Third Circuit Allows Penalties for Failure to Provide COBRA Notice

In a recent decision, the Third Circuit held an employer/administrator liable for penalties for failing to provide a terminated employee with a timely COBRA notice. Penalties were imposed even though the employee continued to receive health coverage, at no cost, after termination. The court affirmed that COBRA continuation coverage notices must be provided to employees upon the first occurrence of a “qualifying event,” not later, and regardless of whether or when the employee actually needs COBRA coverage. This decision is an example of a strict reading of the law and has potential broader implications for other notice and reporting rules under ERISA, including those arising under Health Care Reform.

In Fama v. Design Assistance Corp., Nos. 12-2414, 12-2474 (3rd Cir. April 10, 2013), an employee resigned. Unknown to both the employer and employee, her health coverage was not immediately terminated. A COBRA notice was not sent to the employee. Health coverage continued for several months until the error was discovered and coverage was terminated. Shortly after coverage was terminated, the employee notified the employer that a COBRA notice had not been provided. Instead of providing the employee with a notice of COBRA rights, the employer reinstated the former employee’s health coverage at no cost to the employee with retroactive coverage dating back to the time coverage was terminated. The employee enjoyed free health coverage for nearly a year after terminating employment before the employer terminated coverage for a second and final time and, then, provided the employee with notice of available COBRA continuation coverage.

The employee sued the employer in federal district court under ERISA for failure to provide notice, as required by COBRA. The district court granted relief in the form of a penalty of $10 per day calculated from the time the employee first resigned until the COBRA notice was received. Unsatisfied with a penalty of $10 per day, the employee appealed to the Third Circuit, requesting that the penalty be increased to as much as $110 per day.

The Third Circuit affirmed the $10 per day penalty. The Third Circuit explained that, except where an employee is terminated because of gross misconduct, COBRA requires plan administrators to provide notice of the availability of continuation coverage within 44 days of the event that causes the employee to lose coverage. The court rejected the employer’s claim that COBRA notices are not required when an employee resigns if the employee continues to have health coverage. The court explained that the clock starts running for required COBRA notices beginning when the first event occurs that causes, or will cause, the employee to lose coverage, even if the coverage does not terminate until a later time. Consequently, the court held that plan administrators are not relieved of the obligation to provide COBRA notices merely because employees are still covered under the employer’s health plan after termination. However, because the employer did not exhibit bad faith, and the failure to provide the COBRA notice was attributable to administrative errors, the court refused to increase the penalty.

In sum, Fama shows the importance of providing notice of COBRA continuation coverage to employees in strict compliance with the law – meaning as soon as employees have a qualifying event (and not at some later time when coverage might actually end). The court’s willingness to enforce the applicable penalty provisions shows how important it is to follow the law when it comes to administrative notice and reporting rules (like COBRA) applicable to health and other welfare benefit plans. Similarly, there are other required notices that must be provided periodically to employees under ERISA. The penalties for failing to provide required notices (or providing notices late) can be significant. Thus, employers should review their operating procedures to ensure that all notices required under ERISA are being sent in a timely manner. Attorneys in Buchanan Ingersoll & Rooney’s ERISA and Employee Benefits group have significant experience ensuring compliance with ERISA. Please let us know if you need any assistance.