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July 2017


Court Rejects COBRA Penalties Even Though Administrative Error Occured

Due to an administrative error, an employer clearly did not provide a qualified beneficiary with a COBRA election notice. However, the qualified beneficiary also benefited from that mistake by receiving 11 months of free health coverage. For that reason, a federal district court in Iowa rejected claims that the employer should be subject to COBRA penalties for its notice failure.

Facts of the Case:

Bonnie Cole, an employee of Trinity Health Corp., was covered under the company’s group health plan, along with her husband and son. Blue Cross Blue Shield of Michigan was the insurer.

Bonnie went on leave under the Family and Medical Leave Act beginning in December 2010. Her FMLA leave expired on March 2, 2011, and she went on short-term disability leave, which expired on June 8, 2011. Cole temporarily received long-term disability; the LTD insurer ultimately denied benefits but did not request repayment of what it already paid.

Cole’s employment termination date should have been June 8, 2011, the last date on which she was qualified for disability benefits and considered an employee. However, her termination was not processed at that time and she remained on the health plan. In late April 2012, Trinity Health discovered that Cole had not been terminated, so that was processed on May 8, 2012, effective June 8, 2011, and Blue Cross was notified. The Coles’ coverage was terminated effective Jan. 1, 2012. At this time, they had received covered benefits through April 2012.

The Trinity Health system indicated a “COBRA Term Sent Date” of May 8, 2012, but a COBRA notice had not been sent.

After a doctor told Cole’s husband that they no longer had health coverage, Cole got confirmation from Blue Cross that their coverage had ended. However, it still covered all claims through April 30, 2012. The Coles had $1,307 in medical claims denied by Blue Cross beginning on May 1, 2012. The Coles did have access to coverage through her husband’s employer, however, which became effective June 1, 2012.

The Coles sued Trinity Health, alleging among other things that the company violated COBRA’s notice requirements. They sought statutory penalties of up to $110 per day. Trinity Health conceded that it did not send a COBRA notice but argued that a penalty was unwarranted because the Coles received about 11 months of free health coverage. This far exceeded the $1,307 in medical claims incurred before they were covered under her husband’s plan. The court agreed, noting that because of the Coles’ benefit of receiving extended free health coverage, they were already in a better position than they would have been in but for the COBRA notice violation.

Insufficient COBRA Premium Payments

According to COBRA regulations, a qualified beneficiary is required to pay their COBRA premiums on time and in full. The plan administrator has the right to terminate COBRA coverage if the qualified beneficiary fails to make the proper payment; however, COBRA law includes a special rule in the case of underpayments. If the shortfall is deemed to be “not significant” (which means it does not exceed $50 or 10% of the COBRA premium) then the plan administrator can do one of following:

First, the plan administrator can simply accept the deficient payment as “paid in full.” Or secondly, the plan administrator may choose to notify the qualified beneficiary of the shortfall and allow for a reasonable timeframe for the deficiency to be collected. Simply accepting the insufficient payment as a full payment can be a slippery slope for most plan administrators – it is difficult to determine what is “not significant” and it also sets a precedence for future payments. So in the majority of cases the plan administrator will opt for the second choice and notify the qualified beneficiary of the shortfall.

This is where things can get tricky – there is a separate COBRA stipulation for grace periods. For the initial payment the grace period is 45 days from the date of COBRA election. After that the grace period is generally 30 days for successive payments. But keep in mind even though 30 days is considered the safe harbor for a grace period, it can actually be longer if the plan is insured and the insurer allows more than 30 days for the employer to make the payment for plan coverage. If that is the case, then the same timeframe must be offered to the qualified beneficiary as well.

When an insufficient payment is made, often times the reason is simply due to a mix-up or error. Perhaps the wrong check to another institution was mailed inadvertently in the COBRA envelope or the numbers written on the check were simply transposed. Although a plan administrator is within the legal rights to begin the termination procedures, in this author’s opinion it might be prudent to go above and beyond to ensure an extra effort was made to allow the qualified beneficiary to rectify the error. Especially if it is apparent that the qualified beneficiary has a history of making the proper payments and suddenly there is an insufficient payment, it might make sense to call or email them to make sure the consequences are clear. Doing so will mitigate costly lawsuits and benefits claims, not to mention the fact that as a plan fiduciary, ERISA requires one to always act in the best interest of participants and beneficiaries.


In this Issue:

Court Rejects COBRA Penalties Even Though Administrative Error Occured

Insufficient COBRA Premium Payments

See Also:

COBRA Solutions
Cafeteria Plan Manager
QSE HRA Manager
COBRA Administration Manager
U.S. Department of Labor
COBRA and the Trade Act of 2002
COBRA and Medicare Entitlement

Technical Information
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