December 12, 2011
It is not uncommon for employers to provide special terms to departing executives regarding their group health coverage that they do not generally offer to rank and file employees. Common examples include a period of remaining on active coverage status even after employment responsibilities have largely ceased (for instance during any period in which the executive receives severance compensation), or employer payment of COBRA premiums for some period of time after termination. Generally the terms of the special coverage arrangement are set forth in a separation or severance agreement, and may vary from case to case. Employers traditionally have exercised a significant degree of discretion in this area without a clear sense of the compliance issues that might arise.
Special continuation coverage arrangements do, however, pose several potential problems under ERISA. First, any self-funded group health plan is subject to nondiscrimination provisions under Section 105(h) of the Internal Revenue Code (“Code"), including the requirement that the plan’s eligibility provisions not discriminate against non-highly compensated individuals. To the extent that extended active status coverage or subsidized COBRA coverage are extended only to departing executives, who may likely comprise “highly compensated individuals," these practices would not meet nondiscrimination requirements and under Section 105(h)(7) the market value of the continuation coverage provided to departed executives could be includible in their taxable compensation.
The Patient Protection and Affordable Care Act (“PPACA") extended nondiscrimination rules to insured group health plans for the first time. Thus, providing extended active coverage under an insured plan only to terminated executives, or subsidizing only their COBRA premiums, could comprise a violation of PPACA’s nondiscrimination rules. The rules as such do not yet exist and the IRS is not enforcing the nondiscrimination requirement against insured plans until after regulations issue. However, extending active status coverage to a terminated executive likely is contrary to the terms of the group health policy and representations made by the employer in the application process, and could possibly provide grounds for a carrier to deny coverage of claims incurred during the extended active coverage. Employers that subsidize COBRA premiums for departing executives should be aware that this practice, while not contrary to the carrier’s rules, likely will be disallowed under the nondiscrimination regulations, when they issue.
Yet another problem may exist for self-funded group health plans, with regard to stop loss insurance coverage. In Bekaert Corp. v. Standard Security Life Ins. Co. of New York, 2011 U.S. Dist. Lexis 91605 (No. Dist. Ohio 2011), Standard Life Insurance Company denied stop-loss coverage for approximately $475,000 in medical claims incurred in 2009 by a former executive of employer Bekaert Corp., a Mr. Padgett, who ten years earlier had elected “extended COBRA medical health benefits" under the terms of his severance agreement with Bekaert. This consisted of continued group health coverage at no cost for one year, followed by Medicare bridge coverage at regular monthly premium costs until such time as the retiree reached age 65 and became covered by Medicare, or qualified for other group health coverage. Bekaert referred to this arrangement at “Option D" coverage, as contrasted with “Option C" coverage consisting of unlimited, no-cost retiree coverage up to a lifetime maximum of $100,000. In its written description of coverage provided to Standard it did not outline Option D coverage in detail, only stating that Option D participants were not entitled to retiree coverage.
Standard denied coverage for Mr. Padgett’s medical claims on several different grounds, the most salient being that Mr. Padgett was neither an active employee nor a COBRA recipient (for whom coverage could not exceed 36 months at maximum) and hence was not a covered person under the stop-loss policy. Bekaert raised several arguments attempting to establish that it had sufficiently disclosed Option D coverage to Standard, and that the COBRA coverage limitations did not apply under the specific circumstances, but the district court rejected these arguments ad granted summary judgment for Standard. The court noted that:
“While Bekaert may have had every intention of extending continuation coverage to Option D retirees beyond that which COBRA requires, the language of the Plan fails to do this. Bekaert’s decision to pay Mr. Padgett’s claims for benefits was required by the Separation Agreement it had with Mr. Padgett, but not by the terms of the Plan. The Separation Agreement is not part of the stop-loss agreement at issue here. Consequently, Standard is not bound to reimburse Bekaert for the Padgett claim paid according to the Separation Agreement."
Reading between the lines, it would appear that stop-loss coverage might have attached if Bekaert had described Option D coverage in more detail to Standard and also disclosed that it was intended to go beyond COBRA’s time limitations when necessary to “bridge" the applicable former employee to age 65 and Medicare coverage. Bekaert’s fatal flaw appears to have been to use COBRA terminology to describe Option D coverage, without expressly flagging for Standard that it was not intended to be limited to COBRA’s 18- and 36-month coverage periods.
What is the lesson for employers? Certainly self-funded employers should carefully examine their stop-loss coverage agreements and identify any gaps between the terms of their group health plan as disclosed to the stop-loss carrier, and the continuation coverage provisions in separation or severance agreements with former employees. Claims that arise under any terms or arrangements that fall in the limbo land between active coverage and retiree coverage, if any, as disclosed to the stop-loss carrier, could be at risk of rejection for the reasons set forth in the Bekaert case.
Insured employers also should examine its separation and severance agreements with former executives in light of coming nondiscrimination regulations, and also to identify continuation coverage arrangements that are inconsistent either with the employer’s representations to its carrier in the application process, or with the time limitations under COBRA or state “mini-COBRA" statutes, as applicable. Claims incurred outside COBRA’s parameters are equally at risk of being denied by a primary carrier, as in the stop-loss context.