In litigation with a participant involving health plan continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), a district court concluded that the plan's administrative procedures for resolving the dispute were deficient. As a result, the plan was required to make available retroactive COBRA coverage and pay statutory penalties.
Confusion Over Retirement Date Leads to Litigation
The participant in this case retired from his employer on January 1, 2014, at which time his health coverage should have been changed from employer-paid active coverage to self-paid retiree health coverage. However, owing to confusion over an untimely submitted retirement plan form, the employer did not terminate the participant's active-employee health plan coverage until February 28, 2014, and continued to pay for his health coverage as an active employee through that time. The employer also provided the participant a COBRA election notice with a 60-day election period generally based on the February 28 end date (see Standard Document, COBRA Election Notice). A separate fact sheet and enrollment guide provided to the participant:
Also reflected the February 28 end-date for active employee coverage.
Indicated that he could elect COBRA or be defaulted into the employer's retiree coverage.
In early April, however, the participant was informed by the plans' third-party administrator (TPA) that his 60-day COBRA election period had expired because his COBRA qualifying event (retirement) had occurred on January 1, 2014.
In a series of administrative appeals over the following months, the participant was unsuccessful in obtaining retroactive COBRA coverage with an effective date of March 1, 2014 (rather than January 1, 2014). The participant was informed that retroactively reinstated COBRA would only be available if he paid all COBRA premiums in arrears from January 1, 2014 to the present. (However, the employer apparently had not informed the participant at this point that he had missed COBRA premium payments for January and February 2014.)
In January 2016, the participant received a letter from the employer that he characterized as a final denial of the COBRA claims. Having exhausted the plan's internal administrative appeals, the participant sued the employer in federal district court under ERISA to challenge the denial of retroactive COBRA coverage and for statutory penalties (see ERISA Litigation Toolkit, COBRA Toolkit, and Practice Note, COBRA Overview).
Participant Was Eligible to Elect COBRA Coverage
At issue before the district court was whether:
The employer failed to satisfy COBRA's election notice obligations.
The employer erred in denying the participant's request to elect COBRA.
The participant was eligible for retroactively reinstated COBRA.
The participant argued that the employer prevented him from exercising his COBRA rights by:
Backdating the participant's retirement date and disregarding the date stated on the COBRA election notice.
Removing the COBRA election section from the TPA's website so that he could not make an election.
Refusing to timely respond to the participant's administrative appeals and failing to address his COBRA-related concerns.
Ruling for the participant, the court determined that the employer's handling of the COBRA claim was arbitrary and capricious and resulted in a procedurally defective appeals process. Because the administrative record demonstrated the participant was eligible to retroactive reinstatement of COBRA coverage, the court declined to remand to the employer.
Employer's Conduct Was Arbitrary and Capricious
The district court found that the employer's failure to correct the participant's COBRA eligibility date was arbitrary and capricious. The court reasoned that the employer's decision to use January 1, 2014, as the end date for the participant's active-employee coverage was inconsistent with:
The COBRA election notice furnished to the participant.
The employer's decision to pay for his active-employee coverage through February 28.
The court concluded that the employer should have honored the dates and deadlines in the COBRA election notice provided to the participant. The court noted that even assuming the participant's January 1 retirement date was the COBRA qualifying event, the employer failed to provide a COBRA election notice containing the accurate deadline based on that date.
Appeals Process Was Procedurally Defective and Evasive at Best
Regarding the appeals process for the participant's COBRA coverage, the court found numerous procedural deficiencies, including:
Taking eight months to respond to an appeal letter and then failing to address any of the COBRA-related concerns raised by the participant's attorney.
Failing to open an investigation into the effective date for the participant's COBRA eligibility until almost one year after the request was made.
Failing to contact its own TPA to address the conflicting eligibility dates (despite being at least partially responsible for the conflict).
Failing to inform the participant of the amount of arrears he owed to reinstate COBRA coverage or how to make the payment.
The court observed that the employer's responses to the participant's several inquiries and appeals were "at best evasive and at worst exasperatingly dismissive."
Participant Could Recover Medical Expenses (Retroactive COBRA Coverage)
The participant sought to recover as damages medical expenses incurred during the period he should have been covered by COBRA. The court concluded that the participant could recover these expenses, if he paid the premiums owed for the period beginning on March 1, 2014, and ending on the date the participant became eligible for Medicare. The participant's failure to pay the premiums, however, would be treated as a failure to mitigate damages and prevent him from recovering the expenses. Because the record did not contain the date the participant became Medicare-eligible, the court directed the participant to submit documentation on this issue.
Statutory Penalties for COBRA Notice Violations
Citing the failure to provide a COBRA election notice, the court also considered whether ERISA penalties were warranted (29 U.S.C. § 1132(c)(1); see Practice Note, ERISA Litigation: Penalties for Failing to Provide Documents). The court reasoned that, under COBRA, the employer had 44 days in which to provide the participant with the COBRA election notice. Using the participant's January 1, 2014, retirement date as the qualifying event, the court determined that the deadline for providing the COBRA election notice was February 13, 2014. The employer did not mail the notice until February 26, 2014—that is, 13 days after it was required to be furnished. The court concluded that the 13-day delay in providing the COBRA election notice, combined with the employer's refusal to honor the election period specified in the election notice, warranted penalties in the amount of $1,300 ($100 for each day the election notice was late).
As this case illustrates, relatively minor clerical errors in plan administration may sometimes escalate into significant (and expensive) COBRA litigation. Review under the deferential "arbitrary and capricious" standard of review was not enough to save this employer/plan sponsor from the consequences of a procedurally defective appeals process marked by slow response times and failures to address the participant's substantive and procedural arguments (see Practice Note, ERISA Litigation: Standard of Review). Though acknowledging the participant's role in causing the retirement date confusion, the court saw greater fault in the plan's failure to handle the claim consistent with the COBRA election notice it provided the participant.