A recent case illustration:
Leaves of absence can cause major COBRA headaches. In one recent case (Cole v. Trinity Health Corp., 774 F.3d 423, 8th Cir. Dec. 15, 2014), an employee exhausted all available short term disability leave and then applied for long term disability benefits (LTD). The LTD carrier reviewed her application for three months and ultimately denied LTD benefits.
Under the employer’s internal policy, the employee’s termination date should have been the last date that she was covered by short term disability. However, because of an error, her termination was not processed for several months. After the employer discovered the mistake, it terminated her health benefits. The result is that employee and her family received free health coverage under the employer’s plan for 11 months. A month later, the employee and her family were able to obtain coverage under another employer’s plan. Thus, only one month’s claims were not covered.
Despite this, the employee sued for COBRA notice violations seeking the maximum statutory penalties. The employer acknowledged that it did not provide COBRA election forms but argued that the violation is irrelevant because the employee received free coverage for 11 months.
The court did not award any statutory penalties.
At first blush, this seems like a positive outcome for employers. The court recognizes that under COBRA, it can still impose a statutory penalty even when there is no harm suffered. However, the court refused to do so and ultimately concluded that, in this case, the absence of harm wipes the slate clean.
Pandora’s Box – What could have happened?
The employer in this case failed to follow its own internal policies and the provisions of the insurance policy. Under different facts, the employer could be left owing a large amount of money. Consider how the situation might have ended if the employee and her family had incurred significant claims that far exceeded the premiums paid. The insurer may have refused to provide coverage because the employee and her family were not technically eligible under the policy. Had this been a self-funded plan and large claims were incurred, the stop-loss provider might have refused coverage because the family should not have been eligible under the health plan. The employer’s mistake could have left it ultimately responsible for a large amount of denied claims.
A friendly reminder …
It is imperative to review (or create) your policy covering leaves of absence. You should confirm that your policy answers important questions. For instance … When does the termination of employment occur? When does the loss of health coverage occur? When is a COBRA election notice required? Does active health coverage continue into the leave of absence and COBRA tacks onto the end or does COBRA start at the beginning of the leave of absence?
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