Human Resources: Only Plan Participants, Not Plan Beneficiaries, Are Entitled to Notice Penalties, 11th Circuit Rules

COBRA only establishes separate notice penalties for plan participants - not plan beneficiaries, the 11th U.S. Circuit Court of Appeals ruled. Therefore, although a former employee was entitled to penalties because of a plan administrator´s COBRA notice failure, his wife and two children - who were technically plan beneficiaries - were not. Therefore, the appeals court affirmed the penalty award to that former employee, but reversed the decision to award penalties to his dependents. The case is Wright v. Hanna Steel Corp., 2001 WL 1295304 (11th Cir., Oct. 25, 2001).

Facts of the Case
Daniel Wright was employee of Hanna Steel Corp. He, his wife and their two children were covered under the company´s group health plan. Hanna Steel was the plan administrator and Blue Cross Blue Shield (BCBS) of Alabama was the claims administrator. Hanna Steel was solely responsible for entering employee eligibility data on the BCBS computer system.

Wright terminated employment on Dec. 31, 1996. However, due to an administrative error, Hanna Steel never sent Wright a COBRA election notice. The Wrights sued Hanna Steel, alleging, among other things, that the company failed to provide a COBRA election notice. They sought statutory penalties "of up to $100 a day for each member of the Wright family beginning Jan. 1, 1997, and continuing until Sept. 1, 1998."

A federal district court awarded penalties of $170 per day for 18 months (which included a $75 per day penalty for Wright alone) and attorney´s fees, but allowed Hanna Steel an offset for the value of the insurance premiums it paid between Dec. 31, 1996, and July 1, 1998 on the Wrights behalf. In total, Wright was awarded $93,075 in penalties, $24,025 in attorney´s fees, $584 in costs and an offset of $2,174.

Hanna Steel then appealed, contending that the district court erred in imposing separate penalties for Wright, his wife and two children, and that the $75-per-day penalty for Wright alone was excessive.

Notice Penalties
The court noted that Wright, his wife and his two children were all qualified beneficiaries. Accordingly, Hanna Steel, as the employer/plan administrator, could have satisfied COBRA´s notice requirements by providing notice to any of those persons. However, its failure to do so meant that Wright was eligible for notice penalties.

The court noted that under COBRA´s penalty provisions, each notice violation "with respect to any single participant" - that is, the employee or former employee - is treated as a separate violation.

Here, Wright was the plan participant, and the district court correctly assessed a separate penalty to him. But Wright´s wife and two children were plan beneficiaries - not participants. Therefore, the court ruled that they were not entitled to separate penalties and the district court erred in assessing them. Accordingly, the court affirmed the $75 per day penalty to Wright, but reversed the penalty award for his wife and children.

Implications
On the penalty issue, the court´s analysis was not consistent with COBRA´s requirements. The court erred with its conclusion that when a qualifying event occurs, the COBRA statute only requires that a plan administrator notify "any" qualified beneficiary affected by the qualifying event. Not only is this not consistent with the U.S. Department of Labor´s interpretation of the statute (as explained in Advisory Opinion 99-14A, for example), it is not consistent with a logical understanding of COBRA´s statutory provisions.

Under COBRA, each individual qualified beneficiary has separate election rights when a qualifying event occurs. Thus, Wright, his wife and children each had separate COBRA election rights. To take advantage of those rights, it is clear that they each have be notified of their rights. It is not logical to assume that COBRA could be satisfied regarding Wright´s wife if she never received any notice of those rights. Thus, although the statute states that "any" qualified beneficiary must be notified of his or her COBRA rights, the term "any" in that context clearly means "any and all" qualified beneficiaries, not "any one of the" qualified beneficiaries.

Moreover, if only plan participants are entitled to notice penalties, that would suggest that in cases of divorce or cessation of dependent child status as qualifying events, no notice penalties could be assessed due to a notice failure. This would be inconsistent with the overall purpose of COBRA´s requirements.