Employee Benefits-Eighth Circuit Declines To Impose Penalty For Failure To Send COBRA Notice

In Deckard v. Interstate Bakeries Corporation, No. 11-1595 (8th Cir. 2013), Sean Deckard (“Deckard”) was appealing the order of the district court affirming the grant of summary judgment by the bankruptcy court in favor of Interstate Bakeries Corporation (“Hostess”). Deckard had filed a claim for civil penalties with the bankruptcy court for Hostess’s failure to give notices required by COBRA.

In this case, Deckard began employment with Hostess in May 2004 and commenced participation in its healthcare plan (the “Plan”) in December 2004. Hostess was the Plan’s administrator. COBRA requires an administrator to give each participant a notice of certain health insurance coverage rights upon the commencement of coverage. However, Hostess failed to provide this notice to Deckard. Hostess notified Deckard that his employment was terminated on September 11, 2006. COBRA also requires an administrator to give each participant a notice of certain health insurance coverage rights upon a “qualifying event,” such as the termination of the participant’s employment. Again, Hostess failed to provide this notice to Deckard. Due to an apparent clerical oversight, Hostess did not process certain aspects of Deckard’s termination for almost two years. During this post-termination period, Deckard continued to enjoy health care coverage under the Plan, paying no premiums but receiving about $19,000 in benefits through the Plan. In April 2009, Deckard filed an administrative claim in Hostess’s long-running bankruptcy proceeding, requesting penalties for Hostess’s failure to provide the required COBRA notices.

In analyzing the case, the Eighth Court of Appeals (the “Court”) noted that ERISA provides that a plan administrator who fails to meet the COBRA notice requirements may in the court’s discretion be personally liable to the participant in the amount of up to $110 a day from the date of such failure. The purpose of this statutory penalty is to provide plan administrators with an incentive to comply with the requirements of ERISA and to punish noncompliance. In exercising its discretion to impose the statutory damages, a court primarily should consider the prejudice to the plaintiff and the nature of the plan administrator’s conduct. Although relevant, a defendant’s good faith and the absence of harm do not preclude the imposition of the damages. The Court said that Deckard’s free, ongoing coverage under the Plan, despite the lack of COBRA notices, indicates a lack of prejudice. For that and other reasons, the Court affirmed the district court’s decision to grant summary judgment to Hostess on the penalty issue, that is, the Court affirmed the district court’s decision to decline to impose the statutory penalty on Hostess for the failure to provide COBRA notices.