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Change in Premium Payment Method Was a Loss of Coverage for COBRA Purposes



Morehouse v. Steak N Shake, Inc., 2018 WL 5811001 (S.D. Ohio 2018)

After a workplace injury, an employee participating in her employer’s group health plan went on FMLA leave and began receiving workers’ compensation benefits. During the leave, her health insurance contributions were deducted from her workers’ compensation payments. But when her workers’ compensation benefits terminated—around the same time her 12-week FMLA period expired—the employee did not return to work and was unable to pay her premiums. Her health insurance was cancelled, and eventually, she was terminated. After obtaining private medical insurance that paid some, but not all, of the medical expenses related to her injury, the employee sued the employer, alleging that it failed to notify her of her right to continue health coverage under COBRA and, in so doing, breached its fiduciary duties under ERISA. The employer argued that no COBRA qualifying event had occurred.

Rejecting the employer’s arguments, the court determined that a qualifying event occurred when the employee experienced a reduction of hours leading to a loss of coverage. Defining a loss of coverage for COBRA purposes as “ceas[ing] to be covered under the same terms and conditions as in effect immediately before the qualifying event,” the court concluded that the change in her premium contribution method (i.e., from payroll deductions to payment from her workers’ compensation benefits) was a change in the terms and conditions of coverage. The court also rejected the employer’s argument that the reduction of hours was due to FMLA leave, and thus was not a qualifying event. Because the employer had failed to provide a notice designating the leave as FMLA leave, the employee had no knowledge that her workers’ compensation leave was running concurrently with an FMLA leave. Finding the employer in violation of COBRA, the court awarded the employee compensatory damages equal to her medical costs minus the COBRA premiums she would have paid. It also required the employer to pay statutory penalties of $50 per day, beginning 45 days after the qualifying event and ending on the date the employee obtained new insurance coverage. In addition, the employer was required to pay the employee’s attorney’s fees based on the court’s finding that it acted in bad faith by ignoring its COBRA obligations. The court held, however, that the employer’s actions did not rise to the level of a fiduciary breach.

EBIA Comment: This is a cautionary tale for employers who may be tempted to take COBRA requirements lightly. As shown here, the consequences may be steep, including payment of medical expenses, statutory penalties, and attorney’s fees. Determining when a COBRA qualifying event occurs may be difficult, particularly in situations involving leaves of absence and workers’ compensation, but this does not excuse an employer from its obligations. For more information, see EBIA’s COBRA manual at Sections VII.K (“Triggering Event Must Cause Loss of Coverage”), VII.L (“Special Issues: Leaves of Absence”), and XXV (“Consequences of Failing to Comply With COBRA”). See also EBIA’s Group Health Plan Mandates manual at Section XVII.H (“COBRA Continuation Coverage and the FMLA”).

Contributing Editors: EBIA Staff.

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