Promising Health Care Plan Benefits in Excess of Plan Terms Can be More Costly Than Anticipated
We occasionally hear that an employer wants to promise greater health care coverage than is provided under the plan terms, either in a sympathetic scenario, or to facilitate a separation. Unfortunately, this “generosity” can leave the employer obligated to provide costly benefits, without insurance coverage.
Treating a Qualified Beneficiary on Short-term Disability as Continuing to be an Eligible Employee
Take, for example, Clarcor v. Madison National Life Insurance. The employer maintained a self-funded health plan, and purchased a stop-loss policy. The policy provided that coverage was limited to benefits paid in accordance with plan terms. Under the plan terms, if an employee’s FMLA leave ended and she went on short-term disability rather than returning to active employment, she incurred a “qualifying event.” Her eligibility terminated, and she became a “qualified beneficiary,” eligible for COBRA. When one of the employer’s employees reached the end of her FMLA leave, the employer continued to treat her as eligible, rather than as a qualified beneficiary, and did not timely provide the required COBRA notice and opportunity to elect COBRA coverage. Six months later, after she was terminated from employment, the employer provided the notice. She incurred substantial medical costs during this time period, and the employer submitted a claim to its stop-loss carrier. When the carrier questioned her eligibility, the employer explained that it had a “corporate practice” of continuing coverage during short-term disability, which was not set forth in the plan terms. The stop-loss carrier refused to provide reimbursement.
The district court ruled that the carrier properly denied coverage, and the Sixth Circuit appellate court affirmed. In doing so, it rejected various arguments. We think the carrier’s strongest argument was that the corporate practice was not included in plan terms. The practice presumably would have impacted pricing, and suggests that the employer intentionally violated plan terms, potentially at the carrier’s expense.
Further, the court found that the stop-loss policy specifically provided that the policy would not cover expenses for COBRA continuees or retirees who were not offered COBRA coverage in a timely manner or according to COBRA regulations.
Treatment of a Qualified Beneficiary When the Employer Fails to Satisfy COBRA Requirements
Our friend Sean Kelley at Britton Gallagher notes that this COBRA exclusion is unusual, for either a stop-loss policy or a health care insurance policy. As Sean explains, policy terms are typically designed so that an administrator can retroactively fix COBRA failures when they are discovered, and get the qualified beneficiary back on track with the required coverage. COBRA qualified beneficiaries present risk to both the employer and carrier, since those who elect the coverage tend to have higher expenses. “Lasering out” these individuals is a risky proposition for the employer.
Reading the plan provisions in order to determine whether the individual was still covered under the plan terms, the Clarcor court concluded, “Because [the participant] lost Plan eligibility during her short-term disability, she was not eligible to receive COBRA coverage when it was offered.” We do not understand this conclusion, as a plan provision that remedies an employer’s failure to timely provide the required notice and an election period by stripping a qualified beneficiary of her COBRA rights and tossing her out of the plan would violate the statute. Code Sections 4980B(f)(5)(A) and 4980B(f)(6)(A) provide that a qualified beneficiary has election period that runs 60 days after the later coverage would terminate due to a qualifying event, or the date the qualified beneficiary receives the required notice. Pointing to this mandate, and citing numerous holdings that the right to elect coverage is tolled until notice is received, at least one court has rejected a stop-loss carrier’s claim that it was not liable because the individual was not provided with a timely notice and was no longer covered by the plan. In that case, the policy did not set forth an exclusion provision. (See Zurich American Insurance Company v. Wisconsin Physicians Services Insurance Corporation.)
Further, Code Section 4980B(g)(4) provides that a group health plan must correct a failure to satisfy COBRA requirements by retroactively undoing the failure to the extent possible, and putting the individual in a financial position which is as good as she would have been in had the failure not occurred (i.e., treated as if she elected the most favorable coverage in light of the expenses incurred). If the individual had brought this suit, we presume that a court would conclude that she continued to be eligible to elect coverage, both retroactively and prospectively. Given the stop-loss policy exclusion for late notices, this would not have entitled Clarcor to relief. But in the absence of such an exclusion, it seems that stop-loss coverage should apply.
COBRA excise taxes, Form 8928 excise tax self-reporting requirements, potential penalties and interest, and the potential ERISA civil penalty up to $110 per day should provide enough incentive to ensure that COBRA procedures are followed. But the risk of being required to self-fund health care expenses makes it even more important for employers to review health care insurance policy and stop-loss policy provisions, and to ensure that plan provisions and COBRA procedures are followed.
Treating an Individual as a COBRA Qualified Beneficiary Beyond Statutory Time Period
Here is one more example of what can go wrong when an employer promises benefits beyond the plan terms. In Bekaert Corp. v. Standard Security Life Insurance Co. of New York, the employer agreed in a Separation Agreement to continue health care coverage for a retiring individual well beyond the required COBRA time period. The health care plan terms were not modified to reflect this agreement. The employer did not disclose to the stop-loss carrier that the individual had been listed as eligible for “COBRA” benefits for more than 10 years. In 2009, the individual incurred substantial health care expenses, and died. When the employer filed a claim for reimbursement, the stop-loss carrier rejected the claim, on the basis that the individual was not covered under the plan terms and policy. Interestingly, while the failure to include the benefit in the plan terms was probably enough basis for rejecting the claim, that policy also had an exclusion for qualified beneficiaries who were not offered coverage in a timely manner, or according to COBRA regulations. The court granted summary judgment to the carrier, and dismissed the case.
The employer was responsible for the medical costs that it anticipated would be covered by stop-loss coverage. In addition, we note that ERISA requires a plan to be operated in accordance with its terms. Further, Code Section 105(h) prohibits discrimination in favor of “highly compensated individuals.” The Patient Protection and Affordable Care Act extends nondiscrimination requirements to insured plans, with a hefty excise tax for failures. Accordingly, employers that grant special health care continuation arrangements need to be certain that these provisions comply with the Code and are properly reflected in plan terms and disclosures to insurance carriers.