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Recently reported COBRA strikes: Law continues to bedevil employersExcerpted from West Virginia Employment Law Letter, written by Larry J. Rector at the law firm Steptoe & Johnson PLLC It seems that every time we check for new employee benefits cases, there's something new involving COBRA, the law governing continuation of benefits for employees who lose coverage. Here's a summary of a few recent court decisions to help you highlight potential trouble spots in your procedures. We also offer some simple suggestions for avoiding similar situations and consequences. COBRA's basic requirements Generally speaking, COBRA requires sponsors of group health plans to give employees who lose coverage because of certain enumerated events the opportunity to elect "continuation coverage" for the prescribed period of time at their own expense. Employees' dependents who are covered under the plan also are entitled to elect continuation coverage. Plan administrators must notify an affected employee of her right to elect COBRA coverage after the occurrence of a "qualifying event." Notice must be provided when the employee first becomes covered under the plan and within a certain number of days after a qualifying event like the termination of employment for any reason other than gross misconduct. Failing to comply with COBRA can result in serious consequences. Plan administrators can be tagged with civil penalties of up to $110 a day for not providing proper COBRA notice. In addition, the participant may recover medical expenses (minus the premiums payable for COBRA coverage) that would have been paid had COBRA coverage been in place. A violation of the COBRA rules also can subject employers, third- party administrators, and insurers to excise taxes under the Internal Revenue Code. Open-ended election period Qualified beneficiaries must be given 60 days in which to elect COBRA coverage. That 60-day period begins running from the date of the loss of coverage or the date notice of COBRA rights is given, whichever is later. A federal appellate court recently ruled, however, that the 60-day election period is the minimum permitted by statute. Unless the plan's COBRA procedures specify the period within which the election must be made, said the court, the employer must honor a qualifying beneficiary's election at any time during the maximum coverage period (generally, 18 months). That means, for example, that if a qualified beneficiary received COBRA notice in July 2001 and the plan doesn't impose a deadline for election, she can elect coverage at any time during the 18-month maximum coverage period. Her coverage would be retroactive to the date it was lost as a result of the qualifying event. Consequently, if the qualifying event (termination of employment accompanied by loss of coverage) occurred on July 1, 2001, notice of the right to elect COBRA coverage was provided on July 15, 2001, and the qualified beneficiary elected continuation coverage on June 1, 2002, her coverage must be reinstated retroactive to July 2, 2001, if she pays all back premiums. That messy situation can be avoided by specifying the duration of the election period in your plan's COBRA procedures and ensuring that you communicate the deadline to qualified beneficiaries in your election notice. Miscommunicated deadline for monthly premiums COBRA permits plans to impose and enforce deadlines for paying premiums for continuation coverage. Typically, premiums are due on a monthly basis. But the statute requires that qualified beneficiaries be given a 30-day grace period for premium payments. In a recently reported federal district court case, a plan's COBRA procedures explained in its summary plan description specified that premiums were due on or before the first day of the month. The COBRA notice sent to the beneficiary, however, stated that monthly premiums were due by the end of the month to which they applied. The COBRA notice therefore attempted to build the 30-day grace period into the premium due date and advised the qualified beneficiary of the bottom-line date after which coverage would be terminated for nonpayment. The court held that by virtue of the notice's language, the premium due date was the last day of each month. As a result, payments received within 30 days of that date were timely under the grace period. Even though it may seem logical to advise qualified beneficiaries of the "true" deadline for premium payments — that is, the last day of the grace period based on your plan's premium due date — don't do it. If you want to be able to enforce your deadline for premiums, make sure your notice accurately communicates your plan's actual deadline. 'Legal separations' under COBRA A divorce or "legal separation" is a qualifying event under COBRA. If an employee's spouse is covered under your group health plan and loses coverage because of a divorce or legal separation, he is entitled to elect COBRA coverage. The term "legal separation" isn't defined in the statute, however, which can cause problems. For example, an employer in Oklahoma decided that an employee and his spouse had become legally separated after the divorce court entered three protective orders requiring him to stay away from her during the divorce proceedings. When the spouse attempted to elect COBRA coverage after the divorce was finalized, the employer argued that it was too late because her election period had run from the date of the earlier legal separation. The court disagreed with the employer's claim. According to the court, a legal separation is a judicial decree that "directs the parties to live apart and defines the parties' legal rights and obligations in regard to custody, support, property division and/or maintenance." The closest thing we have in West Virginia to a "legal separation" is a family court's order awarding "separate maintenance." If a dependent spouse's coverage under your plan would terminate as a result of an order of separate maintenance, treat that order as a qualifying event. But if the dependent spouse later notifies the plan the divorce has been finalized and she hasn't already elected COBRA coverage, you should send her another election notice based on the qualifying event of divorce. Some things aren't proper COBRA notices We have seen a number of cases in which courts have made general statements effectively saying that COBRA notices need not be in writing. They're wrong. The U.S. Department of Labor regulations that took effect September 26, 2004, specify that COBRA notices must be in writing. Even before those regulations became effective, courts tended to hold oral notices inadequate. For example, an HR representative's statement to an employee leaving employment that there's a law called COBRA and he had rights under that law didn't satisfy the plan administrator's notice obligation, even if the employee already knew about his COBRA rights. And a letter from the employer's attorney to the former employee's attorney offering to provide COBRA coverage didn't discharge the company's COBRA notification obligation, either. The employer in that case was assessed an $80-a-day penalty beginning on the 45th day after the employee's termination of employment and ending 18 months later, for a total of $40,400. The court imposed that relatively harsh penalty in large part because "[the employer] is in gross violation of COBRA in that it routinely does not provide COBRA notifications to employees and/or does not retain COBRA records." Judges don't like it when you ignore your COBRA obligations. Honest mistakes might be forgiven so long as you can show that your company has appropriate procedures in place to ensure compliance and that you routinely follow them. Bottom line It's easy to make mistakes when administering COBRA procedures. Despite the potential for harsh consequences, however, evidence of a conscientious and good- faith effort to comply with the law carries considerable weight with the courts. And as the cases discussed in this article show, many mistakes are easily avoided if you draft your plans and procedures with care. Find out more about avoiding COBRA liability in the subscribers' area of www.HRhero.com . You have access to an HR Executive Special Report titled "How to Comply with COBRA Without Getting Bit." Just log in and scroll down to the link for all the Special Report titles. Need help? Call customer service at (800) 274-6774. Copyright 2006 M. Lee Smith Publishers LLCWEST VIRGINIA EMPLOYMENT LAW LETTER should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only. Anyone needing specific legal advice should consult an attorney. The State Bar of West Virginia does not certify specialists in the law, and we do not claim certification in any listed area. For further information about the content of any article in this newsletter, please contact any of the editors. |
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