I blogged a few months ago about an employer who had to pay more than $83,000 in penalty, attorneys’ fees and costs for failure to give a proper COBRA notice for a dental plan. I warned employers that failure to maintain adequate procedures for COBRA compliance can be costly. That amount pales in relation to a recent federal district court decision awarding a penalty of $1,852,500 to a class of employees to whom timely COBRA notices had not been sent. The amount is to be divided equally among all class members so each class member will receive $2,500. In addition, the class will be entitled to attorneys’ fees yet to be awarded, but likely to be substantial in amount.

In this case, the employer, Visteon Corporation, outsourced its COBRA administration but did little or nothing to audit or monitor the COBRA processes. Visteon’s records were so bad that it took the company seven years to discover that 711 individuals could be excluded from the class because they had in fact received a timely COBRA notice. Although former employees complained about not receiving COBRA notices, Visteon had no process for capturing or following up on those complaints.

During the time period in question, there were different payroll administrators, benefits administrators, and COBRA administrators. There was little coordination among the administrators and no real oversight by Visteon. Visteon did some initial quality assurance testing but never did any follow up testing to make sure that notices were handled properly.

Courts have discretion to impose a penalty of up to $110 a day for failure to provide a COBRA notice. In this case, the court wanted to send a message to Visteon that its failure to monitor its COBRA processes was unacceptable. In the court’s view, the company can afford to pay both the penalty and the reasonable attorneys’ fees.

The lesson for employers:  Administering COBRA is a fiduciary duty of health and dental plan administrators. A failure to maintain adequate COBRA processes or to monitor third parties to whom COBRA processing is delegated can be quite expensive.