Employee Benefits-Third Circuit Upholds Penalty For Failure To Provide COBRA Notice

May 9, 2013

In Fama v. Design Assistance Corporation, Nos. 12-2414, 12-2474 (3rd Cir. 2013), the district court had granted the request of the plaintiff, Sarah Fama ("Fama"), for the imposition of a penalty on her former employer, Design Assistance Corporation ("DAC"), for failing to notify Fama of her COBRA rights under in a timely manner. However, Fama challenges the district court's decision to impose a penalty of only $10 per day.

In this case, Fama began to work for DAC in April 2008, as an administrative and personnel assistant. As a regular, full-time employee, she was entitled to group health insurance benefits under DAC's health insurance policy (the "Plan"). Fama resigned from employment with DAC, effective on September 30, 2008. COBRA requires that the employer inform the health care plan's administrator of a covered employee's termination of employment within thirty days, and then the administrator has fourteen days to notify the employee of the right to continued coverage under COBRA.

However, after Fama ceased to work at DAC, the company mistakenly continued Fama's health care coverage under the Plan for several months. Only in March 2009 did DAC realize its mistake, and it then cancelled Fama's coverage retroactively, effective January 1, 2009. But in June 2009, for reasons not entirely clear, DAC retroactively reinstated Fama's benefits effective January 1, 2009 to eliminate any gap in Fama's coverage. Finally, on September 3, 2009, almost a year after her resignation, Fama received notice of her eligibility for COBRA continuation coverage (the "Notice"). In the time between her resignation (September 30, 2008) and September 3, 2009, Fama paid for medical expenses that otherwise would have been covered by the Plan.

Under COBRA, Fama was eligible to receive a statutory penalty from DAC of up to $110 for each day that the notice of her eligibility for COBRA coverage was late. A court has discretion in determining the amount of the penalty to be imposed. The Third Circuit Court of Appeals (the "Court") found that Fama's resignation of September 30, 2008 constitutes a "qualifying event", notwithstanding that Fama's coverage under the Plan was erroneously allowed to continue. Thus, the period for providing the COBRA notice began to run on September 30, 2008, with the result that the Notice was provided late. The Court further found that-on the facts in the case record such as the Notice being furnished late but an absence of bad faith or malicious intent by the administrator- the district court did not abuse its discretion in imposing a penalty of $10 day.