Employers with 20 or more employees should pause and review their compliance with the Consolidated Omnibus Budget Reconciliation Act (COBRA). Federal law requires certain COBRA deadlines to be extended due to COVID-19, and recent litigation demonstrates that even minor COBRA failures can trigger six- to seven-figure penalties.
This alert highlights recent lawsuits filed during the COVID-19 outbreak as well as COBRA lawsuits filed in the wake of the 2007-2009 recession, which provide case studies for employer best practices in the months and years ahead.
COBRA: An Overview
Under COBRA, employers with 20 or more employees must offer continuation coverage to individuals who lose their employer-sponsored group health plan coverage as a result of certain events. Continuation coverage is provided for a limited period, and the individual can be charged up to 102 percent of the applicable insurance premium. The plans subject to COBRA include employer-sponsored medical, dental, and vision plans as well as health flexible spending accounts and health reimbursement accounts. In addition, some employee assistance programs, wellness programs, and on-site medical clinics are subject to COBRA.
Only certain events trigger an employer’s obligation to offer COBRA:
- A voluntary or involuntary termination of employment (other than for gross misconduct)
- Reduction in work hours
- Divorce or legal separation
- Employee death
- Loss of dependent status
- An employee becoming entitled to Medicare
- Employer bankruptcy (for retiree plans only)
COBRA imposes strict notice requirements following these triggering events, and employees must be notified of their COBRA rights within certain timeframes after losing active plan coverage. The notice requirements are the focus of most COBRA litigation, as discussed below.
COBRA Deadlines Extended During COVID-19
Our previous alert explained recent IRS and US Department of Labor (DOL) guidance that requires an extension of certain COBRA deadlines due to COVID-19. The deadline to elect COBRA coverage, make COBRA premium payments, and notify the plan of a COBRA qualifying event or disability determination is disregarded during the COVID-19 outbreak period (defined as the period from March 1, 2020 through 60 days after the announced end of the COVID-19 national emergency).
A description of these deadline extensions should be provided with COBRA communications so COBRA beneficiaries understand they have additional time to elect COBRA and pay for coverage. Otherwise, a claimant could allege their COBRA rights weren’t properly explained, resulting in lost medical benefits that, in turn, can trigger a COBRA lawsuit and statutory penalties against the employer. Many third-party COBRA administrators aren’t communicating these extensions, leaving employers exposed to COBRA penalty and litigation risk.
COBRA Penalties and Litigation
A $110-per-day statutory penalty applies to each COBRA notice failure. In addition, an employer is subject to up to $200 per day in IRS excise taxes for failing to comply with COBRA. As a result, one employee could trigger over $100,000 per year in penalties alone. Plan participants and beneficiaries can also bring individual and class-action COBRA lawsuits against employers, increasing the potential liability for COBRA failures. Courts can award COBRA damages for amounts paid for medical bills, attorneys’ fees, and “other relief”—none of which are typically covered by an employer’s contract with an insurance carrier or third-party COBRA administrator. It’s no surprise that six- and seven-figure COBRA settlements have become common, as penalty exposure is magnified when a COBRA failure spans multiple years.
The majority of recent COBRA lawsuits have challenged deficiencies in the COBRA election notice, including, but not limited to:
- Failing to use the DOL model COBRA election notice
- Failing to provide Spanish-speaking employees and employees who speak English as their second language with an election notice written in Spanish
- Failing to clearly explain the deadline to elect COBRA. For example, some lawsuits have challenged election notices that referenced both a specific deadline date and a 60-day election period.
- Failing to identify the group health plan administrator. Typically, the plan administrator is the employer or a delegated position (e.g., human resources director). Many election notices merely identify the insurance carrier or third-party COBRA administrator.
- Failing to provide the COBRA election notice within the required timeframe.
COBRA lawsuits filed against Amazon, Nestlé Waters, and Starbucks during COVID-19 forecast a continued surge in COBRA litigation despite the ongoing pandemic. Filed in March and April 2020, respectively, the lawsuits against Amazon and Nestlé Waters allege the companies prevented employees from electing COBRA by intentionally drafting COBRA election notices that buried important information and included harsh warnings about providing false or misleading information to the COBRA administrator. Filed in June 2020, the lawsuit against Starbucks challenged Starbucks’ failure to include physical forms with the COBRA election notice and requiring individuals to enroll in COBRA by phone or online. Notably, all three lawsuits each challenged the failure to use the DOL model COBRA election notice or only using certain portions of the model notice.
Similarly, lawsuits filed in the wake of the 2007-2009 recession may provide a roadmap for post-COVID-19 COBRA litigation. Lawsuits filed after the passage of the American Recovery and Reinvestment Act of 2009 (ARRA) challenged failures to adequately explain COBRA relief provided by the federal government. Under ARRA, the federal government provided COBRA subsidies for employers who lost their group health plan coverage due to an involuntary termination of employment. Employees of Macon County Greyhound Park and Brunel Energy sued their employers for failing to explain the ARRA subsidy relief in their COBRA election notices. The lawsuits resulted in a $1.3 million settlement with Macon County Greyhound Park and a nearly $1 million settlement with Brunel Energy.
Although the federal government hasn’t subsidized COBRA for individuals impacted by COVID-19, it’s clear that there will be an influx of COBRA beneficiaries due to COVID-19-related furloughs and layoffs and, as a result, an increase in the pool of COBRA plaintiffs. Employers should describe the COVID-19-related COBRA deadline extension relief in their COBRA communications and ensure third-party COBRA administrators are properly tracking and implementing deadline extensions.
Action Items
If your organization is subject to COBRA, you should review your COBRA notices and determine whether any changes are necessary in light of the recent litigation and federal guidance. COBRA election notices should describe the COVID-19-related deadline extensions or otherwise communicate these changes. Lastly, those who have outsourced COBRA administration to a third-party COBRA administrator should perform an audit of any administrator-provided notices to ensure their administrator is complying with best practices.
If you have questions regarding COBRA compliance, please contact Art Marrapese, Employee Benefits Practice Area chair, at amarrapese@barclaydamon.com; Alexandra Lugo, associate, at alugo@barclaydamon.com; or another member of the firm’s Employee Benefits Practice Area.