IRS Information Letter 2017-0027 (Sept. 20, 2017)
Available at https://www.irs.gov/pub/irs-wd/17-0027.pdf
The IRS has released an information letter addressing an employer’s calculation of the COBRA premium charged to a terminating employee for continuation coverage under a health reimbursement arrangement (HRA). The employee disputed the premium amount and asked the IRS (through his Congressional representative) to audit the employer’s COBRA practices to determine whether it was charging excessive premiums for the coverage. The employee further maintained that the employer had failed to notify him of an increase in the premium or about its open enrollment process.
The information letter explains generally that an employer may charge the “applicable premium” for COBRA coverage, which is the cost to the plan of coverage for similarly situated beneficiaries for whom a qualifying event has not occurred, plus a 2% administrative fee. The letter points to IRS guidance providing that (1) HRAs are subject to COBRA; (2) the applicable premium under an HRA may not be based on a qualified beneficiary’s reimbursement amounts available from the HRA; and (3) the COBRA premium for an HRA is determined under existing COBRA rules. The letter explains that, under those rules, the plan administrator may calculate the premium for a self-insured plan (such as an HRA) based on either an actuarial determination or on past costs to the plan. The letter also states that the IRS was unable to determine whether this employer’s charge for HRA premiums exceeded the amount determined under either method, or whether the employer was operating in good faith compliance with a reasonable interpretation of COBRA. The letter further notes that the IRS uses several methods to select an organization’s accounts and financial information for review, and that the employee should use Form 3949-A to report suspected tax law violations to the IRS, while concerns about the employer’s compliance with COBRA’s notice and disclosure requirements should be directed to the DOL.
EBIA Comment: IRS guidance would be welcome on how to determine the COBRA applicable premium for an HRA. The IRS hinted that such guidance might be forthcoming when it issued Notice 2015-16 regarding health care reform’s “Cadillac tax” (see our Checkpoint article), but nothing has been issued to date. The letter is also a reminder that employees can report benefit-related compliance violations to government agencies and that these reports may trigger an audit. For more information, see EBIA’s COBRA manual at Sections XI.G.6 (“Determining and Paying the COBRA Premium for an HRA”) and XXI.D (“Applicable Premium for Self-Insured Plans”), and EBIA’s Consumer-Driven Health Caremanual at Section XXV.B (“HRAs and COBRA”). See also EBIA’s Self-Insured Health Plans manual at Section XXXII (“Audits of Self-Insured Health Plans”), EBIA’s ERISA Compliance manual at Section XXXVII (“DOL Audits and Investigations Under ERISA”), EBIA’s Cafeteria Plans manual at Section XXXVIII (“Cafeteria Plan Audits”), and EBIA’s HIPAA Portability, Privacy, & Security manual at Section XX.C (“HIPAA Compliance Audits by OCR”).
Contributing Editors: EBIA Staff.