Sponsors of self-funded health plans often fail to offer COBRA coverage on a timely basis to employees who are placed on a leave of absence. This mistake can lead to a most unpleasant result – the denial of stop-loss coverage. This was recently illustrated in a decision by the Sixth U.S. Court of Appeals, CLARCOR Inc. v. Madison National Life Insurance Co. (For another recent example, see our March 2010 article.)
CLARCOR sponsored a self-funded health plan. It maintained stop-loss coverage through Madison National Life, with a specific attachment point of $250,000. The stop-loss policy covered only “eligible employees” under the CLARCOR health plan. The plan document provided that eligibility was limited to full-time employees who were regularly scheduled to work a minimum of 40 hours per week. The only exceptions to this 40-hour requirement applied to (1) qualified retirees; (2) employees on leave under the Family and Medical Leave Act (“FMLA”); and (3) individuals receiving COBRA coverage.
One CLARCOR employee incurred over $637,500 in health care costs. The employee’s last regularly scheduled workday was October 20, 2007. She was placed on FMLA leave through January 12, 2008. Once the employee’s FMLA leave had expired, CLARCOR placed her on short-term disability (“STD”) leave. During that STD leave, CLARCOR continued to make health care deductions from the employee’s compensation and maintained her health coverage. On June 23, 2008, CLARCOR terminated the employee’s employment. Only then did CLARCOR offer her COBRA coverage.
CLARCOR submitted a claim to Madison under the stop-loss policy, seeking reimbursement for the employee’s health care expenses above the $250,000 attachment point. Madison denied the reimbursement claim with respect to expenses incurred after the employee’s FMLA leave had ended, on the ground that the employee was no longer “eligible” under the CLARCOR plan.
CLARCOR then filed suit against Madison, alleging that Madison had wrongfully denied the reimbursement claim. Madison argued that the employee was no longer an eligible plan participant once the FMLA leave had ended. The employee’s medical expenses were therefore not reimbursable under the stop-loss policy.
In support of its claim, CLARCOR presented evidence that it had a practice of allowing employees on STD leave to continue their health coverage as though they were active employees. However, this practice was not written into the plan document.
The trial court agreed with Madison that the employee lost coverage under the terms of the plan on the termination of her FMLA leave. Moreover, she should have been offered COBRA coverage at that time, rather than at the end of the STD leave. Although the employee was eventually offered COBRA coverage, the stop-loss policy expressly excluded coverage for any expenses incurred after such an untimely offer of COBRA coverage. Accordingly, the appellate court agreed with the trial court that the employee’s post-FMLA medical expenses were not reimbursable under the stop-loss policy.
Had CLARCOR timely offered COBRA coverage to this employee – and had the employee timely enrolled in that coverage – Madison would have been required to reimburse CLARCOR for the expenses the employee incurred during that coverage period. As it turned out, however, CLARCOR was forced to bear the full cost of the employee’s medical expenses.
Here are some suggestions for plan sponsors on how to avoid this all-too-common plan mistake:
- Review and understand the COBRA, FMLA, and other coverage continuation or leave-related provisions found in your plan document.
- Resist the temptation to make exceptions to – or deviate from – those provisions.
- If your practice does not conform to the terms of your plan, either change that practice or amend the plan document.
- If you amend the plan, communicate those changes not only to plan participants, but also to everyone involved in the plan’s operations.
- Know what services the plan’s third-party administrator (“TPA”) has agreed to provide. For example, if the TPA provides COBRA notices, confirm that those notices are being provided timely and in accordance with the terms of the plan.