A recent Sixth Circuit Court of Appeals case considered a situation that we have seen in our practice: An employee gets sick, goes out on FMLA leave, and then is placed on short term disability. The employer’s health plan provides that employees are eligible for the plan if they are regularly scheduled to work at least 40 hours a week. The employer does not bother to send a COBRA notice until after the short term disability period ends (which is after the FMLA period has ended) and in the meantime simply treats the employee as having regular coverage, deducting the employee cost of the health insurance from the short term disability payments. That is the good deed – keeping the employee on regular medical coverage through the end of the short term disability period, despite the fact that the employee no longer met the weekly hours requirement for coverage under the health plan.
In the case considered by the Sixth Circuit, the employer’s health plan was self-funded and the employer had a stop loss contract in place to cover health claims for a single participant in excess of $250,000. That stop loss contract contained an exclusion we have seen in other stop loss contracts, namely, that the stop loss contract excludes expenses for a COBRA continuee “whose continuation of coverage was not offered in a timely manner or according to COBRA regulations.”
In this case, COBRA should have been offered after the employee’s FMLA leave expired because that is when regular coverage ended under the terms of the plan. The COBRA notice was not given until after the short term disability period ended. The employee’s claims exceeded the $250,000 limit that allowed the employer to seek reimbursement under the stop loss coverage. The stop loss carrier declined to reimburse the employer and – the “punishment” for the good deed — the district court and court of appeals upheld the stop loss carrier and denied coverage to the employer because of the irregularities in the timing of offering COBRA to the participant.
Had the COBRA notice been properly given (after the end of the FMLA period) and the employer simply subsidized the COBRA premium for the employee during the short term disability period, the employer might not have lost its stop loss coverage (although the employer would have needed to make certain that the health plan did not preclude the employer from subsidizing COBRA coverage for the employee). The excess health claims were incurred well within the 18 month COBRA continuation period that the stop loss carrier should have expected that its insurance would cover. Nevertheless, because the employer decided to offer COBRA at the end of the short term disability period, instead of at the end of the FMLA period, the employer found itself truly self-insured without any stop loss covering the large claim.
Employers should remember that their health insurance coverage is typically not something that they offer on their own even if their plan is “self-funded.” A fully insured plan is offered under the terms of an insurance contract and a self-funded plan typically has a third party administrator and stop loss carrier also involved in the coverage. The employer should make certain that any policies that it wishes to put in place regarding continuation of coverage, for example, during leaves of absence or in connection with employment separations, are reflected in the health plan document and accepted by the insurance carrier or stop loss carrier. The employer should also make sure that there are no stop loss exclusions inconsistent with the health plan’s terms. The last thing an employer typically wants is a truly “self-funded” plan.