COBRA Notice Penalties Awarded in FMLA/Leave of Absence Litigation

Practical Law Legal Update w-017-4887 (Approx. 6 pages)

COBRA Notice Penalties Awarded in FMLA/Leave of Absence Litigation

by Practical Law Employee Benefits & Executive Compensation

Background

Shortly after injuring her knee at work in May 2013, the plaintiff-employee in this case took a leave of absence from her job as a restaurant manager. At the start of her leave, the employer instructed the employee to submit a doctor's certification so that her absence could be processed as an FMLA leave. The employee also received workers' compensation benefits during the first months of the leave, from which premiums to cover her health insurance were deducted. After the employee stopped receiving workers' compensation payments the following August, she was unable to pay her health coverage premiums. (The employee's FMLA leave period also expired in August.) The employee's health coverage was terminated in October due to nonpayment of premiums, retroactive to August. According to the employee, the employer did not respond to her repeated phone calls to the employer during this period seeking information about her premium payment obligations.

Before being terminated by the employer in February 2014 (when her leave of absence formally ended), the employee obtained private health insurance that she used to pay for knee surgery related to the injury. However, the private insurance covered only $42,000 of the surgery's total cost of $75,000.

The employee later sued the employer, asserting violations of COBRA and ERISA's fiduciary breach rules based on the employer's failure to provide a COBRA election notice (see Practice Notes, COBRA Overview and ERISA Litigation: Causes of Action under ERISA Section 502 and ERISA Litigation Toolkit). The employee and employer filed cross-motions for summary judgment.

Outcome

The district court granted in part and denied in part the summary judgment motions, concluding that:

The employer failed to timely provide the employee a COBRA election notice but did not breach its ERISA fiduciary duties.
The employee was entitled to compensatory damages, statutory penalties, and attorney's fees.

Employer's Failure to Provide COBRA Notice

A COBRA qualifying event occurs when there is both a specified triggering event and a related loss of plan coverage. The employer in this case asserted, among other arguments, that the plan preserved the employee's benefits eligibility following her reduction in hours and that the employee therefore did not sustain a loss of coverage related to the leave of absence. As a result, the employer argued, no COBRA qualifying event requiring an election notice occurred at that time (see Standard Document, COBRA Election Notice). The employee claimed that the change in how health insurance premiums were paid resulting from the reduction in hours after her leave (that is, that the premiums were deducted from workers' compensation rather than from her regular pay) was a loss of coverage constituting a COBRA qualifying event.

In rejecting the employer's argument, the court observed that a complete loss of coverage is not required for a COBRA qualifying event to occur. The court cited an IRS COBRA regulation under which a "loss of coverage" for purposes of determining whether a COBRA qualifying event has occurred means ceasing to be covered under the same terms and conditions that were in effect immediately before the qualifying event (26 C.F.R. § 54.4980B–4, Q&A-1(c)).

According to the court, the employee experienced a reduction in hours that affected how her insurance premiums were paid (that is, the payment contribution method). In the court's view, this was sufficient to constitute a loss of coverage, and so a COBRA qualifying event requiring an election notice had occurred.

Employee's Reduction in Hours Was Not Due to FMLA Leave

The court also rejected the employer's argument that the employee's reduction in hours was due to FMLA leave, and therefore not a COBRA qualifying event (see Practice Note, COBRA Overview: FMLA). The court concluded that the employee was not on FMLA leave when her leave began in May 2013, and therefore she experienced a qualifying event on that date. In reaching this conclusion, the court noted that:

The employer failed to provide the employee with a notice properly designating the leave as FMLA leave.
The employee had no actual or constructive knowledge that her workers' compensation was running concurrently with FMLA leave.

As a result, the court held that the employer violated COBRA by failing to provide a COBRA election notice after the employee's COBRA qualifying event which, according to the court, occurred in May 2013.

Employer Did Not Breach Its ERISA Fiduciary Duties

The court rejected the employee's argument that the employer breached its ERISA fiduciary duties by failing to inform the employee of her premium payment obligations (see Practice Note, ERISA Fiduciary Duties: Overview). The court reasoned that the employee possessed:

Constructive notice of her obligation to pay premiums (as disclosed to her in employer communications addressing the plan's benefits).
Actual notice of the obligation when she received an email from the employer warning her that coverage would be cancelled due to nonpayment of premiums.

Court Awards Compensatory Damages, Penalties Based on Bad Faith, and Fees

The court awarded the employee compensatory damages reflecting the cost of benefits that were not covered under the private health insurance the employee subsequently obtained, minus the cost of COBRA premiums that she would have incurred.

The court also awarded the employee statutory penalties under ERISA related to the employer's failure to provide a COBRA election notice (see Practice Note, ERISA Litigation: Penalties for Failing to Provide Documents). The court concluded that penalties of $50 per day for a period of roughly five months or more, rather than the maximum penalty amount, were appropriate, given the complexity involved in identifying when the COBRA qualifying event occurred. In reaching this amount, the court found that the employer acted in bad faith in failing to timely provide the employee a COBRA notice. The court characterized the employer's argument that notice was unnecessary because the employee could not pay for COBRA premiums anyway as a "blatant attempt to subvert statutory requirements."

The court also determined that the employee was entitled to an award of ERISA attorney's fees (see Practice Note, ERISA Litigation: Attorney's Fees).

Practical Impact

The COBRA "loss of coverage" regulation addressed in this decision reaches situations beyond simply the termination of coverage, such as an increase in premiums paid by an employee. This court took a more expansive view of the regulation, however, concluding that a change in the premium payment contribution was also a change in the coverage's terms and conditions from what they had been before the employee's injury. The court therefore disagreed with the employer's analysis of whether and when a COBRA qualifying event occurred, resulting in negative consequences for the employer that included expensive penalties and fees. To try to avoid this outcome (and the unpredictability of how a reviewing court may analyze an employee's COBRA claims), employers should pay careful attention to the potential COBRA implications of employee leaves of absences, including – as in this case – situations involving FMLA leave and workers' compensation.

COBRA Notice Penalties Awarded in FMLA/Leave of Absence Litigation | Practical Law