376 / What are the consequences of breaching COBRA continuation coverage requirements?

The penalty for failure to make continuation coverage available is an excise tax of $100 per day during the noncompliance period with respect to each qualified beneficiary, limited to $200 per day in the case of more than one qualified beneficiary in the same family. Attorney’s fees also may be available. Where a covered employee’s spouse and children were not participants on the date of the qualifying event, the award was limited to penalties and attorney’s fees based on the covered employee only.¹

The noncompliance period begins on the date when the failure first begins and continues until the failure is corrected or the date that is six months after the last date on which the employer could have been required to provide continuation coverage to the beneficiary, whichever date is earlier.²

The minimum tax for a failure that is not discovered until after the employer receives a notice of tax audit is $2,500 (increasing to $15,000 for violations that are deemed more than de minimis). However, no tax is imposed on any failure for which it is established that the employer (or plan in the case of a multiemployer plan) did not know, or exercising reasonable diligence would not have known, that such failure existed.³

No tax is imposed for the period during which it is shown that none of the persons liable for the tax knew or, by exercising reasonable diligence, would have known, that the failure existed. There is no tax if the failure was due to reasonable cause, not willful neglect, and is corrected within the first 30 days of the noncompliance period.⁴

Normally, an employer is liable for the tax. In the case of a multiemployer plan, the tax is imposed directly on the plan. In addition, a person responsible for administering the plan or providing benefits under it pursuant to a written agreement is liable if that person causes the failure by failing to perform one or more of its responsibilities. A person also may be liable if the individual fails to comply, within 45 days, with a written request of the employer, the plan administrator, or, in limited situations, a qualified beneficiary to provide benefits that the person provides to similarly situated active employees. This excise tax may be imposed on a third party such as an insurer or third party administrator if the third party assumes certain responsibilities.⁵

In the case of single employer plans, the maximum excise tax for failures due to reasonable cause, not willful neglect, is 10 percent of the aggregate amount paid by the employer during the preceding tax year for medical care coverage or, if less, $500,000.⁶ The maximum excise tax in the case of a person other than an employer is limited to $2 million with respect to all plans.⁷

In the case of a failure due to reasonable cause, the Secretary of the Treasury may waive part or all of the tax to the extent it is excessive relative to the failure involved. The determination of the excessiveness of the excise tax is to be made based on the seriousness of the failure, not on a particular taxpayer’s ability to pay the tax.⁸

Failure to make continuation coverage available will be treated as corrected if it is retroactively undone to the extent possible and the qualified beneficiary is placed in as good a financial position as the individual would have been in had the failure not occurred and had the beneficiary elected the most favorable coverage in light of the expenses incurred since the failure first occurred.⁹

Other Remedies

In addition to the excise taxes discussed above, other civil remedies are available under ERISA.¹⁰ Employees or other qualified beneficiaries can bring civil actions to obtain other equitable relief, including an injunction and restitution, and to recover additional penalties of up to $110 per day for failure to provide required notices or to furnish requested information.¹¹ Compensatory damages are not available.¹²