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Employer Precluded From Denying COBRA Coverage After Purchase Of Wrong Insurance Product


By Patricia Kryder

A recent employer found out the hard way that even though it did not have 20 or more employees to trigger COBRA continued health coverage, it was still obligated to provide the coverage to certain terminated employees at its own expense. COBRA contains a number of other requirements, other than those based upon the number of employees employed which every employer needs to understand.

The Facts
The employee, in this case, had served in various management positions and even president of the company before his company was purchased. The employee was then told his services were not required, and laid off. However, the employee was offered a continuation of his health insurance coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA).

After more than one year of paying insurance premiums for himself and his spouse, he filed a complaint with the U.S. Department of Labor (DOL) when his premiums increased. However, the DOL pointed out the employer was not subject to the federal COBRA requirements because it employed fewer than 20 employees. As a result, the insurance company retroactively terminated the former employee’s medical coverage, and the medical coverage for his spouse, and reimbursed the employer the medical premiums paid for the former employer’s COBRA benefits to date. The former employee appealed the DOL’s decision.

COBRA In a nutshell
To be eligible for COBRA continuation of health insurance coverage, an employee must have been enrolled in his employer’s health plan while employed and the health plan must continue to be in effect for active employees. After an employee’s employment terminates, COBRA is available upon the occurrence of a qualifying event that would – except for the COBRA continuation coverage – cause an individual to lose their health care coverage.

There are three elements to qualifying for COBRA benefits. COBRA establishes specific criteria for 1) employer plan coverage, 2) qualifying events and 3) beneficiaries.
1.    Plan Coverage - Group health plans for employers with 20 or more employees on more than 50 percent of its typical business days in the previous calendar year are subject to COBRA. Both full and part-time employees are counted to determine whether a plan is subject to COBRA. Each part-time employee counts as a fraction of an employee, with the fraction equal to the number of hours that the part-time employee worked divided by the hours an employee must work to be considered full time.
2.    Qualifying Events for Employees - Qualifying events are certain events that would cause an individual to lose health coverage. The type of qualifying event will determine who the qualified beneficiaries are and the amount of time that a plan must offer the health coverage to them under COBRA. A plan, at its discretion, may provide longer periods of continuation coverage.
3.    Qualified Beneficiaries - A qualified beneficiary generally is an individual covered by a group health plan on the day before a qualifying event, and who is either an employee, the employees spouse, or an employees dependent child. In certain cases, a retired employee, his spouse and his dependent child may be qualified beneficiaries. In addition, any child born to or placed for adoption with a covered employee during the period of COBRA coverage is considered a qualified beneficiary. Agents, independent contractors, and directors who participate in the group health plan may also be qualified beneficiaries.

Equitable Estoppel
The U.S. Court of Appeals for the Sixth Circuit considered whether the employer should be precluded from denying coverage to the former employee. The court ruled that the employer’s contract with the insurance company placed the responsibility for complying with federal and state law squarely upon the employer. The court stated that the employer is responsible for communicating with its employees about their eligibility for the continuation of health care coverage under COBRA.

Here, the employer knew the total number of its employees totaled only 16. Therefore the particular provisions of COBRA technically did not apply. However, since it was the employer who accepted this particular insurance coverage plan with COBRA benefits and made the misrepresentations that the employee was actually entitled to COBRA coverage, it was therefore precluded from denying its promised benefits and coverage to the former employee.

Final Thoughts
Before purchasing health insurance for your employees, employers should have an attorney review their contract with the health insurance provider. In the event that the insurance company has sold a policy to you with COBRA continued health care coverage that is actually not applicable to your company, because you do not have 20 or more employees or otherwise, you may have to provide the coverage to certain terminated employees, should you fail to know your federal and state law obligations and convey inapplicable benefits to your employees.


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