How Hard Can COBRA Bite?

May 15th, 2008

The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) provides qualified individuals with the right to continue certain employee benefits under specific circumstances.  Generally, COBRA applies to all employers who had 20 or more employees (full and part time) for 50% of the preceding calendar year.

The IRS is authorized by the Technical and Miscellaneous Revenue Act of 1988 (TAMRA) to assess excise taxes for COBRA failures.  Under TAMRA, the IRS is given the ability to waive the excise taxes if it determines that the failure stems from reasonable cause rather than willful neglect on the part of the employer.  In making this determination, the IRS considers 4 factors:

  • Whether the program provides for proper training of individuals responsible for COBRA operational compliance.
  • Whether the program has written instructions detailing COBRA procedures.
  • Whether the program was designed based on competent professional advice and is updated regularly for changes in the law and/or employer’s situation.
  • Whether the program is monitored by an independent auditor.

If these factors are present and the violations are corrected within 30 days, the IRS can waive the excise taxes for the COBRA violations.  However, if the TAMRA factors are not present in a program, the IRS most likely will not waive any applicable excise taxes.  Any excise tax penalty imposed by the IRS is usually the responsibility of the employer.  Courts have found that outsourcing COBRA administration does not necessarily protect employers from liability under ERISA and related laws.

The excise taxes that the IRS may impose for COBRA non-compliance include $100 per day for each beneficiary affected, with a cap of $200 per day, per family if more than one qualified beneficiary is impacted.  The “non-compliance period” is measured from the date of failure to the earliest of (1) the date of correction or (2) the date 6 months after the last day of the otherwise applicable COBRA coverage period.  The maximum liability for any employer is the lesser of $500,000 or 10% of the total costs of providing group health coverage for the preceding year.

If an employer with 50 single employees violates COBRA requirements for all of its current employees, and the non-compliance period is for 1 calendar year, the IRS excise tax calculation would be:

# of affected employees X per day tax amount X # of days in non-compliance period = total excise tax

 which in this case would be:   50 X $100 X 365 = $1,825,000

As this amount exceeds the maximum liability, it should be capped at the lesser of $500,000 or 10% of the prior year’s total group health care costs.  But even with the maximum cap, the IRS penalties can be significant.

The IRS estimates that as many as 90% of all employers subject to COBRA have plans that do not comply with all COBRA requirements.  The IRS conducts audits of thousands of employee benefit plans each year, many of which include auditing for COBRA non-compliance.  Employers should work with their benefits counsel to ensure that their COBRA programs are designed and administered to comply with the TAMRA “factors” that allow for the waiver of IRS excise taxes if a non-compliance violation should occur.

3 Responses to “How Hard Can COBRA Bite?”

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