This article was updated on October 9, 2020, with additional information on COBRA coverage.
The COVID-19 crisis has spurred an increase in the number of employees who are entitled to Consolidated Omnibus Budget Reconciliation Act (COBRA) notices in light of the many layoffs, furloughs and reductions in hours it has caused. For the past year or more, class action lawsuits filed in federal court against large employers alleging that COBRA notices are insufficient or otherwise violate federal law have ramped up.
In May 2020, the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) added a new wrinkle to COBRA compliance by plan administrators: The agencies extended the deadlines for employees to elect COBRA and to pay COBRA premiums. This adds another area that employers and plan administrators have to pay careful attention to or risk a lawsuit by plaintiffs’ counsel who are looking to bring lawsuits against employers and plans that may have violated COBRA.
COBRA amended the Employee Retirement Income Security Act (ERISA), the federal statute that governs group health plans, to require employers to offer employees and other plan beneficiaries (including spouses and children) continuation health coverage if they would otherwise lose health coverage because of termination of employment, reduction in hours or another “qualifying event.” The employee who has a qualifying event can continue health coverage for a fixed period (at his or her own expense) but must make an election to do so within a time period specified by federal law.
In joint guidance published on May 4, 2020, in the Federal Register, the DOL and the IRS extended the deadlines imposed by ERISA on employees for electing COBRA and complying with other COBRA requirements. These deadlines don’t start to run until 60 days after “the announced end of the National Emergency or such other date announced by the Agencies in a future notification.” This extension period, which started on March 1, 2020, is designated as the “Outbreak Period.” The extensions set forth in the joint DOL/IRS guidance apply to all group health plans, disability and other employee welfare benefit plans, and employee pension benefit plans subject to ERISA.
The extension applies to all deadlines imposed on plan participants and employees who sustain a qualifying event during the Outbreak Period. Most importantly, the extension means that plan participants don’t have to elect COBRA until 60 days after the Outbreak Period ends. Currently, based on an extension of the National Emergency issued on October 2, 2020, that period is due to expire on March 22, 2021, because the National Emergency is set to end on January 21, 2021. That would allow plan participants to wait until May 2021, that is, 60 days after the end of the Outbreak Period, to submit a timely COBRA election. That election would be retroactive to the date the participant lost health coverage. Because a participant is able to add up claims before deciding whether it’s cost-effective to elect COBRA, there is no way for a plan to avoid adverse selection. Participants who take advantage of the extended election period would have to pay the COBRA premiums for all months from loss of coverage until the COBRA election date. In addition, the National Emergency expiration date could be extended again. It already has been extended three times.
The import of the extension is that plan administrators will have to keep track of the end of the Outbreak Period and tack on the 60-day election period thereafter. Employers should advise plan participants who have had a qualifying event after March 1, 2020, of the extension of the COBRA election period in their communications with plan participants.
The price of not complying with COBRA is potentially high. If a COBRA notice is deficient, a court may award statutory penalties of up to $110 per day for each affected individual, injunctive and other equitable relief, and, perhaps most important, attorneys’ fees and costs to plaintiffs’ counsel. If a plan administrator fails to extend the time for a COBRA election, that could lead to a lawsuit alleging breach of fiduciary duty. In a class action on behalf of dozens or even hundreds of employees, these litigation awards and attorneys’ fees could be enormous.
Nor can employers and plan administrators rely on the fact that a third-party administrator is responsible for preparing and sending out COBRA notices. Under ERISA, COBRA requires employers to send the notices, making them responsible if something goes wrong.
In view of the many employees who have incurred a qualifying event, including a layoff, temporary furlough or reduction in hours, during the COVID-19 crisis starting March 1, 2020, it is incumbent on plan administrators and plan fiduciaries to ensure that their COBRA notices comply with legal content requirements and their COBRA practices comply with the joint guidance published on May 4, 2020, by the DOL and the IRS.
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