Correcting Failures when Offering COBRA

When a COBRA administrator discovers a failure to offer COBRA coverage they should take immediate steps to correct the mistake to avoid such penalties as ERISA ($110 per day), IRS excise tax and lawsuits.

Code Section 4980B imposes an excise tax on failures unless an employer has not received an audit letter from the IRS and the failure is due to reasonable cause, as opposed to willful neglect, and remedied within 30 days after any person liable for the tax is aware of the failure to comply with COBRA. A COBRA failure is considered corrected when retroactively undone to the degree that any affected beneficiary is restored to the same financial position as the beneficiary would have been had the failure not taken place. The code requires that the qualified beneficiary is offered the election of the most favorable coverage with regards to the medical expenses incurred after the failure occurred. In this case, the term beneficiary also implies reference to the qualified beneficiary’s estate.

Keep in mind the employer is liable for all expenses incurred by the employee due to the employer’s failure to comply with COBRA. This means that according to IRS’s COBRA Examination User’s Guide it may involve determining whether the complaining individual had been “made whole.”

Judicial standards as reported in past decisions in terms of assessing retroactive corrections of COBRA failures offer valuable insight as to what constitutes proper correction of COBRA failures. Generally the corrections involve providing:

1. the benefits that should have been paid to a qualified beneficiary for already-incurred medical expenses, less applicable COBRA premiums;
2. coverage for remaining portion of the maximum coverage period; and
3.  attorneys’ fees and interest.

As for implementing measures to correct failures there are no simple solutions that will work in every situation. However, the following options appear to satisfy the Code’s requirements that qualified beneficiaries are to be restored to the position they would have been in if COBRA coverage had been properly offered: In the event that a plan administrator has failed to offer COBRA coverage the notice should be provided. In the event the notice was inadequate it should be provided again – one possibility is to provide the notice again with open enrollment materials. If the qualified beneficiary is within the election period and it is discovered that the election notice was not sent, then the plan administrator should re-send the notice. However, if it is outside the election period and there is solid proof that the notice was sent to the last known address, then the plan administrator may decide not to provide a second notice. In regards to a notice of unavailability or termination notice, even though these notices basically inform the qualified beneficiaries that they will not have coverage, a new one should be provided if missed. Providing a notice could stop the penalty period from running.

When retroactive COBRA coverage is necessary, offer to pay all covered claims that have been charged to date, or if earlier, the expiration of the applicable maximum coverage period whether it be 18,29, or 36 months from the qualifying event. Keep in mind, however, that each qualified beneficiary should be given the choice to elect the period of retroactive COBRA coverage. For example, if the employee wants to end coverage prior to the expiration of the full period, the employer cannot demand payment for the full retroactive period. Also, ensure that all beneficiaries are clearly notified that this offer is for retroactive coverage only as it can easily be assumed that they are being offered prospective coverage.

If the COBRA election notice is very late or the maximum coverage period has already expired, you may consider offering some sort of prospective coverage. While this offer would seem to go beyond what COBRA requires, it may mitigate complaints that necessary medical attention was passed up due to lack of proper coverage being offered; it can be argued that retroactive coverage does nothing to make up for lost health care treatment.

As for collecting the initial payment premium, there are conflicting arguments - be careful about demanding one lump sum. There has been at least one case where the qualified beneficiary was still allowed to make monthly payments while the employer was required to provide the full retroactive coverage. On the other hand, there have been at least two court cases to permit the request for a lump sum although neither case directly considered the question. The Ninth Circuit has upheld a decision that required payment for retroactive premiums to be collected in a lump sum (Chaganti v. Ceridian Benefits Servs., Inc., 2006 WI. 3431753 (9th Cir. 2006). But it should also be noted that the 1999 final IRS COBRA regulations provide that plans may permit qualified beneficiaries to make payments at other intervals such as weekly, monthly, quarterly and semi-annually so it could be easy to assume this requirement would also hold true in the case where a COBRA notice was late due to the failure of a plan administrator. In one court case, the employer’s demand for a lump sum payment was upheld, however large statutory penalties were awarded to the qualified beneficiary.

In the case of conversion coverage that might have been elected if not for the failure to offer, consider offering conversion coverage beginning with the expiration of COBRA coverage if permitted by insurance carrier. Also be careful not to limit claims filing deadlines for expenses incurred before the correction. And in the case of a qualified beneficiary becoming covered by another group health plan, according to one court case, it concluded that the plan should still offer COBRA coverage as a curative matter even if this means the opportunity for dual coverage. Until the plan administrator corrects the election notice failure, the fact that the qualified beneficiary has become covered under another plan, does not relieve the obligation to offer COBRA coverage.

