Employer’s COBRA Notice Missteps Mean It Must Provide Retiree with Retroactive Coverage, Pay Statutory Penalties

Employers that provide retiree medical coverage for certain employees need to carefully consider how to integrate that retiree medical coverage with continuation coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). Many employers assume that if retirees receive retiree medical coverage at subsidized rates (or even for free), then no COBRA coverage has to be offered. That is not true. Any time there are differences between active employee coverage and retiree medical coverage, COBRA coverage must be offered.

An employer/plan administrator engaged in a series of procedurally deficient steps in providing a retiree with a COBRA election notice, a federal district court in Michigan ruled. Among them: sending out the notice with a deadline it subsequently failed to abide by due to inconsistent application of which dates (termination or loss of coverage date) triggered the election period and failing to adequately respond to the retiree’s administrative appeals. Accordingly, the court held that the retiree was entitled to retroactive COBRA coverage; statutory notice penalties of $1,300, and attorneys’ fees. The case is Buford v. Gen. Motors, LLC, 2022 U.S. Dist. LEXIS 14660 (E.D. Mich., January 26, 2022).

Facts of the Case

GM Employee Charles Fraley was approved for disability retirement effective January 1, 2014. GM’s policy was that active employee health coverage was terminated as of the retirement date, and retirees were “defaulted into” GM’s retiree plan, which requires participants to pay monthly premiums. GM was the plan administrator and sponsor of its benefit plans.

Accordingly, Fraley’s active coverage should have terminated on December 31, 2013. However, he did not sign paperwork confirming his “pension election”—which would have authorized enrollment in the retiree plan—until February 11, 2014. So, GM set the termination date for his active coverage as February 28, 2014, essentially maintaining that coverage for 2 extra months.

In a February 26, 2014, letter, GM informed Fraley of his COBRA election right as follows:

1. He had 60 days from the date his health coverage ended (February 28, 2014) or the date of notice (March 11, 2014), whichever was later, to enroll in COBRA coverage.
2. The deadline to enroll was May 5, 2014.
3. The eligibility date to start receiving COBRA coverage was March 1, 2014, with a self-pay rate of $492.47 for the next 18 months.

Fraley appealed the decision to end his active employee coverage. On or around March 17, 2014, he received documentation from GM that his employee coverage ended on February 28, 2014, and he had until March 27 to waive the retiree plan and enroll in COBRA coverage or be defaulted into the retiree plan. (That monthly premium was $56 higher.) He was instructed to go to a website to enroll in a health plan other than a retiree plan.

Fraley claimed that on March 18, 2014, he checked that website and saw he had been defaulted into the retiree plan, which he did not want. While waiting to resolve the dispute concerning his active coverage, Fraley alleged that (1) on March 31, 2014, he called Fidelity (the third-party COBRA administrator) to enroll in COBRA coverage; (2) a GM representative informed him via telephone that COBRA coverage would be effective March 1, 2014, and his medical treatments would be covered; and (3) however, in early April 2014, he was told by GM that his 60-day COBRA election period had expired because it was based on his January 1, 2014, retirement date (not the latter February 26 date).

Eventually, Fraley terminated his “cost prohibitive” retiree plan and became Medicare-eligible. However, he continued to seek retroactive COBRA coverage through “numerous” administrative appeals under which he alleged GM was unresponsive. His legal counsel was told by GM that:

1. Fraley’s COBRA coverage was terminated due to nonpayment, and he was eligible for a onetime retroactive reinstatement, which required “auto-pay and a lump-sum payment for all arrears from the effective date (January 1, 2014) through the present.”
2. Correcting the effective date for COBRA coverage would require a “research request through the appeals process.” Accordingly, the legal counsel submitted an appeal letter dated April 9, 2015, requesting that GM correct the effective date of Fraley’s COBRA coverage and give him the right “to terminate retroactive COBRA coverage at the time of his choosing.” However, it took almost a year to receive any response.

Fraley’s estate sued GM for improperly denying benefits under the Employee Retirement Income Security Act (ERISA). It alleged that Fraley was denied his right to COBRA coverage by way of denial of due process and a “procedurally infirm decision by the Plan Administrator.”  Specifically, the estate claimed GM intentionally prevented Fraley from exercising his COBRA rights by “backdating [his] retirement date and ignoring the date of the notice”; “removing it from the portion of their website he could access”; and “repeatedly purposely thwart[ing] continuation of [his] health care coverage” by refusing to respond to his administrative appeals and failing to address his concerns.

GM’s Decision was Arbitrary and Capricious

The plan expressly granted GM, as the plan administrator, discretionary authority to determine eligibility. Therefore, the court reviewed the company’s actions under ERISA’s “highly deferential arbitrary and capricious standard of review.” This means that the plan’s decision would only be overturned if it were without reason, unsupported by substantial evidence, or erroneous as a matter of law.

