Benefits and Compensation

3rd Circuit Rejects Call to Change $3K COBRA Notice Penalty

In rejecting a qualified beneficiary’s attempt to increase a nearly $3,000 COBRA notice penalty, the 3rd U.S. Circuit Court of Appeals noted that the employer/plan administrator’s efforts to remedy the violation did not warrant any higher award. The court also rejected the individual’s request for the reimbursement of medical expenses and attorney’s fees. But in affirming the lower court decision, the appeals court also rejected the employer/plan administrator’s contention that because it had extended active coverage due to an administrative error, no COBRA qualifying event occurred at all. The court noted that COBRA is triggered when coverage is lost either at the time of the qualifying event, or as in this case, at some point within the 18-month coverage period. The case is Fama v. Design Assistance Corp., 2013 WL 1443463 (3rd Cir., April 10, 2013).

Facts of the Case

Sarah Fama, an employee with Design Assistance Corp., incurred a termination of employment on Sept. 30, 2008. At that time, she was covered under the company’s group health plan.

Fama did not receive a COBRA election notice on a timely basis. But she was left on the plan for several months due to an administrative error. DAC did realize its mistake in March 2009, and then cancelled Fama’s coverage retroactively, effective Jan.1, 2009. But in June 2009, DAC retroactively reinstated her benefits to eliminate any gap in coverage. Finally, on Sept. 3, 2009, almost a year after her qualifying event, Fama received her COBRA election notice.

Fama later sued DAC, its plan administrator and the plan for COBRA notice violations. A federal district court in New Jersey found that a violation occurred and assessed a statutory penalty of $10 per day for 293 days (representing the time between when she should have received her notice — 44 days after the qualifying event date of Sept. 30, 2008 — and the date she finally received the notice, Sept. 3, 2009). (A plan administrator can be liable for a penalty of up to $110 a day from the notice failure date.)

However, the court failed to give Fama an award for her medical expenses or attorney’s fees. So Fama appealed those decisions, as well as the penalty amount. DAC cross appealed, arguing that the court erred in finding that the penalty period began 44 days after Sept. 30, 2008, because that reasoning did not consider the fact that the company mistakenly continued her coverage well after the employment termination. The company explained further that COBRA defines a qualifying event as an event as an occurrence that, “but for the continuation coverage required under this part, would result in the loss of coverage of a qualified beneficiary.” However, the company alleged that Fama “received the same health and prescription coverage she had as an employee at no cost to her.” As a result, she was “in a better position with respect to the health insurance benefits” than she would have been with COBRA coverage, and her termination of employment on Sept. 30, 2008, could not have been a qualifying event because it did not result in a loss of coverage.

The appeals court rejected DAC’s argument, first clarifying that the IRS COBRA regulations state that “[t]he end of the maximum [COBRA] coverage period is measured from the date of the qualifying event even if the qualifying event does not result in a loss of coverage under the plan until a later date.” 26 C.F.R. §54.4980B-7(e)(A-4)(b)(1)

“Thus the fact that Fama’s coverage continued after her resignation does not mean that her resignation does not constitute a qualifying event,” according to the court.

Fama had argued that in cases when plan administrators acted in good faith or there was no prejudice to the employee, courts have typically awarded penalties of $45-$55 per day.  However, the appeals court rejected this argument, noting that the lower court provided a carefully reasoned decision in assessing the $10-per-day penalty. Furthermore, the lower court had found an absence of bad faith and had noted that the retroactive reinstatement of Fama’s coverage at no cost showed good faith and a willingness to remedy the mistake.

The court then rejected Fama’s other requests to reevaluate the lower court’s rejection of medical expenses and attorney’s fee awards.

More details on this case can be found in Mandated Health Benefits — the COBRA Guide, at http://hrcomplianceexpert.com.

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