Are Employer Benefit Plans Facing Increased Scrutiny?
In the wake of the new COBRA subsidy provisions included as part of the American Recovery and Reinvestment Act (see Eyes on Benefits dated Feb. 27, 2009), the IRS is now taking a closer look at employer-provided benefit plans to determine abuse of the new subsidy rules. While the subsidy itself is intended to help recently-unemployed individuals maintain their health insurance in a tight economy, the IRS knows that it can also be an opportunity for some businesses to take advantage of the subsidy’s tax reimbursement – and now it is stepping up its monitoring of all employer plans as a result. This is just the latest sign that employer benefit plans are facing increased examination and surveillance from government organizations like the IRS and the Department of Labor and, as a result, may be in need of further compliance safeguards.
IRS and the COBRA Subsidy
In regard to health and welfare benefits, the IRS typically has been more involved with tax-related provisions of employee benefits. But because they also monitor employment and payroll taxes, the new COBRA subsidy is an obvious target for IRS auditors.
Under the new subsidy rules, the federal government will cover 65% of the COBRA premium for up to nine months for employees who were involuntarily terminated between Sept. 1, 2008, and Dec. 31, 2009. Employers must pay the full amount of the premium up front, and claim the 65% subsidy as a payroll tax credit – but only after receiving the individual’s 35% share.
If an employer is selected for a routine employment tax audit, the IRS will be looking to make sure that (a) employers are only receiving tax credits for subsidy-eligible individuals, and (b) only individuals that qualify are receiving the subsidy. For confirmation, the IRS auditor will ask the employer for additional paperwork proving that eligible individuals meet the qualifications (date of termination, etc.) and that they have already paid their 35% share of the premium. Otherwise, the employer’s tax refunds will be frozen until the issue is cleared up, and penalties can be leveraged if the employer was found in violation.
DOL Stepping Up Audits?
The IRS may not be the only government entity increasing its investigations of employee benefit plans. Since 2001, the Department of Labor has been implementing an enforcement initiative to increase monitoring of benefit plans subject to ERISA (Employee Retirement Income and Security Act) through its enforcement arm, the Employee Benefits Security Administration (EBSA). According to the latest DOL annual report, EBSA closed over 32,000 civil and 1,400 criminal cases between 2001 and 2008, and received over 111,000 filings in the same period from plan officials and administrators who want to self-correct plan violations through the agency’s voluntary compliance programs.
EBSA’s record-setting enforcement program has yielded $12 billion in monetary results and more than 900 criminal indictments since 2001 for retirement and health benefit plans – and those numbers are expected to increase.
According to EBSA’s Fiscal Year 2010 Congressional Budget Justification, the Administration will continue focusing on the protection of plan assets and participant benefits, and will ramp up its investigations through national enforcement projects based upon emerging compliance issues. EBSA estimates that approximately 3,900 civil and criminal cases will be conducted resulting in over $952,000,000 in enforcement results and approximately 118 criminal indictments.
Message to Employers: Be Proactive
To ensure they are prepared in the event of an audit, employers can take several steps to confirm compliance with new and existing laws that govern benefit plans. One is to be prudent in administering the plan, which includes selecting service providers and collecting employee contributions. Another is to document everything – an employer can never have too much documentation regarding its benefit plan. Probably the most important step involves being educated on current requirements and recent updates to those requirements. There are plenty of resources, including consultants and brokers, that can provide compliance education, and it would make good practice to tap those resources as often as possible.
For more information on this topic, please click on the links below:
IRS Eyes Employers for COBRA Subsidies
What to Expect if the DOL Audits Your Employee Benefit Plan (password may be required)
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Important Notice: Hill, Chesson & Woody does not engage in the practice of law, accounting, or medicine. Therefore, the contents of this communication should not be regarded as a substitute for legal, tax, or medical advice.
June 19, 2009
Hill, Chesson & Woody strives to keep our clients' group decision makers abreast of trends influencing the employee benefits market. Look for Eyes on Benefits to bring you news and information affecting you and your employees.
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