Pension & Benefits News COBRA participant can recover medical expenses incurred for employer’s failure to provide termination notice
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Friday, September 21, 2018

COBRA participant can recover medical expenses incurred for employer’s failure to provide termination notice

By Pension and Benefits Editorial Staff

ERISA’s discretionary civil penalty remedy provides a cause of action for a discharged employee who incurred medical expenses after his former employer terminated its health plan without providing him notice, held the Fifth Circuit. His COBRA coverage ended because the health plan was being terminated, but he never received notice, and the employer continued to accept and deposit his premium checks for three months after the plan was terminated. Meanwhile, he incurred medical expenses, and then learned that three months of cancer treatment was not covered. He filed suit, but the district court dismissed his claims, finding no relief was available to him under ERISA. The appeals court, however, found he had ERISA standing because he was a participant at the time the employer failed to give him COBRA notice. And while he had no remedy under ERISA’s provisions allowing participants to enforce rights under the plan or obtain equitable relief, he did have a remedy under a provision allowing a discretionary civil penalty against an administrator that does not comply with COBRA notice requirements. The case was remanded to make factual findings regarding the employer’s good faith and determine whether to award a penalty.

A former employee obtained COBRA continuation coverage under the employer’s health plan. Ten months later, the employer terminated the plan. It had sent the plaintiff a letter stating that coverage was terminated effective June 1, but the letter was sent to his former address (not the address to which it had delivered his termination letter a year earlier). For June through August, the plaintiff continued paying premiums to the employer, and the employer deposited his checks. During that time, he underwent treatment for cancer and in August, he learned that he had not been covered by health insurance for those months. He sued the employer, alleging that it failed to provide a COBRA termination notice in violation of ERISA and seeking reimbursement for the medical expenses. The district court dismissed the claims, concluding that ERISA did not provide him with a remedy.

ERISA standing. The appeals court first considered whether he had standing as a plan "participant" under ERISA although he had no claim for benefits because the plan no longer existed. It concluded that he had standing because he was a participant at the time the employer failed to give him the COBRA notice. "Otherwise, employers would be able to avoid ERISA lawsuits simply by terminating their employees’ health benefits," the appeals court reasoned. In addition, there was some case law holding that an individual has ERISA standing if he would be a plan participant but for an employer’s alleged ERISA violation.

COBRA notice obligation. The employer had an obligation to inform the plaintiff of the termination of coverage. ERISA requires a plan administrator to inform qualified beneficiaries "of any termination of continuation coverage that takes effect earlier than the end of the maximum period of continuation coverage applicable to [the] qualifying event." The appeals court rejected the district court’s conclusion that no notice was required because "the maximum period of continuation coverage" cannot be longer than the plan’s existence. The maximum referred to is the 18- or 36-month maximum allowed under ERISA based on the qualifying event, not the lifespan of the plan.

Good faith. Circuit precedent has held that a good-faith attempt to satisfy the COBRA notice requirement will suffice; it is unclear whether this holding is still good law, though, the appeals court said. Yet even if the employer need only show good-faith compliance, a question of fact remained on that point—one that was more appropriately resolved on summary judgment or at trial, not on a finding of failure to state a claim. And the court was skeptical the evidence would establish good faith, even on summary judgment. The employer produced a copy of a letter purportedly sent to the plaintiff, but no evidence the letter was actually mailed. Also, the employer sent his termination letter the previous year to the correct address, the plaintiff exchanged emails with the employer about insurance, during which time the employer failed to mention the plan’s discontinuation, and the employer deposited three months of premiums and refused to refund them for almost two years.

ERISA remedy. As to whether ERISA provides a remedy, the court concluded that the plaintiff had no remedy under 29 U.S.C. § 1132(a)(1)(B), which allows an individual to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan. Because the plan was discontinued, he could not recover benefits due under the plan’s terms. He also had no remedy under 29 U.S.C. § 1132(a)(3), which allows for equitable relief, because he sought money damages for medical expenses.

He did, however, have a remedy under 29 U.S.C. § 1132(a)(1)(A) and § 1132(c)(1), which allow a participant to bring an action for a discretionary civil penalty against an administrator that does not comply with COBRA notice requirements. The penalty may be up to $100 per day from the date of the failure to provide the COBRA notice and include such other relief as the court deems proper. While the amount is discretionary, courts have generally considered whether the employer acted in bad faith. If so, a court could award medical expenses as the penalty. Therefore, the court remanded the case to the district court to make factual findings regarding the employer acted in good faith and to determine whether to award a penalty.

SOURCE: Hagar v. DBG Partners, Inc., (CA-5), No. 17-11147, September 6, 2018.

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