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What Should Plan Sponsors Do After Discovering Ineligible Employees Enrolled in a Health Plan?

EBIA  

EBIA  

QUESTION: We sponsor a self-insured health plan. We recently discovered that employees working 25 hours per week have been enrolled in the plan based on outdated information in our employee handbook. Our plan document and SPD correctly state the current eligibility threshold of 30 hours per week. What actions should we take?

ANSWER: Plan sponsors should act promptly upon discovering errors in plan administration. Corrective action generally becomes more complicated as time goes by.

In this situation, you should consider two options. First, you could allow the employees to remain in the plan for the remainder of the plan year in reliance on the handbook language. Second, you could remove the employees from the plan based on the language in the plan document and SPD. Each option carries some risks and considerations.

Allowing the employees to remain in the plan is arguably the fairest approach since it may have been reasonable for the employee to rely on the language in the handbook. This is true even if, as is advisable, the handbook states that the handbook description is subject to the terms and conditions of the plan. This approach mitigates the risk that the employees would seek equitable relief to remedy the failure to properly communicate the terms of the plan in the employee handbook.

If you have stop-loss insurance associated with your self-insured health plan, however, allowing these employees to remain in the plan creates a risk that the stop-loss insurer would refuse to consider their claims under the stop-loss policy. Usually, stop-loss coverage is tied to the terms described in the plan document, not ancillary documents. Accordingly, before allowing “ineligible” employees to remain in the plan, you should consider seeking approval from the stop-loss insurer.

Removing the employees from the plan is consistent with the plan terms and mitigates the risk that the employees might incur significant claims under the plan that the stop-loss insurer would refuse to cover under the stop-loss policy. However, removing the employees from the plan despite the handbook language could raise the possibility of exposure by plan fiduciaries to a claim for equitable relief for lost plan benefits. If the employee will be removed from the plan, removal likely must be on a prospective basis, rather than removing the employee retroactively to the beginning of the plan year. Although the employee arguably has not been eligible for coverage for the entirety of the plan year, retroactive removal could be viewed as an impermissible “rescission” of coverage under the plan.

Regardless of your approach, you should strive to treat similarly situated employees alike. Treating similarly situated employees differently—allowing some 25-hour employees to enroll while denying enrollment to others—can trigger claims under nondiscrimination laws. Employees denied enrollment may assert that they received less favorable treatment due to their sex, race, age, or health status. Also, self-insured health plans should consider the nondiscrimination rules under Code § 105(h).

For more information, see EBIA’s Self-Insured Health Plans manual at Sections XIV.G (“Termination of Eligibility and Participation”) and XXII.G (“Self-Insured Health Plan Administrative Mistakes”). See also EBIA’s ERISA Compliance manual at Section IX (“Eligibility: Key Design Choices and Legal Constraints”) and EBIA’s Health Care Reform manual at Section X.D (“Prohibition on Rescissions”).

Contributing Editors: EBIA Staff.

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