In reaching the decision, the court noted that based on the COBRA notice, Fraley understood his 60-day election period would begin on February 28, 2014, or March 11, 2014, and he had until May 5, 2014, to elect coverage. Fraley called to elect COBRA coverage on March 31, “well within” the 60-day period. But rather than comply with those dates, GM recorded the end of his active coverage as January 1, 2014, the effective date of his retirement, despite maintaining that coverage until February 28, 2014. This discrepancy resulted in Fidelity recording Fraley’s COBRA eligibility date as January 1, 2014.

The court noted that:

While an ordinary delay in paperwork would not be expected to undermine one’s right to access healthcare, in this case the two-month delay between when Mr. Fraley retired and when he was actually identified as COBRA eligible by Fidelity, had detrimental consequences that neither party appears to have foreseen.

GM contended that:

1. The date discrepancy was due to Fraley’s failure to sign and submit his pension election confirmation statement in a timely manner, but when he did, he requested a disability retirement with benefits to start retroactively on January 1, 2014. However, the court noted this related to pension benefits; there was no reference to continued or terminated health coverage.
2. Fraley received numerous documents related to his right to enroll in COBRA coverage or the retiree plan. However, the court noted this literature was not mailed until after Fraley signed the confirmation statement.

Most key, the court noted that any implication that Fraley was agreeing to retroactive health coverage should have triggered “GM’s duty to inform Mr. Fraley of the correct deadline for COBRA coverage, which it failed to do.” Instead, GM issued a COBRA notice with an election period ending May 5, 2014. As such, it should have abided by the dates in that notice or, at the very least, permitted retroactive reinstatement of COBRA coverage, with a start date that aligned with the termination of his GM-paid health coverage (March 1, 2014), according to the court.

Overall, the court found a problem “with the integrity of” GM’s decision-making process, including failing to (1) provide a rationale for why Fraley should be expected to know that his effective date for enrolling in COBRA would be different from the date in the notice and (2) properly address Fraley’s inquiries regarding reinstatement of his COBRA coverage, giving rise to a major procedural defect in the appeals process. Thus, the court held that GM acted in an arbitrary and capricious manner.

GM’s Conduct Resulted in a Procedurally Defective Appeals Process

Next, the court held that GM failed to adequately respond to Fraley’s administrative appeals and explain the grounds for denial of his right to retroactively enroll in COBRA. The court noted that:

1. GM’s responses to Fraley’s “numerous inquiries and appeals are at best evasive and at worst exasperatingly dismissive.”
2. GM failed to respond to Fraley’s attorneys within reasonable time frames and provided “little to no guidance on how to resolve what could have been a simple fix.”
3. Even though GM repeatedly offered to reinstate COBRA coverage retroactive to January 1, 2014, if he paid all delinquent payments, it never informed Fraley that he had a past-due balance or provided a bill or other information with the specific amount due and how it should be paid to reinstate COBRA coverage.
4. GM’s “excuse” that part of the challenge in addressing Fraley’s inquiry was because COBRA is managed by Fidelity, a third-party provider, was “unpersuasive.”

Accordingly, the court held that GM’s appeals process was procedurally defective.

Damages

The court ruled that Fraley’s estate was entitled to the following damages:

1. Retroactive reinstatement of COBRA coverage. Fraley was only liable for repayment of COBRA monthly premiums at a rate of $492.47, from March 1, 2014, until the date he became Medicare-eligible.
2. Statutory penalties of $1,300. As the employer and plan administrator, GM had 44 days from the January 1, 2014, qualifying event to notify him of his COBRA rights. That meant that the notice should have been sent on February 13, but it was not mailed until February 26. This resulted in a 13-day violation. The court found that GM was liable to pay a statutory penalty of $1,300—$100 per day (note that the court used the older rate of $100 per day, not the current maximum of $110/day) that the notification was late. The court noted that despite the notice delay, if GM had still given Fraley 60 days to elect COBRA while continuing his active coverage, Fraley would not have a claim. “But that is not the case here. Instead, GM not only provided Mr. Fraley with delayed notice, but also ignored the election period provided in Mr. Fraley’s notice,” according to the court.
3. Attorneys’ fees. The estate’s legal counsel was to submit a request for attorneys’ fees.

Conclusion

Many employers offer alternatives to COBRA coverage during periods of a leave of absence or other special circumstances, like retirement. When that happens, careful consideration needs to be given as to how to integrate the alternative coverage with COBRA coverage. As the Buford case illustrates, administration of the two types of coverage at the same time can lead to confusion and misunderstandings. At ¶1264 of Mandated Health Benefits—The COBRA Guide, there are several suggestions on how to evaluate these issues.

Paul M. Hamburger is co-chair of the Employee Benefits, Executive Compensation, and ERISA Litigation Practice Center and head of the Washington, D.C., office of law firm Proskauer Rose LLP. He is also a leader of the Practice Center’s health and welfare subgroup and a member of Proskauer’s Health Care Reform Task Force. Hamburger has more than 35 years of experience in advising employers and administrators and is the author of numerous articles and publications on COBRA and other employee benefits issues affecting pension and welfare plans. Hamburger is contributing editor of Mandated Health Benefits—The COBRA Guide. You can reach him at phamburger@proskauer.com.

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