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THIS COBRA CAN BITEPlan administrators need to be aware of COBRA’s new notice requirementsBy Jean E. Tomasco, Esq. A court recently ordered a human resources service company to pay more than $300,000 in damages, plus attorneys’ fees, to an employee health plan participant and his wife. The reason? The company had failed to provide them with notice of their right to continue health insurance coverage when the employee’s group coverage otherwise would have terminated, as required by the Consolidated Omnibus Reconciliation Act of 1986, as amended (“COBRA”). The company also apparently had misinformed the employee about the status of his health insurance coverage and failed to remedy the situation despite its promises to do so. As a result, the employee and his wife, who each had serious health issues, incurred approximately $27,000 in medical expenses and ultimately divorced so that the wife could qualify for public assistance. The court’s award included reimbursement for the medical expenses as well as the full statutory penalties available for the company’s failure to provide the COBRA notices. Delcastillo v. Odyssey Resource Management Inc., 320 F. Supp. 2d 889 (D. Neb. 2004). The case underscores the importance of understanding and complying with
COBRA’s notice requirements. COBRA, which is a part of the federal
Employee Retirement Income Security Act (“ERISA”), requires
certain employers (generally, those with 20 or more employees) to allow
employees and their covered dependents the opportunity to elect continuation
of their health care coverage for a period of time, at their own expense.
Plan participants must be given adequate notice of their continuation
rights. Notice Requirements Under COBRA COBRA imposes several different notice requirements upon administrators of employee health benefit plans. A plan administrator is the person specifically so designated by the terms of the operative plan document or, if an administrator is not specifically designated, the plan sponsor (usually, the employer). A plan administrator must provide the following: (1) a general notice, to be provided shortly after health benefit coverage begins; and (2) an election notice, to be provided at the time of a qualifying event (such as termination of employment or reduction of hours) that would result in loss of coverage. In addition, under the new regulations, notices must be provided (3) when an individual is not entitled to continuation coverage after a qualifying event and (4) when COBRA coverage terminates early. Each of these requirements will be addressed in turn. 1. General Notice When employee first becomes eligible for coverage under a plan, the administrator is required to provide a general notice concerning COBRA continuation rights. The notice must be written in a manner that can be understood by the average plan participant. Among other things, it must provide a general description of the plan’s COBRA provisions, including information on who may become a qualified beneficiary, the types of qualifying events that may give rise to continuation coverage, the maximum period of coverage, and requirements applicable to payment of premiums. The general notice must describe circumstances when an employee or other qualified beneficiary is required to notify the administrator of certain events (such as a divorce or a Social Security disability determination). It also must include the plan’s name and COBRA information contact, along with a statement that more information is available from the plan administrator or in the summary plan description (SPD). A model general notice is provided in the new regulations. The model notice cannot be copied and used “as is” but must be modified to include specific information for each plan. Importantly, the Department of Labor has indicated that administrators may no longer rely on the old model notice of COBRA rights that was issued in 1986. Therefore, any such notices should be discarded. The general notice must be furnished within 90 days after coverage begins, unless a qualifying event occurs before the 90 days expires. If an administrator is required to furnish an election notice (discussed below) within the 90-day window, the election notice can satisfy the general notice requirement. The general notice requirement can also be satisfied by including the information within the plan’s SPD and distributing the SPD within the time limit. The general notice must be provided to the covered employee and also
to his or her spouse, if the spouse is covered by the plan. (A separate
notice is not required for dependent children living with the employee
or spouse.) The administrator can deliver a single notice addressed to
both the employee and covered spouse at their joint residence. Hand-delivery
to a covered employee at work is sufficient notice for the employee,
but is not considered to be sufficient notice to a spouse. (This is an
important consideration if the administrator intends to incorporate the
general notice into an SPD.) Also, a single notice is not adequate if
the spouse’s coverage begins at a different time than that of the
employee. For example, if an employee gets married after receiving the
general notice and adds his or her spouse to the plan, the spouse should
be sent a separate general notice. COBRA also requires plan administrators to provide an election notice concerning continuation coverage upon learning of an event that would otherwise cause an employee and/or the employee’s dependents to lose their health benefit coverage. Such events are known as qualifying events, and include termination of employment, reduction of hours, death of the employee, the employee’s entitlement to Medicare, commencement of employer bankruptcy proceedings, divorce or legal separation of the employee and spouse, or a child’s loss of dependent status. Certain qualifying events (such as termination, reduction of hours, or an employee’s death) must be reported by the employer to the plan administrator within 30 days of the qualifying event. Other qualifying events (such as divorce, legal separation, or loss of dependent child status) must be reported by the employee or other qualified beneficiary; the qualified beneficiary must have at least 60 days to provide notice of such an event. The new regulations require plans to provide reasonable procedures for a qualified beneficiary to report a qualifying event, including identifying who is responsible for receiving such reports and how the information should be furnished. Specific forms for this purpose can be utilized as long as they are easily accessible and free of charge; the procedures also must be included in the SPD. If a plan doesn’t have reasonable procedures in place, notice by a qualified beneficiary is deemed to be provided as long as information identifying the event is given to any party who is potentially in charge of the plan (such as the employer’s human resources department). Once the plan administrator becomes aware of a qualifying event, it must provide election notices to all qualified beneficiaries within 14 days. The election notice must include the following: a description of the continuation coverage provided and its duration, including potential early termination or extensions; an explanation of the manner in which COBRA rights may be exercised; information concerning second qualifying events and Social Security disability determinations; payment requirements, payment schedule, and policies; a statement that further information is available from the plan administrator or in the SPD; information regarding the impact of not electing continuation coverage; identification (by status or name) of each qualified beneficiary who is entitled to elect coverage; a statement that each qualified beneficiary has independent election rights; and a statement concerning the importance of keeping address information current. A model election notice is provided in the regulations; as with the model general notice, it must be tailored to include information on the specific plan. Election notices must be furnished to each qualified beneficiary. However, if the employee and covered spouse reside at the same address, it is acceptable for an administrator to provide a single notice addressed to both of them. Similarly, an administrator may provide notice to a dependent child of a covered employee by furnishing a single notice to the covered employee or to the covered employee’s spouse, provided that the dependent child resides with the individual to whom notice is sent. Plan administrators are well advised to keep copies of notices sent
as well as information concerning the method of notification in the event
a dispute should arise. In fact, in a recent case where receipt of an
election notice was disputed, a court declined to render an early judgment
in favor of an employer where the employer could not offer sufficient
proof (such as a sworn statement or mail receipt) that the election notice
was actually mailed. Claudio-Gotay v. Becton Dickinson Caribe Ltd., No.
