Employers Who Fail to Give Health Care Continuation Notices May End up with a Nasty “Cobra” Bite

Employment Law Insider & Alert

 Share  print   Print     Subscribe

PUBLISHED ON: June 1, 2003

COBRA is the name generally given to the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 which require that most employers sponsoring group health plans offer employees, their spouses and their dependent children the opportunity for a temporary extension of health coverage at group rates in certain instances where coverage under the plan would otherwise end. The Act requires that a notice of COBRA rights be given to employees and covered spouses when they commence participation under the employer’s health care plan. This notice is usually contained in the plan’s Summary Plan Description. Furthermore, employees, their covered spouses and dependent children must be given notices of their rights under COBRA at the time coverage under the employer’s health care plan would otherwise end due to termination of employment or certain other specified events such as, for example, divorce or loss of dependent child status.

Failure to provide timely and accurate notices to plan participants as required by COBRAcan result in a court imposed civil penalty on the plan administrator of up to $110 per day which would be payable to each affected plan participant for the period of noncompliance (Section 502(c)(1) of the Employee Retirement Income Security Act of 1974 (“ERISA”)). This penalty would be in addition to any damages imposed on the employer for failure to provide the medical coverage mandated by COBRA, including attorney’s fees and court costs expended to enforce these rights under COBRA. The penalties for noncompliance with the COBRA notice requirements should not be taken lightly. In a number of cases the federal courts have imposed these civil penalties in order to stress the importance of compliance with the COBRA notice requirements even when the plan participant did not suffer actual harm or the violation was unintentional. See, e.g., Scott v. Suncoast Beverage Sales, Ltd., 295 F.3d 1223 (11th Cir. 2002) and Chenoweth v. Wal-Mart Stores, Inc., 159 F. Supp. 2d 1032 (S.D. Ohio 2002).

The most extreme example of the enthusiasm of some federal courts to impose this civil penalty appears in an unpublished opinion of the Fourth Circuit Court of Appeals where it affirmed the district court’s imposition of this civil penalty even though the notice wasn’t required. Shade v. Panhandle Motor Services Corporation, 91 F.3d 133 (4th Cir. 1996). This case involved a claim for unreimbursed medical expenses incurred by an employee who was on a medical leave of absence when his name was erroneously omitted from coverage at the time the employer changed from an insured to a self-insured medical plan. The claim does not appear to be one that was primarily based on the specific continuation coverage requirements of COBRA, but one based on the fiduciary duty of the employer under ERISA to provide medical benefits that the employee was entitled to receive under the plan. The district court found a breach of that fiduciary duty by the employer and imposed damages of $122,808 for reimbursement of medical expenses and $18,151 for attorneys’ fees. The district court also assessed a civil penalty of $4,035 (incorrectly referred to by the Fourth Circuit as “punitive damages”) for failure by the employer (as plan administrator) to provide the COBRA notice. The facts in this case indicate that the employer had mistakenly believed that the employee had terminated employment which would require it to issue a COBRA notice. However, the employer failed to send the COBRA notice to the affected employee. Thus, this penalty was imposed because, as noted by the Fourth Circuit, “..the district court found it appropriate to impose a penalty to impress upon [the employer] the importance of compliance with COBRA notice requirements.” It should be noted that the penalty was based on a $5 per day assessment beginning on the date the employee went on the medical leave of absence and ending on the date of the filing of the lawsuit. The reduced assessment was due to the finding by the district court that the employer had not acted in bad faith and had corrected its COBRA notice procedures. Therefore, the district court could have imposed a maximum penalty (in 1996) of $100 per day or $80,700. The Fourth Circuit Court of Appeals, in effect, held that the determination by the district court to impose the civil penalty was not clearly erroneous.

Finally, the failure to provide the required continuation coverage under COBRA can also result in the imposition by the Internal Revenue Service of an excise tax on the employer (or, in certain instances, the insurance carrier) of up to $100 per day for each affected person during the period of noncompliance (Section 4980B(b) of the Internal Revenue Code of 1986).

Therefore, an employer must be particularly careful to provide COBRA notices when participants lose coverage under its health care plan. This is especially true when there is the sale of a division or subsidiary that results in some participants losing coverage under the seller’s health care plan. Failure to provide these notices can result in an employer receiving a very nasty “COBRA” bite!