Given the availability of Marketplace coverage, is a missed COBRA notice really that big of a deal?

Let’s face it, employers are busy running daily operations. Quite possibly one of the last things on an employer’s mind is COBRA compliance. In fact, some employers may be tempted to let COBRA compliance slide and not perform an adequate review of systems until a problem arises, but as the case below suggests, COBRA carelessness is not a good idea.

The backstory

Most employers are aware that COBRA noncompliance can create liability in many ways – one of those being statutory penalties. However, today’s environment is saturated with constant reminders that coverage is available for all under the Health Insurance Marketplace. Practically speaking, with the safety net of Marketplace coverage, is an employer really ever going to face a COBRA penalty?

In the December 2013 column, we discussed why COBRA will survive and may, in fact, be the better choice. Employees are still interested in COBRA coverage and expect to be offered COBRA coverage. Couple the continued desire for COBRA coverage with employers’ increased use of automated systems to generate notices and you get the potential for very large COBRA noncompliance penalties.

A quick review of potential COBRA statutory penalties

Plan administrators that are subject to COBRA can be assessed penalties of up to $110 per day for the failure to timely provide an initial COBRA notice or an election notice. Plan participants and beneficiaries can sue the plan administrator directly for these penalties. If assessed by the court, the penalty is paid by the plan administrator to the qualified beneficiary.

As a general rule, courts have held that a plan administrator can be liable for statutory penalties regardless of whether the qualified beneficiary was injured or prejudiced.  Courts reach this decision by concluding that the purpose of the penalty is not to compensate the participant, but rather to punish the plan administrator and deter future noncompliance. 

Because a participant does not have to show injury caused by the missing notice, the ability of a former employee to obtain coverage through the Marketplace does not insulate employers from potential COBRA penalty liability. 

A frightening case of missed COBRA notices

In January 2015, a Federal District Court in Texas approved a settlement of $1,000,000 in a COBRA class action for statutory penalties. Slipchenko v. Brunel Energy, Inc. 2015 WL 338358 (S.D. Tex. Jan. 23, 2015). 

The employer, Brunel Energy, Inc., hired people with specialized knowledge to work on temporary projects for its energy industry client companies. These employees were hired on a temporary basis under short term contracts. They were allowed to participate in the Brunel group health plan.

At the beginning of the short term employment, Brunel failed to provide an initial COBRA notice. When the short term contracts were up, Brunel failed to timely provide election notices. In some instances, Brunel never provided the notices. After requests from some former employees, Brunel provided election notices late - as much as nine months late. 

The case was originally filed in 2011. Brunel fought the accusations for several years and, no-doubt, incurred substantial litigation costs in addition to the ultimate settlement payment.    

The takeaway

COBRA compliance may seem like a minor thing to many employers especially since the advent of the Marketplace. However, cases like the Brunel Energy case should remind employers that the potential cost of noncompliance is extremely high. 

While most employers are busy ensuring compliance with new Marketplace reporting requirements, they should not overlook the importance of ensuring compliance with COBRA.

Employers should review their current notices and procedures for providing notices. In addition, employers should make sure that they are providing notices in every situation required by COBRA and to every person required to receive a notice. One systematic mistake can lead to several violations – each carrying its own COBRA penalty. 

COBRA CONUNDRUMS is reprinted from the June 2015 issue of Health Insurance Underwriter Magazine featuring our very own Robert Meyers.