If you sponsor a group health plan subject to the federal Consolidated Omnibus Budget Reconciliation Act (COBRA), now may be a good time to review your compliance. The Internal Revenue Service (IRS) recently issued updated COBRA Audit Guidelines intended to provide IRS examiners with a procedural guide to conduct COBRA compliance checks.

The Internal Revenue Code imposes a tax penalty for failure to comply with COBRA requirements. The tax amount is $100 per day, per qualified beneficiary (those individuals entitled to COBRA continuation coverage), for each day of the noncompliance period, subject to a statutory limit of up to $500,000 for unintentional failures that are due to reasonable cause and not to willful neglect.

COBRA Continuation Coverage

COBRA generally requires that group health plans sponsored by employers with 20 or more employees on more than 50% of typical business days in the prior year offer employees and eligible spouses and dependent children the opportunity for a temporary extension of health insurance where coverage under the group plan would otherwise end due to certain qualifying events. Group health plans must provide covered employees and dependents with specific notices explaining their COBRA rights.

New Audit Guidelines for COBRA Compliance

The updated COBRA Audit Guidelines direct IRS examiners to probe specific areas for noncompliance by asking questions regarding:COBRA compliance

  • The number of qualifying events occurring in the year under examination through the current date;
  • How qualified beneficiaries are notified of their COBRA rights;
  • How the plan administrator is notified when a qualifying event occurs;
  • The COBRA election made by qualified beneficiaries; and
  • The premium paid by qualified beneficiaries for COBRA.


Additionally, IRS examiners are instructed to determine what continuation coverage procedures are in place by obtaining certain information related to the plan, including:

  • A copy of the continuation coverage procedures manual;
  • Copies of standard form letters sent to qualified beneficiaries;
  • A copy of internal audit procedures for continuation coverage;
  • Copies of all group health care plans; and
  • Details pertaining to any past or pending lawsuits for failing to provide appropriate continuation coverage.


Personnel records will also be reviewed to confirm whether or not qualified beneficiaries were properly notified of their rights to continuing health coverage. According to the guidelines, personnel records should include documents to support the following items of information:

  • Name and address of each beneficiary (for purposes of third party confirmation if necessary);
  • Date the qualifying event took place;
  • Copies of the notification letters sent to qualified beneficiaries (to determine the period they were eligible to elect coverage, and in fact were offered coverage, and also to confirm they received their notice of rights under COBRA);
  • Type of coverage received under COBRA (to determine if the qualified beneficiary received the proper coverage);
  • Premium payments required under COBRA (review of health plan documents previously requested may indicate whether the premium charged was excessive);
  • Copy of employer's letter to the insurance company/plan administrator notifying them of a qualifying event;
  • Reasons for termination of COBRA coverage properly elected by the beneficiary; and
  • Reasons for employment termination.


Employers required to comply with COBRA should review the Audit Guidelines in detail. If you have questions regarding your responsibilities with respect to COBRA compliance or the type of documentation you should maintain, please consult with your plan administrator or a knowledgeable employment law attorney.


For step-by-step guidance on compliance, be sure to check out our COBRA Steps to Success ebook, available free for download.


Image Credit: shutterhacks


Topics: Employee Benefits, Reporting and Recordkeeping

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