Pension & Benefits News Employee’s change in premium payment method during leave was not a ‘qualifying’ COBRA event
Friday, October 4, 2019

Employee’s change in premium payment method during leave was not a ‘qualifying’ COBRA event

By Pension and Benefits Editorial Staff

A Steak N Shake employee did not experience a "qualifying event" entitling her and her husband to a COBRA notification after the company began deducting her premium payments for her health insurance from her workers’ compensation benefits while she was on medical leave, the Sixth Circuit U.S. Court of Appeals ruled in reversing the district court’s grant of summary judgment in her favor, as well its award of damages, penalties, and attorneys’ fees. Because the terms and conditions of her insurance coverage did not change during her leave, the lower court erroneously found that the reduction in her hours upon her injury constituted a “qualifying event.”

Leave of absence and workers’ comp. The employee enrolled in the company’s health insurance plan after her husband lost his job and health insurance. On May 26, 2013, after she injured her knee in a w

orkplace fall, she began receiving workers’ compensation benefits and the employer approved her extended absence as FMLA leave rather than any type of paid leave. Because she was no longer receiving her normal salary, and thus was no longer paying premiums from her usual payroll deductions, it also began deducting all required insurance contributions from her workers’ comp checks.

Benefits cancelled due to nonpayment. On September 9, 2013, about three weeks after her workers’ comp benefits ran out, the employee received a letter from Steak N Shake indicating that a portion of her insurance premiums had not been paid and that she would need to pay the premium in order to continue her coverage. Then on September 20, the company notified her that her FMLA leave expired on August 19, that she should contact the company to discuss a reasonable accommodation, and that if her employment ended, she would have the opportunity to continue health benefits through COBRA upon that termination. On October 3, she was notified her health benefits had been discontinued due to the nonpayment of premiums. Several months later she was terminated.

Summary judgment granted to employee. The employee and her husband sued, arguing that Steak N Shake failed to properly notify her of her right to continue her health coverage under COBRA. The parties filed cross-motions for summary judgment disputing whether there had been a "qualifying event" requiring COBRA notice. The district court sided with the employee, finding as a matter of law that a qualifying event had occurred as a result of the reduction in her work hours on the day after her injury; thus, they were entitled to a notice of their rights to continuation coverage under COBRA. In addition to awarding damages covering medical costs, the court ordered the company to pay a $50 per day statutory penalty and attorneys’ fees.

COBRA requirements. Under COBRA, an employer that sponsors a group health plan must offer employees and qualified beneficiaries the opportunity to continue their health insurance coverage, at group rates but at their own expense, for at least 18 months after the occurrence of a "qualifying event" and notice to the affected employee. Here, it was undisputed that Steak N Shake sponsored a group health-insurance plan of which the employee and her husband were qualified beneficiaries. At issue on appeal was whether a COBRA-qualifying event occurred.

What is a "qualifying event"? COBRA defines "qualifying events" as those which "but for the continuation coverage required under this part, would result in the loss of coverage of a qualified beneficiary" and can include "termination (other than by reason of such employee’s gross misconduct), or reduction of hours, of the covered employee’s employment." While the regulations also provide that the taking of leave under FMLA does not constitute a qualifying event, the Sixth Circuit found it unnecessary to address the parties’ dispute over whether the employee was properly placed on FMLA leave here.

Hours reduction must cause loss of coverage. Significantly, a "reduction in hours" alone is not necessarily a qualifying event, it must also lead to a loss in insurance coverage. A Department of Treasury regulation defines a "loss of coverage" to mean "to cease to be covered under the same terms and conditions as in effect immediately before the qualifying event" and clarifies that it "need not occur immediately after the [qualifying] event, so long as the loss of coverage occurs before the end of the maximum coverage period."

Here, employee’s failure to pay was cause. The Sixth Circuit squarely rejected the lower court’s reliance on a decision with similar facts by an out-of-circuit district court. Instead, it took guidance from its own prior decision in Jordan v. Tyson Foods, Inc., where it addressed a plaintiff’s suggestion that he had been entitled to receive a COBRA notice during or at the end of his FMLA leave (which occurred several months before his termination). The Sixth Circuit said that in that case, it "implicitly held that the change in payment method that accompanied the plaintiff’s taking FMLA leave did not result in a ‘loss of coverage,’ a sine qua non for a ‘qualifying event.’ In other words, the plaintiff’s failure to pay premiums, not the FMLA leave or accompanying change in payment method, resulted in the loss of coverage."

The circuit court now clarified that "altering the contribution method alone," as Steak N Shake did when it began deducting premiums from the employee’s WC checks, did not "inherently change the ‘terms and conditions’ of coverage and therefore does not produce a ‘loss in coverage.’" Therefore, because the employee failed to identify any other "term" or "condition" of coverage that changed when the company altered the contribution method—such as a change in the amount of their premiums—the district court’s decision was reversed in its entirety and it was instructed the to grant summary judgment in favor of Steak N Shake.

SOURCE: Morehouse v. Steak N Shake (CA-6), No. 18-4186, September 13, 2019.

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