03-1752 (1st Cir. 2004). In the event that an individual is not entitled to continuation coverage, the new regulations require the plan administrator to send out a notice of unavailability of COBRA coverage explaining the reason(s) why. This notice must be sent within 14 days after the administrator receives notice of a qualifying event. It must be sent out whenever COBRA coverage is denied, regardless of the basis for the denial or the type of qualifying event. The Department of Labor declined to provide a model denial notice on the grounds that it would be difficult to develop a single model form that would adequately cover all of the potential circumstances. Nevertheless, plan administrators should consider implementing a checklist or other procedure to ensure that proper notice is sent. 4. Notice of Early Termination of COBRA Coverage Plan administrators also must send out a notice in situations where COBRA coverage is terminated earlier than the end of the applicable maximum period of coverage. The notice of early termination must be sent to each qualified beneficiary to whom it applies and it should include the reason why coverage was or will be terminated early, the date of termination, and any rights the individual has under the plan or applicable law to elect alternative group or individual coverage (such as a conversion right). This notice must be furnished as soon as practicable after the administrator determines that coverage will terminate early. Again, because there are many potential reasons why COBRA coverage could terminate early, the Department of Labor declined to provide a model early termination notice. Consequences of Noncompliance Failure to follow COBRA’s notice requirements can lead to plan administration problems. For example, a plan participant who does not receive a general notice may not be aware of his or her obligation to notify the plan administrator of certain qualifying events, and may consequently retain coverage for a longer period than that to which they would otherwise be entitled. Delay or failure to send out an election notice can result in extension of the beneficiary’s time period for electing coverage and also may result in problems (and potential liability) if coverage is terminated prematurely. Moreover, a plan administrator that fails to comply with COBRA’s notice requirements can face significant legal liability. A court may, in its discretion, impose a statutory penalty of up to $110 per day per beneficiary where a plan administrator delays or fails to provide the required notices. The court can also order other relief as it deems proper and can award attorneys’ fees and costs. Criminal penalties (including fines and imprisonment) can be imposed for willful violations. In addition, depending on the circumstances, failure to comply with COBRA’s requirements might constitute a breach of fiduciary duty. Penalties for such a breach can include appropriate equitable or remedial relief, such as restitution of losses and removal as a plan fiduciary. State Continuation Coverage Plan administrators should be mindful that state laws may impose other continuation coverage obligations upon employee benefit plans. Connecticut, for example, requires group health insurance plans to provide a right of continuation coverage similar to that under federal COBRA. This state law applies to insured group health plans regardless of employer size; federal COBRA, by contrast, generally applies to employers with 20 or more employees. Connecticut also requires insured plans provide certain continuation coverage rights to employees and dependents who would otherwise lose coverage due to termination of employment, leave of absence, or reduction in hours because of eligibility to receive Social Security retirement benefits. Depending on the facts of a particular case, this could potentially increase the amount of time for continuation coverage well beyond the maximum periods provided by COBRA. Plan administrators should ensure that employees and their dependents receive information not only on their rights under the federal COBRA law but also on any rights they may have under any applicable state laws. The model notices included in the new COBRA regulations deal strictly with the federal law and do not address the state law. Further, there may be situations where continuation coverage is available under state law but not COBRA, or vice-versa. Therefore, depending on the circumstances, plan administrators may need to adapt the model COBRA notices to include information on state continuation law or have separate notices available for each. Because the interplay of state and federal continuation requirements can be confusing, plan administrators may wish to consult with a benefits attorney in preparing such notices. Conclusion Plan administrators are well advised to review their existing COBRA notification procedures for compliance with the new rules. By utilizing the model notices as appropriate, establishing effective procedures, and maintaining adequate documentation, administrators can minimize the risk of COBRA’s bite.
This article is intended to provide general information only and should not be considered legal advice. Consult your attorney before acting on anything contained herein. © 2004 Robinson & Cole LLP
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© 2003 Connecticut Business & Industry Association (CBIA). All rights reserved. The articles, forms and other materials available through this Web site are for informational purposes only. They are not intended as legal advice or as a solution to an individual problem. You are encouraged to consult with appropriate legal counsel prior to relying on the materials in whole or in part.
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