IRS announces new 2 step audit procedure for COBRA compliance

Small businesses with more than 20 employees that offer employee health benefits should be aware of IRS’s revised 2-step audit procedure to ensure compliance with COBRA law. The first step of the audit checks five key documentation issues:


  • The employer’s COBRA procedure manual (or its equivalent);
  • Form letters used in COBRA administration;
  • The underlying group health plan documents;
  • The employer’s internal audit procedures; and
  • Identification of, and details of, any COBRA-related litigation involving the employer.

If these documents are not available, not produced timely, or are not in an appropriate format then a second more comprehensive audit is initiated. Penalties for non-compliance with COBRA can be substantial. Even if no penalty is assessed, the cost of complying with an audit can be substantial.

Companies can redesign their health plans to avoid COBRA requirements and more are expected to do so by 2014 if the current health plan reform law survives. Redesign primarily involves moving employees to individual portable coverage (rather than group insurance coverage) and reimbursing part of the cost. Since individual coverage is less expensive but provides less coverage, there are both risks and rewards to making the change. Freedom Benefits offers consultations to businesses with concerns about COBRA.


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