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► COBRA Documents And Notices: When Are Penalties Warranted?

When an employee is terminated from employment and loses group health plan coverage (subject to the Consolidated Omnibus Budget Reconciliation Act (COBRA)), plan administrators and third-party administrators (TPAs) should ensure that all affected qualified beneficiaries are provided, in a timely fashion, COBRA election notices.

The failure to provide COBRA notice can result in a claim for damages and statutory penalties. However, even where a COBRA election notice is not provided, Employee Retirement Income Security Act (ERISA) damages and statutory penalties can be mitigated, if not entirely avoided, by the good-faith actions of plan administrators and TPAs trying to manage the situation.

This is illustrated in a recent case. An employer/plan administrator had inconsistent language about the plan procedures and other information in COBRA notices and other plan documents—and did not send an election notice on a timely basis. However, a federal district court in Kansas dismissed penalty claims, finding that the notice delay was relatively brief and not done in bad faith, and the qualified beneficiary failed to show that his out-of-pocket expenses exceeded the cost of COBRA coverage.

At most, the court held that the qualified beneficiary can recoup attorneys’ fees incurred in his attempts to have the COBRA notice sent to him. The case is Violetta v. Steven Bros. Sports Management, LLC, 2018 U.S. Dist. LEXIS 92734 (D. Kansas, May 31, 2018).

Facts of the Case

In August 2015, Steven Brothers Sports Management (SBSM), LLC, hired Steven Violetta to serve as CEO of its three minor league hockey franchises. Violetta was covered under the company’s group health plan. The company does not have employee handbooks; personnel manuals or policies; or policies, procedures, or records related to employee health benefits or COBRA.

SBSM terminated Violetta on March 11, 2016. On April 28, 2016, Violetta asked for plan documents. On or about July 15, 2016, he suffered a foot injury for which he paid approximately $500 in medical bills.

SBSM did not send COBRA information to Violetta until July 8, 2016, when it sent a document titled “Your Health Care Benefits Program,” along with a COBRA election notice, as well as medical and dental benefits booklets. That document failed to identify, among other things, the plan name, plan number, or the plan's agent for service of process.

The COBRA notice stated that coverage would be under the Top Shelf LLC plan (the company that once owned one of the franchises), and premiums should be made out to Blue Cross and Blue Shield of Kansas and sent to a P.O. Box in Dallas. The booklet, however, referred to Blue Cross and Blue Shield of Texas. In addition, the notice stated that coverage would end “6/30/2016 due to ... End of employment.” However, SBSM had actually ended Violetta's employment on March 11.

Violetta sued SBSM for COBRA notice violations. After the complaint was filed, employees in an affiliated company were assigned to handle COBRA and plan document inquiries.

On July 27, 2016, Violetta’s lawyer informed SBSM that it had not provided Violetta with a summary plan description under ERISA and highlighted the problems and inconsistencies with the COBRA notice.

On August 30, 2016, SBSM provided Violetta with a document titled “Additional Information Provided to Steven Brothers Sports Management of Allen LLC Medical Plan.” However, it was inconsistent with the July 8 notice about things such as the plan name, the insurance provider, who to pay, and where to send COBRA premiums.

That same day, Violetta sent the election form to the designated SBSM contact and followed up with an e-mail. However, the contact had “no idea of any of this” and said he would ask someone in HR at the affiliated company. That person said payment for COBRA coverage should be made to “Allen Americans” and mailed to an address in Allen, Texas. This contradicted the instruction in the COBRA notice.

On September 29, 2016, Violetta's counsel wrote a letter to defendants' counsel to help facilitate Violetta's COBRA coverage in light of the inconsistent information. On October 8, Violetta remitted his COBRA premiums as the HR staffer had instructed.

COBRA Claim

Violetta argued that the court should award notice penalties against all defendants as part of the “control group” that included his employer SBSM. In turn, SBSM argued: (1) only SBSM-A, as the plan administrator, was liable for any penalties; (2) no penalties may be awarded because Violetta contributed to any delays; (3) no penalties should be awarded given an absence of bad faith or actionable damages by Violetta; and (4) any attorneys’ fees should be limited to the reasonable expenses of obtaining the required notices.

The court found COBRA penalties, if any, would solely be assessed against SBSM-A, which is the designated plan administrator. It rejected SBSM’s claim that no penalties should be awarded because Violetta contributed to the delays involved.

First, it noted that questions existed on whether Violetta was actually responsible for developing COBRA procedures. And even if he contributed to the problem, “this does not mean that it was reasonably beyond SBSM-A's control to realize, promptly, that no proper procedures were in place and provide the required notice.”

However, the court ultimately dismissed the penalties claim, finding penalties were not warranted because of the relatively brief nature of the delay, the absence of evidence of bad faith on the defendants’ part, the extremely limited evidence of actual prejudice cited by Violetta, and his failure to show that his out-of-pocket medical expenses exceeded the cost of COBRA coverage. Any attorneys’ fee award should be limited to the efforts reasonably expended in obtaining the required notices in 2016, the court further indicated.

Implications

COBRA provides that a termination of employment or reduction in hours that results in a loss of coverage is a qualifying event entitling a qualified beneficiary to up to 18 months of COBRA coverage. An employer has up to 30 days to notify a plan administrator of a qualifying event. In turn, the plan administrator has 14 days from the date of that notice to send a COBRA election notice.

COBRA’s notice requirement applies to the plan administrator, which in many, if not most, cases is defined in a plan to be the employer sponsoring the plan or a committee designated by the employer to administer the plan. Other entities are generally not subject to COBRA penalties.

Although the COBRA notices were sent late in this case, the court did not award penalties because there was no evidence of bad faith. Plan administrators and TPAs should carefully administer plans to ensure COBRA compliance. However, mistakes are bound to occur, and when they do, the administrator’s response will affect potential ERISA damages and statutory penalties.

For example, if a plan administrator decides to retroactively terminate coverage that was extended incorrectly, on the basis that no premiums were paid, a court might view things differently than if the administrator simply terminated coverage prospectively. Of course, each case is different and needs to be considered carefully.

The bottom line is that taking a good-faith and reasonable approach in solving cases involving a failure to provide COBRA election notices can go a long way toward mitigating, or even eliminating, the risk of penalties and damages.

[9/2018]

 

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