Benefits and Compensation

COBRA and ARRA Rules Misread in Slapping Employer with $500 Notice Penalty

Here’s one positive pattern in COBRA coverage lawsuits: Even if a plan administrator violated the COBRA law, if it acts reasonably under the circumstances, courts are inclined to mitigate the amount of any penalties. But even though the law is more than 25 years old, case law shows there’s still a learning curve about its requirements.

Recently, an employee who did not follow a company rule was terminated from employment just a couple of months after being hired, and about one month after becoming covered under the group health plan. She never got an initial COBRA notice upon becoming covered under the plan, and the election notice she received was — as the employer/plan administrator admitted — deficient in six ways. The employee sued the employer for COBRA notice violations. She also alleged that she was entitled to a separate notice for her dental plan, as well as a notice regarding premium subsidy rules under the American Recovery and Reinvestment Act of 2009 (ARRA).

The federal court in the Eastern District of Virginia reached the following conclusions:

  1. The individual’s conduct did not rise to the level of gross misconduct, as the employer tried to contend; thus, she was entitled to an election notice.
  2. Based on COBRA notice regulations issued by the U.S. Department of Labor, the election notice satisfied the employer’s obligation as plan administrator to provide an initial notice. Specifically, the rules provided that if a qualifying event occurs before the end of the 90-day initial notice period — as was the case here — providing the election notice simultaneously satisfies the initial notice requirement. Accordingly, the employer was only charged with one notice violation (for the election notice), rather than two (for both the election and the initial notice).
  3. Despite the notice defects, the employer operated in good-faith and the individual was not harmed, so only a $500 notice penalty was assessed to punish ERISA noncompliance.

However, COBRA experts Paul M. Hamburger and Lynda M. Noggle of Proskauer Rose LLP noted that the opinion includes two points that “are clearly wrong”; therefore, administrators should not be misled by those conclusions:

  1. The COBRA notice rules do not apply to limited-scope dental benefits, according to the court. That is not the case, the COBRA experts clarified.
  2. The company’s COBRA notice was not required to provide information on the ARRA COBRA subsidy because ARRA was enacted months after the October 2008 termination. However, the COBRA experts explained that ARRA required companies to send notices to employees who had involuntarily terminated employment between Sept. 1, 2008, and Feb. 17, 2009, but who did not elect COBRA coverage — like the employee in this case — explaining the subsidy and giving them a second opportunity to elect COBRA coverage.

Hamburger and Noggle noted the court’s flawed analysis worked out in the company’s favor but generally hoped future decisions correctly interpret and apply the COBRA provisions.

They explain more about the case (see link below for opinion) — Middlebrooks v. Godwin Corp., No. l:10-cv-1306(AJT/JFA) (E.D. Va., Feb. 7, 2012) — in Mandated Health Benefits: The COBRA Guide.

Middlebrooks opinion

Leave a Reply

Your email address will not be published. Required fields are marked *