuation coverage form letters sent to the qualified beneficiaries; (iii) a copy of the taxpayer's internal audit procedures for health care continuation coverage; (iv) copies of all group health care plans; and (v) details pertaining to any past or pending lawsuits filed against the taxpayer for failing to provide appropriate continuation coverage.

Based on the procedures in place, IRS examiners should probe specific areas for noncompliance. Examiners may also want to ask taxpayers to provide copies of federal and state employment tax returns filed during the current period under examination and the preceding year. These returns will show changes in the number of employees on the payroll between the two years. Changes in the comparative lists may reveal potential qualifying events that the taxpayer has not accounted for. In addition, examiners should review the employer's personnel records and confirm whether or not qualified beneficiaries were properly notified of their rights to continuing health coverage.

The material contained in this article has been prepared by Checkmate Payroll Services, Inc for informational purposes only and does not constitute legal advice and the information is not guaranteed to be correct, complete, or up-to-date. Before taking action on any of the information in this article it is advisable to speak with a licensed attorney.

For more information about the services offered by Checkmate contact Josh Robinson at (603) 225-2004 or by e-mail at josh@checkmatenh.com.

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