An employer/plan administrator that tried to make good on a COBRA administrative error got more reinforcement that its efforts greatly minimized its legal liability. The 8th U.S. Circuit Court of Appeals affirmed the fact that the aggrieved qualified beneficiary received two years of free health coverage effectively cancelled out any need to impose penalties for initial and election notice failures. Earlier, the qualified beneficiary had pursued notice penalties in bankruptcy court and federal district court, and was rejected each time. The case is In re Interstate Bakeries Corp., 2013 WL 275978 (8th Cir., Jan. 25, 2013).
Interstate Bakeries Corp. (Hostess) had a group health plan. It served as plan administrator; CIGNA was the third-party administrator. Sean Deckard began employment with Hostess in May 2004 and became covered under the plan in December 2004. Hostess routinely provided initial COBRA notices when employees become covered under the plan, but because it was in the midst of a Chapter 11 bankruptcy reorganization, it was unable to provide proof that such a notice was sent to Deckard. Accordingly, it did not dispute that he did not receive an initial COBRA notice.
Hostess notified Deckard that his employment was terminated on Sept. 11, 2006. Hostess had no documentation that it sent Deckard an election notice; accordingly it also did not dispute this notice failure.
Due to an apparent clerical oversight, Hostess did not process certain aspects of Deckard’s termination for almost two years. As a result, Deckard still had health coverage without any premium payments and received about $19,000 in plan benefits. Once the error was found, however, Deckard’s coverage was cancelled retroactively back to his employment termination date. CIGNA then attempted to recover plan benefits that had been paid to various health providers, which in turn pursued reimbursement from Deckard.
In April 2009, Deckard filed an administrative claim in Hostess’ bankruptcy proceeding for reimbursement of his medical expenses and penalties for the COBRA notice failures. Hostess did reinstate Deckard’s coverage and CIGNA returned almost $2,442 it had recovered from Deckard’s providers, which in turn refunded nearly $230 of the roughly $693 they had collected from Deckard.
Hostess challenged Deckard’s claim, arguing that it had no remaining liability. Deckard counterclaims for COBRA notice penalties, contending that he suffered damages during the six-month period when his coverage was revoked.
The bankruptcy court ruled in Hostess’ favor, finding among other things that Deckard’s damages were not connected to the lack of notice two years earlier and even if they were, any prejudice suffered was “insignificant compared to the benefit he received from two years of uninterrupted free health care.” Also, Hostess did not act in bad faith so a civil penalty was unnecessary; the tumult of Hostess’ bankruptcy reorganization likely caused its inability to prove that the COBRA notices were sent.
Deckard appealed that decision, which a district court later affirmed. Deckard then pursued an appeal before the 8th Circuit, but that court affirmed the lower court decision.
More details on this case can be found in Mandated Health Benefits — the COBRA Guide, at http://hrcomplianceexpert.com.