How not to handle a COBRA notification

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Case study on how not to handle a COBRA rights notification

by Tony Novak, CPA, MBA, MT
, revised 11/28/11

Freedom Benefits Association uses a recent legal case reported in major news services this week to illustrate the importance of proper coaching of former employees who are being dropped from an employer’s health plan. Many firms provide group health coverage but few provide former employees with help on how to best convert their coverage after termination of employment. This often leads to poor decisions by employees and an increased likelihood of future legal actions.

An employer in Illinois (identified as Powell v. Paterno Imports, Ltd., 2004 U.S. Dist. LEXIS 21724 N.D. Ill. 2004) wound up in federal court over a dispute as to whether a COBRA notice was delivered to a former employee. Federal law requires that employers send this notice to departing employees, but there is no requirement to ensure that the notice is received or that the employee understands the options available. Most benefits administrators perform the minimum required task, as in this case. The COBRA notice was properly sent by certified mail by the employer’s benefits administrator but the employee never went to the post office to pick it up.

Ultimately the court case against the employer was thrown out by a federal judge but the company could have saved thousands of dollars in legal fees simply by duplicating the COBRA notice by regular mail and e-mail. Third party benefits advisers at firms like Freedom Benefits Association typically make personal contact and provide individual support to the departing employee to ensure that all commutations are clear and that the employee understands the options. In the large majority of cases, COBRA coverage is not the best option for the former employee, but nevertheless the employer can be charged with fines and financial damages from unpaid medical bills when another coverage option is not selected.

The best prevention from legal threats under COBRA law from former employees is to ensure that they are not financially hurt from being removed from the employer’s benefit plans. Substituting less expensive individual insurance coverage is usually the best option from both the employer’s and employee’s perspective. More than nine out of ten departing employees consulted individually select alternate short term medical insurance over COBRA coverage, according to Freedom Benefits Association. In this legal case the employer hired a firm to handle the employer’s benefit plan needs, but apparently did not address the employee’s concerns following dismissal from employment and did not offer alternative coverage. The employee took the easiest course of action – bought no coverage and later sued the employer. A benefit plan that provided individual support to the employee following termination of employment would have cost very little (if anything) but saved a lot. Freedom Benefits Association is an advocate for independent personal support services for employees, including recently terminated employees.

More information on group health plan support is available at and information about COBRA coverage and alternatives is available at

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tonynovak.comThis Web site is independently owned and operated by Tony Novak operating under the trademarks “Freedom Benefits”, “OnlineAdviser” and “OnlineNavigator”. Opinions expressed are the sole responsibility of the author and do not represent the opinion of any other person, company or entity mentioned. Tony Novak is not a representative, agent, broker, producer or navigator for any securities broker dealer firm, federal or state health insurance marketplace or qualified health plan carrier and has no financial position in any stocks mentioned. Novak may act as and be compensated as an accountant, agent, adviser, writer, consultant, marketer, reviewer, endorser, producer, lead generator or referrer to the companies listed on this site or other commercial companies and non-governmental insurance exchanges. Information is from sources believed to be reliable but cannot be guaranteed. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

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