Be Careful About Proper Dates when Offering Subsidized COBRA Coverage
A recent court case involved a suit against an employer and plan
administrator for an alleged ERISA fiduciary breach along with COBRA notice
failures. In the case Damiano v. Institute for In Vitro Sciences et al, 2016 WL
7474535 (D. Md. December 29, 2016) the plaintiff, Michele Damiano sued her
former employer, (IIVS) and their third party COBRA administrator, Paychex
Insurance Agency, Inc. in connection with material misrepresentation claims as
well as COBRA notice violations.
The facts of the case are as follows: Michele Damiano was sent a letter by
IIVS on September 9, 2015 stating that she was terminated effective immediately.
The letter further affirmed her benefits would be paid through October 31, 2015.
However, Damiano ended up liable for $4,900 in dental expenses for procedures
that were done in September. Additionally Damiano underwent emergency surgery in
early October. A few days later, on October 8, 2015 Paychex issued a COBRA
notice that stated her coverage end date would be October 31, 2015 confirming
what the original termination letter from IIVS had articulated. However, a
second COBRA notice arrived that was dated October 23, 2015 stating that her
coverage ended September 9 2015. Because Damiano received this second notice
more than 44 days after being fired from her job, she decided to file suit
against both IIVS and Paychex based upon a breach of fiduciary duty under ERISA,
COBRA notice violations, and lastly, state law breach of contract.
The state law claim was dismissed as preempted by ERISA. As for the fiduciary
claim, the defendants tried to wriggle out of this by suggesting Damiano did not
detrimentally rely upon the statements in the termination letter. However,
Damiano was able to prove that the defendants were indeed a fiduciary and as
such they had breached their fiduciary responsibilities to her. Furthermore, she
successfully proved her need from the court to remedy the violations. Damiano
was able to prove that she “relied on the misrepresentation of the Defendants
that she had coverage and thus did not pursue alternate coverage to her
detriment.” Therefore her claim of breach of fiduciary duty stood strong.
Lastly, her COBRA notice claim also survived because the court concluded that
the plan administrator failed to send the notice within the 44-day timeframe.
In this author’s opinion it appears that the conflicting verbiage in the two
COBRA notices was probably because of confusion as to whether the employer was
offering extended “subsidized” coverage in the severance package or not. In
other words, make sure to specify that the even though the coverage may be free
of charge for a specified period, the 18 month COBRA period would still begin
upon the original employment termination date. And most importantly, the COBRA
election notice must be sent within 44 days of that original termination date –
not within 44 days of the end of any employer subsidized COBRA coverage.
Handling COBRA Premium Payment Shortfalls
Perhaps the most common recurring administrative challenge comes from the
fact that often the amount paid by the qualified beneficiary does not match up
with the amount owed. The following true story illustrates this challenge:
A qualified beneficiary accidentally writes his check for $0.02 (two cents)
less than the required premium amount for a given month. Although there were
attempts by the Cobra Administrator to notify the qualified beneficiary of the
shortfall, he does not realize his error, therefore does not pay the two-cent
shortfall before the end of the applicable grace period. So in “strict
compliance” with the law, the Cobra Administrator cancels his COBRA coverage
leaving him unable to receive lifesaving care for his illness.
According to COBRA law, qualified beneficiaries must pay their premiums in
full and on time. If not, as a general rule, the plan administrator has the
right to terminate the COBRA coverage; however, COBRA regulations include a
stipulation that applies when the shortfall is by an amount that is “not
significant.” To be deemed “not significant” the amount of the shortfall must be
no greater that the lesser of: a) $50 or b) 10% of the required COBRA premium.
In the event the shortfall is determined to be “not significant,” the plan
administrator has two options:
- Consider the payment as “paid in full.”
- Notify the qualified beneficiary of the deficiency and extend to him or
her a reasonable time period to make up the shortfall. A safe harbor for
this extension, according to regulations, is considered to be 30 days.
In most cases the plan administrator will opt to provide a premium shortfall
notice and extend a 30-day grace period to the qualified beneficiary. It is rare
to see a plan accept the shortfall as payment in full as this would set a bad
precedent, not to mention the fact that making a determination as to what
constitutes a significant amount or not is a complicated task. As a plan
administrator it is important to think through these issues in order to
implement a compliant COBRA premium payment system. The following steps may be
helpful in handling COBRA Premium payments:
- Review all COBRA notices, letters and premium payment coupons (if any)
making sure they clearly convey all COBRA deadlines and premium amounts.
Emphasize that COBRA coverage will be terminated if the payment policy is
not strictly adhered to, and once the coverage is terminated, it cannot be
reinstated. If partial payments are a recurring issue then administrators
may want to amend their summary plan descriptions and plan documents to
include similar language. So in the event that a qualified beneficiary’s
coverage is terminated for insufficient premiums, the documentation will
support the administrator’s actions.
- Sending COBRA notices and letters regarding insufficient payment via
certified mail or similar means may be an option in order to get the
beneficiary’s attention and to serve as a receipt. Many times the qualified
beneficiary argues that they were willing to pay the shortfall but were
never notified. This procedure may help deflect such a claim.