ONCE AGAIN… NO GOOD DEED GOES UNPUNISHED
Question: As part of a settlement/ severance agreement we agreed that for the next 3 months, we would keep our former employee “Sally” on our company’s health insurance and pay her premiums. Was that Okay?
Or: We only provide health insurance to full-time employees. We are reducing Sally’s hours to part-time, but we told her that she could stay on our plan for the next 6 months to ease into the situation. Was that okay?
Or: Sally is out on short/long term disability leave, but we are going to keep her on our health insurance while she is on leave and continue the premium sharing we offer our employees. Is that okay?
Answer: It depends on the terms of the company’s health insurance plan. An employer should be sure an individual meets their plan’s eligibility requirements, before telling them they can stay on the plan. Otherwise, the employer may have an obligation to the employee that is not covered by insurance.
Most employer sponsored health insurance plans provide that coverage eligibility ends on termination of employment. Under some policies, coverage eligibility ends if an employee’s work hours fall below a specified amount, or if the employee is not actively working (out on leave other than FMLA). An employer’s promise to allow an employee to remain on its health insurance plan contrary to the plan’s eligibility requirements may create liability for the employer to pay all medical expenses that the plan would otherwise have covered. The employer’s decision to offer special eligibility does not amend the insurance plan or impose new obligations on the insurer. Even worse, doing this may result in the employee losing their COBRA continuation rights, thereby subjecting the employer to liability for the employee/former employee’s medical expenses for the entire COBRA continuation period.
That is exactly what happened to the employer in Clarcor Inc. v. Madison National Life Ins. Co. Inc., issued on July 12, 2012, This case is an excellent reminder that an employer needs to be sure that an employee/former employee remains eligible for coverage under the terms of the company health insurance plan before telling anyone that they can stay on the company’s insurance.
Clarcor, the employer, provided health insurance to its employees through a self-funded Plan, with excess coverage from an insurer for losses over $250,000 per plan beneficiary, per year. A company employee who was unable to return to work after exhausting FMLA leave was granted an additional leave of absence while also receiving disability benefits. The company deducted health insurance premium contributions from the disability benefit and continued to list the employee as a plan beneficiary on paperwork it submitted to its excess insurer. At the end of the short-term disability leave the employee was still unable to return to work. The company terminated the employee and notified the employee of his COBRA rights. The employee’s medical expenses were well in excess of $250,000 for the plan year.
When the company submitted a claim to the excess carrier, the insurer refused to pay on the basis that:
- The Plan states that to be eligible for coverage an individual must be “regularly scheduled to work a minimum of 40 hours per week,” except that “eligibility will continue for the duration of FMLA leave, so long as the premiums are paid.” Therefore, once the employee’s FMLA leave ended and the employee failed to return to work, the employee was no longer eligible for coverage.
- With respect to eligibility for COBRA coverage, the Plan provides that “an individual must be a covered person … on the day before the qualifying event.” Since the employee ceased to be a covered person at the end of his FMLA leave, he was not eligible for COBRA continuation coverage when Clarcor terminated his employment at the end of the extended disability leave.
The Court agreed with the insurer that this Plan unambiguously excluded coverage for employees on non-FMLA leave. The Court ruled that as a result COBRA notification should have been given at that time. The Court further ruled that since the employee was not a “covered person” when he was terminated at the end of his disability leave, the insurer had no duty to provide COBRA continuation coverage.
The Court rejected the company’s claim that by accepting the employer’s premium payments, the insurer had implicitly agreed to modify the Plan. The Court found that the insurer was not aware that the employee did not meet the Plan’s eligibility requirements. The Court stated that “it is the terms of the plan that control… not… (the Company’s) interpretation or implementation of the plan.” And, the Court held that, “Clarcor cannot avoid the consequences of the Plan and Policy language by offering insurance coverage not otherwise provided by the Plan.” The Court also noted that the Plan expressly provides that the insurer “is not responsible for any liability [Clarcor] assumes[s] under any contract or agreement other than the Plan.” As a result, the Court ruled that the insurer was not responsible for the employee’s medical expenses. As a result, the employer had to go it alone and cover those expenses without benefit of the excess coverage.
The moral of the Clarcor decision is that employers need to be aware of and understand the eligibility requirements of the health insurance plans that they offer. An employer should never make an agreement to provide or continue health insurance under the company’s plan for a person who is not “eligible” for coverage under the terms of the plan. In addition, whenever an employee, because of a leave, reduction in hours, termination, or some other reason, is no longer eligible for coverage under the terms of the company’s health insurance plan the employee must be given timely notice of their COBRA right.
Employers should be very careful to adhere to the terms of their health insurance plan regarding the date a terminated employee’s eligibility for health insurance coverage ends. For example, some plans terminate coverage eligibility the day employment terminates, while others allow coverage to continue through the last day of the month of termination. As in Clarcor, an employer’s policy or past practice on this will not bind an insurer to provide coverage beyond the terms of the policy. If your company has been or wants to provide health insurance coverage through the last day of the month an individual’s employment terminates, be sure that is what your plan provides. Failing to do so could be an incredibly costly mistake for the company if an employee is told they can remain on the plan though the end of the month, the person suffers a catastrophic illness or injury sometime during the remainder of the month, and it is then discovered that the person’s eligibility for coverage ended the day of termination.
Always be certain of the eligibility requirements of your company’s health insurance policy before telling anyone they can remain on the plan. Please contact anyone in our group if you need any assistance understanding the application of your company’s health insurance plans’ eligibility requirements to any given situation.
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This is not a legal document nor is it intended to serve as legal advice or a legal opinion. Devine, Millimet & Branch, P.A. makes no representations that this is a complete or final description or procedure that would ensure legal compliance and does not intend that the reader should rely on it as such.
© Copyright 2012 Devine Millimet & Branch, Professional Association
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