(November
1998)
Offering Several Individual Health Policies
Results in Group Plan Subject to COBRA
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Immediate
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All employers with 20 or more
employees
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| An employer that offered individual
health insurance policies to several employees established a “group
health plan” subject to COBRA, according to a federal district
court in Michigan. This is the first ruling on this issue, and
deals only with the federal COBRA statute, which applies businesses
with 20 or more employees. |
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In Burrill v. LECO Corp., LECO
Corp. gave all new employees an individual health insurance policy
during the 90 days before they became eligible for the company’s
group plan. Burrill was terminated while covered by the individual
policy. Because it was an individual policy, LECO did not provide
Burrill with any information regarding his right to continue
the insurance policy. After his termination, Burrill did not
continue the insurance policy on his own, and he later incurred
some large medical expenses. He then claimed that LECO violated
his COBRA rights by failing to provide continuation information.
Under COBRA, an employer that offers a group health plan must provide
participants with the right to elect to continue their health benefits
coverage after experiencing certain "qualifying events" which
would otherwise result in a loss of their health benefits. The
participant electing this continued coverage would be required
to pay the full premium him/herself, but would pay based on the
lower, group rate premium, rather than having to pay the cost of
an individual policy. Additionally, the participant would not need
to prove insurability. This federal statute has always been understood
to apply to group health insurance plans that were sponsored by
the employer, where the main benefit to the participant is the
lower, group rate. After all, anyone can take over the payments
for individual policy at the regular individual rate. But the Court
held that the employer does not need to be purchasing a "group
policy" at a group rate in order to be providing a health
plan to a group of employees. Accordingly, a group of individual
policies would be a "group health plan" under COBRA unless
it met four criteria: (1) there are no employer contributions;
(2) the plan is completely voluntary for the employees; (3) the
employer does not endorse the policy and its only function is to
act as a conduit between the employee and the insurer; and (4)
the employer receives no consideration under the policy other than
reasonable compensation for administrative services related to
payroll deduction.
Since LECO paid for and selected the policy, it failed to meet
the four criteria and was found to be a covered group health plan.
As a result, LECO was in violation of COBRA for failing to notify
the insurer of Burrill’s termination and for failing to give
Burrill the required notices and election opportunities. The Court
held that LECO would be liable for statutory penalties, which are
currently up to $110 per day from the date of the failure under
COBRA. |
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Although this is the first case
on the subject, regulations promulgated by the IRS have always
taken the position that an employer who offers individual policies
to several employees is sponsoring a "group health plan" within
the meaning of COBRA. The IRS contends that otherwise, employers
would use the "group of individual policies" approach
as a subterfuge to avoid COBRA obligations. At least one court
now agrees with the IRS view. While this ruling applies only
to employers covered by the federal COBRA statute, it also raises
questions about how such practices may be viewed in the context
of Cal-COBRA, the state law imposing COBRA-like requirements
on small group plans covering between 2 and 20 employees. Employers
who offer any arrangements consisting of several individual health
insurance policies should review their insurance practices with
counsel to determine whether or not the situation requires them
to comply with COBRA.
This information is not meant to provide professional opinions
or to substitute for professional advice and should not be
relied upon as an opinion of Waag and Co. regarding any specific
matter. Please contact Susan Waag for additional information. |
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