No Penalties for COBRA Violation Absent Proof of Employee’s Harm or Employer’s Bad Faith

A federal trial court has declined to impose statutory penalties in a former employee’s lawsuit against his employer for failing to provide a COBRA election notice. Following the employee’s termination, the employer provided him with free health coverage for almost a year. But after the coverage expired, the employee filed suit, seeking compensation for emotional distress and uncovered medical expenses due to the employer’s failure to provide a COBRA notice. The employer conceded that no notice was provided but argued that the employee was not entitled to statutory penalties because the free coverage following his termination put him in a better position than he would have been in had no violation occurred. The employer also argued that COBRA does not provide for compensation for emotional distress.

Agreeing that COBRA offers no relief for claims of emotional distress, the court considered only the claim for statutory penalties. Relying heavily on a prior case with similar facts (see our Checkpoint article), the court noted that, while COBRA gives courts the discretion to award penalties for notice violations, it directs them to primarily consider the prejudice to the qualified beneficiary and the nature of the plan administrator’s conduct. Here, the court determined, imposing a penalty would not serve the purposes of COBRA. First, the employee suffered no real prejudice because the premiums he would have paid if he had elected COBRA far exceeded the medical expenses he incurred after his free health coverage expired. In addition, the employer’s extension of free health coverage undercut any notion that the employer had acted in bad faith. The court concluded that the lack of prejudice to the employee and the lack of bad faith on the part of the employer weighed heavily against imposing a statutory penalty.

EBIA Comment: As pointed out by the court, an award of statutory penalties for failure to provide a COBRA notice is discretionary. Many courts have imposed penalties regardless of whether the qualified beneficiary was injured or prejudiced, so employers (and other plan administrators) should not assume that they will escape as easily as the employer in this case. Comprehensive COBRA administration procedures under which required notices are diligently prepared and timely distributed are essential. For more information, see EBIA’s COBRA manual at Sections XXV.C (“Statutory Penalties for Failure to Provide Certain COBRA Notices”) and XXV.F (“‘Other Relief’ Under COBRA: Possibility of Damages Beyond Penalties and COBRA Coverage”).

Contributing Editors: EBIA Staff.