A recent case provides a reminder for plan administrators of the importance of complying with Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) notice obligations and a good excuse to review health plan COBRA procedures.
In Morehouse v. Steak N Shake, Inc., a former employee brought a suit against her former employer after a workplace injury ultimately led to her losing her employer group health plan coverage. Before her injury, the plaintiff paid for her plan coverage by biweekly payroll deductions. Once injured, the plaintiff went on Family and Medical Leave Act (FMLA) leave and started workers’ compensation benefits. She was not provided a COBRA notice when she began leave. Instead, she continued to be covered under the plan and premiums were deducted from her workers’ compensation benefits. Once her workers’ compensation benefits ended, she was unable to pay her premiums and her plan health coverage was cancelled. She was then terminated from employment following the expiration of the FMLA period. After her plan coverage ended, she purchased health insurance to help pay for surgery to address her injury, but still had more than $30,000 in out-of-pocket costs.
COBRA Requirements
As discussed in more detail in our prior COBRA: Back to Basics post, COBRA generally requires plan administrators to provide a notice of election to individuals who experience a COBRA qualifying event that causes a “loss” in coverage. But a “loss” in coverage may not always be obvious. As the court here noted, under Treasury regulations and other cases, a complete loss of health insurance coverage is not required; rather, any change to the terms and conditions of coverage as in effect prior to the COBRA qualifying event can be a “loss” of coverage.
Applying this rule, the court determined that the change in the method of payment of premiums—from payroll deductions to deductions from workers’ compensation benefits—was a sufficient enough change in the terms and conditions of coverage to constitute a “loss.” Coupled with the plaintiff’s reduction in work hours (a COBRA qualifying event) due to her injury, this triggered the obligation to provide the COBRA election notice.
Consequences
Because the plan administrator failed to provide the COBRA election notice, the court awarded the plaintiff
- compensatory damages to pay for her surgery and other medical expenses not covered by her private insurance, less the COBRA premiums she would have had to pay for continuation of coverage under the plan;
- statutory penalties under ERISA of $50/day from the date the notice should have been provided to the date the plaintiff was covered by other insurance; and
- attorney fees.
Perhaps the only silver lining for the employer here was that the court concluded that the failure to provide the election notice did not rise to the level of a breach of fiduciary duty.
Next Steps
Plan administrators may want to dust off their COBRA compliance procedures to ensure that they are in full compliance with the COBRA regulations. This includes providing notice upon, or reporting to any third-party COBRA administrators, all potential losses of coverage that accompany COBRA qualifying events. When in doubt as to whether a COBRA notice is required, please reach out to the authors or your Morgan Lewis contact.