In any event, it is probably not wise to use standard election notices and forms in the case of a correction, especially one that is very late. It would be best to customize written notices for the specific situation to avoid confusion and future litigation. Ultimately, if a qualified beneficiary refuses the appropriate offer for retroactive coverage they lose any claim for COBRA.
For those Insured or Self –Insured plans with Stop-loss Insurance the employer needs to work with the insurer to make sure they will provide the coverage that is being offered. Also, an employer that is held liable for violating COBRA, should investigate whether this could be covered under its liability policy, and the decision to correct the failure should be made in accordance with the liability policy’s notice provisions and guidance.

In the case of withdrawing offers of COBRA coverage the plan administrator should look at the strengths of their position based on a review of COBRA documents such as the election notice, the initial notice, the SPD, the plan document, the plan’s insurance contract and any other pertinent communication documents. Looking at past practices will also be critical as this alone can determine the obligations even when the law does not. And lastly, look at the facts. Were specific representations made to the claimant? Should the claimant have understood the coverage was mistakenly offered? Were there any misrepresentations by the claimant in order to gain coverage? It is advisable to seek counsel to make certain the legality of the decision to withdraw coverage retroactively is substantiated.

Gross Misconduct Can Void COBRA Rights

In the court case, Gilson v. Pennsylvania State Police, 2016 WL 1237351 (W.D. Pa., March 30, 2016), a federal district court in Pennsylvania ruled that the plaintiff, William Gilson, was appropriately denied the option of COBRA coverage due to his termination of employment for “gross misconduct.” Although the term “gross misconduct” is not clearly defined in COBRA statute, therefore being rather ambiguous to affirm, courts generally look to state unemployment law in making their determination of whether a termination occurred by actions that escalated to the level of “willful misconduct.” In this case, state trooper Gilson’s actions of sexual misconduct and deception were found to be just cause for the negation of his COBRA rights.

The facts of the case are as follows: As an employee of the Pennsylvania State Police (PSP) Gilson, along with several other officers, were called to an incident in August of 2009 where a female crisis service worker was also present. She alleged that Gilson touched her inappropriately, claiming he placed his arm around her waist and pulled her toward him. There was at least one other officer that corroborated this violation. Disciplinary and arbitration proceedings ensued which found that Gilson lied several times about the facts of his actions. Consequently, it was determined that Gilson had indeed violated the PSP’s regulations prohibiting police officers from engaging in sexual misconduct/harassment and was thereby given a notice of termination in November of 2010. After an arbitrator upheld PSP’s decision, Gilson was terminated on May, 2, 2011 and given no option of COBRA coverage by PSP because of his gross misconduct.

Gilson decided to sue PSP as well as several individuals, claiming his COBRA rights under the Public Health Service were violated. Because the COBRA statute does not contain an actual definition of what “gross misconduct” means, the court chose to take the lead from the standards set by the state in terms of unemployment compensation. So in this case, the court noted that under Pennsylvania law discharges resulting in willful misconduct connected with work disqualifies an individual from receiving unemployment benefits. It was therefore determined that for COBRA purposes, Gilson’s actions would also constitute “willful misconduct” thereby taking away his COBRA rights.
Gilson fought back. Ironically, in this case, he was actually awarded state unemployment compensation, therefore bringing into question whether his actions did comprise the willful misconduct standards. Gilson argued that the unemployment office determined that the August 2009 incident “was not sufficiently related in time” to the notice of termination in November 2010. Because of that, the unemployment office could not say for certain that his termination was caused by the PSP rule violation. However, the court noted that just because the unemployment office may have had a hard time with the timing issue, it did not rule out the fact that Gilson’s inappropriate physical contact and “serious act of deception” was deemed “gross misconduct.” Subsequently, the court ruled in favor of the defendants.

In this author’s opinion, employers should be very cautious when considering a gross misconduct decision. Because of the lack of a clear-cut definition in the COBRA statute, this a judgment call that should be well thought out and documented to avoid costly litigation. Remember laws vary from state to state. Not all legal verbiage in one jurisdiction can be applied across the board. Taking a good look at relevant cases in your locality may offer helpful guidelines.