The Alabama Lawyer
68 The Alabama Lawyer 142 (2007).
Unraveling ERISA Civil Penalties
Unraveling ERISA Civil Penalties BY DAVID P. MARTIN AND JOHN DAVID COLLINS A potential client came to an attorney's office because his claim for disability benefits had been denied by his employer's group disability insurer. During their initial consultation, the attorney learned that the employee also lost his job as well as his company-provided health insurance. The employee had repeatedly asked his employer for a copy of the long-term disability benefit booklet and for health insurance information, but to no avail.
The attorney took the case and filed in state court what he thought was a clear-cut "bad faith" lawsuit against the insurance company that made the decision to deny disability benefits. He soon learned that ERISA preempted the state law claims and provided a basis for removal to federal court. Next, the case was dismissed for failure to exhaust administrative remedies. A case that was sure to result in significant mental anguish and punitive damages was over before discovery commenced. Unfortunately, the attorney not only failed to exhaust his client's administrative remedies, but also overlooked two potential civil penalty claims that could have been asserted in federal court.
This particular employer had been careless with other employee requests for information and notices as well. The company had been operating under the belief that there was little chance of ever being liable for significant damages since the benefits it offered were "fully insured" and governed by ERISA. The employer let the insurance companies "do all the work," but it was listed as the plan administrator in all plans. The employer laid off 30 employees without providing them with mandated COBRA notices under ERISA § 502(c)(1)(A).
When defense counsel became involved, she calculated that after one year the company's maximum penalty exposure was $1.2 million dollars. Moreover, the company failed to provide its employees with a copy of its most recent disability summary plan description. Twenty-four terminated employees had asked for it without a response for 300 days, thereby exposing the company to an additional $700,000 in potential penalties. This employer was soon to learn that employees do not forfeit all remedies in exchange for receiving the right to participate in an employer-sponsored benefit plan. ERISA's civil enforcement scheme has a variety of remedies, but one form of relief-civil penalties-can potentially result in significant liability for a plan administrator.
I. Why Do We Have ERISA?
The Employee Retirement Income Security Act ("ERISA") was passed in 1974 "to protect the interests of participants in employee benefit plans by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefits plans, and by providing for appropriate remedies and ready access to the Federal courts." ERISA § 2(b). Congress was motivated by a desire to protect against private sector mismanagement of employee benefit plans which placed participants' potential benefits at risk. A key component to the enforcement of these protections is ERISA's civil penalty provision. The circumstances requiring penalties and extent of those penalties, however, are the subject of debate between counsel for plaintiffs and counsel for defendants. To keep a balanced perspective, this article was co-written by two attorneys practicing regularly in this area but on opposite sides of the fence.
II. What Are the Civil Penalties under ERISA?
The civil penalties are fines for failure to perform a duty. There are two civil penalty provisions in § 502 (c)(1). The first part, subparagraph (A), allows for penalties for notice violations of the Consolidated Omnibus Reconciliation Act of 1985 (COBRA). These notices pertain to health insurance benefits. The employee mentioned above had a COBRA notice claim when he was not told of his right to continue health insurance under COBRA. The other notice violations relate to the transfer of excess pension assets and certain pension funding notices. These pension notices are required so that employees know more about the financial condition of their pension fund.
Subparagraph (B) is much broader than (A). It obligates any administrator regardless of the type of plan, (i.e. disability, health, pension, life etc.) to furnish information required by Title I. This title, which concerns Protection of Employee Rights, spans ERISA §§ 2 through 734. While that is much to review, in order to ascertain all of the duties which could give rise to penalties, the task is simplified by the fact that all of the duties are found in Subtitle B which is divided up into seven topical parts.
These seven topics focus on the duties for different aspects of plan management. Part 1 covers general reporting and disclosure duties, and as a result, it provides a frequent basis for civil penalties. Part 2 deals with participation and vesting in pension plans. Part 3 applies to plan funding, and Part 4 regulates fiduciary responsibilities. Part 5 sets out the administration and enforcement provision. Parts 6 and 7 relate to COBRA provisions and concern group health plans.
The penalties under § 502(c)(1)(A), which arise from failure to provide COBRA and pension notices, are distinct from the penalties under §502(c)(1)(B). A penalty arises under (A) merely for failure to provide a required notice, such as the right to continue health insurance. A violation is calculated based on each participant who did not receive the required notice in the 11th Circuit, even though there may be beneficiaries entitled to separate notice. See, Wright v. Hanna Steel, 270 F.3d 1336 (11th Cir. 2001). For example, if an employee, his wife and his children are all entitled to a COBRA notice which was not given, only one violation will be found.
Under subparagraph (B), however, there must be a request for information and the administrator must fail to provide the information within 30 days before a penalty claim arises. To avoid penalties the administrator must mail all responsive materials requested to the last known address of the participant or beneficiary. If a penalty claim arises, courts have discretion to hold the administrator personally liable to the participant or beneficiary in an amount up to $110 a day, from the date of the failure or the refusal.(fn1 )Additionally, the court may order such other relief as it deems proper.
Each request for information under subparagraph (B) involving a participant or beneficiary can give rise to a separate penalty award. In other words, repeated requests can result in repeated violations. If a beneficiary requested information six times in one year, and never received a response, there will be six potential penalty claims. Additionally, both a participant and a beneficiary are entitled to a separate response to their separate requests for information. In fact, if several beneficiaries in a life insurance plan individually ask for information about the same benefit, each request may result in a penalty claim.
Penalties should be taken very seriously. Many courts have awarded the maximum penalty or substantial penalties.(fn2 )Penalties have been awarded when there was no harm caused, other than the anguish of not knowing why information was not provided or the expense of hiring an attorney.(fn3)Courts are...