It’s a fairly common and generous practice of employers to continue health and other employee benefit plan coverage for employees out on leaves of absence. Of course, for certain leaves (such as under the Family and Medical Leave Act and the Uniformed Services Employment and Reemployment Rights Act), this is required for certain coverage, including group health plan coverage. But what happens after protected leaves end or if the leave is not protected by law, and coverage continues? Continuing coverage out of a generous, long-standing company policy or inattention to plan terms can result in substantial exposure to the employer where the insurance company has not agreed to continue coverage in the policy, as a recent federal district court has held. Clarcor, Inc. v. Madison National Life Ins. Co., No. 3:10-189 (M.D. Tenn., July 11, 2011).

The employer in Clarcor sponsored a “self-funded” group health plan, which basically means the employer (and not an insurance company) pays claims incurred under the plan. However, like most employers with similar plan designs, the company’s plan also had “stop-loss” coverage, which protects the company against exceptionally high claims. This type of reinsurance coverage usually relies on the terms of the underlying group health plan to determine when claims are payable.

In this case, an employee covered under the health plan ceased active work and commenced protected disability leave under the FMLA. As required under the FMLA, the employee’s health coverage continued during the 12-week period. Once the 12-week FMLA period concluded, the employee, still unable to return to work, was placed on short-term disability leave. Pursuant to a “company practice,” the employee was permitted to continue health benefits for another six months without being offered COBRA. Sound familiar.

During the six-month short-term disability period, the employee incurred substantial medical expenses, sufficient to trigger coverage under the stop- loss policy. The underlying health plan required the employee to be working 40 hours per week to be eligible. The carrier denied the employer’s claim for reimbursement because the terms of the health plan simply did not support coverage for the employee after the employee exhausted FMLA leave. That is, during the six months the employee was on short-term disability, the employee was not regularly working or “shielded by the FMLA or COBRA.” The court found unpersuasive the employer’s argument that the 40-hour per week active work requirement was only a condition for initial eligibility. Instead the court held:

Under the plain terms of the Plan, an employee is generally "eligible" under the Plan if she is a "regularly assigned, full-time employee," working at least 40 hours per week. Here, there is no question that, up until September 20, 2007, I.K. was an "eligible" employee under the Plan. After September 20, I.K. was removed from the schedule and was no longer a full-time, scheduled employee. Again, under the plain terms of the Plan, this action would "end" her coverage, absent FMLA leave, which she took. However, once her FMLA leave ended on January 12, 2008, Madison appears to be entirely correct that the only way to preserve I.K.’s coverage in light of these events was to offer I.K. COBRA coverage as soon as I.K.’s FMLA leave concluded, which Clarcor did not do.

By continuing coverage, the employer lost the protection of its reinsurance policy and became responsible to self-fund all of the claims incurred by the employee under the terms of the plan.

This unfortunate situation could have been avoided through (i) careful attention to plan terms, (ii) negotiating with the stop-loss carrier for an extended period of coverage following the FMLA leave period and adding appropriate language, and (iii) ensuring handbook policies do not create obligations that do not exist in the plan terms. Also, in addition to health benefits, similar exposures exist with respect to dental, vision, life insurance and other benefits. For all benefits, employers should be certain they understand when benefits are supposed to end, not only as a matter of their “company practice,” but as set in the applicable insurance policies and plan documents.

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Photo of Joseph J. Lazzarotti Joseph J. Lazzarotti

Joseph J. Lazzarotti is a principal in the Berkeley Heights, New Jersey, office of Jackson Lewis P.C. He founded and currently co-leads the firm’s Privacy, Data and Cybersecurity practice group, edits the firm’s Privacy Blog, and is a Certified Information Privacy Professional (CIPP)…

Joseph J. Lazzarotti is a principal in the Berkeley Heights, New Jersey, office of Jackson Lewis P.C. He founded and currently co-leads the firm’s Privacy, Data and Cybersecurity practice group, edits the firm’s Privacy Blog, and is a Certified Information Privacy Professional (CIPP) with the International Association of Privacy Professionals. Trained as an employee benefits lawyer, focused on compliance, Joe also is a member of the firm’s Employee Benefits practice group.

In short, his practice focuses on the matrix of laws governing the privacy, security, and management of data, as well as the impact and regulation of social media. He also counsels companies on compliance, fiduciary, taxation, and administrative matters with respect to employee benefit plans.

Privacy and cybersecurity experience – Joe counsels multinational, national and regional companies in all industries on the broad array of laws, regulations, best practices, and preventive safeguards. The following are examples of areas of focus in his practice:

  • Advising health care providers, business associates, and group health plan sponsors concerning HIPAA/HITECH compliance, including risk assessments, policies and procedures, incident response plan development, vendor assessment and management programs, and training.
  • Coached hundreds of companies through the investigation, remediation, notification, and overall response to data breaches of all kinds – PHI, PII, payment card, etc.
  • Helping organizations address questions about the application, implementation, and overall compliance with European Union’s General Data Protection Regulation (GDPR) and, in particular, its implications in the U.S., together with preparing for the California Consumer Privacy Act.
  • Working with organizations to develop and implement video, audio, and data-driven monitoring and surveillance programs. For instance, in the transportation and related industries, Joe has worked with numerous clients on fleet management programs involving the use of telematics, dash-cams, event data recorders (EDR), and related technologies. He also has advised many clients in the use of biometrics including with regard to consent, data security, and retention issues under BIPA and other laws.
  • Assisting clients with growing state data security mandates to safeguard personal information, including steering clients through detailed risk assessments and converting those assessments into practical “best practice” risk management solutions, including written information security programs (WISPs). Related work includes compliance advice concerning FTC Act, Regulation S-P, GLBA, and New York Reg. 500.
  • Advising clients about best practices for electronic communications, including in social media, as well as when communicating under a “bring your own device” (BYOD) or “company owned personally enabled device” (COPE) environment.
  • Conducting various levels of privacy and data security training for executives and employees
  • Supports organizations through mergers, acquisitions, and reorganizations with regard to the handling of employee and customer data, and the safeguarding of that data during the transaction.
  • Representing organizations in matters involving inquiries into privacy and data security compliance before federal and state agencies including the HHS Office of Civil Rights, Federal Trade Commission, and various state Attorneys General.

Benefits counseling experience – Joe’s work in the benefits counseling area covers many areas of employee benefits law. Below are some examples of that work:

  • As part of the Firm’s Health Care Reform Team, he advises employers and plan sponsors regarding the establishment, administration and operation of fully insured and self-funded health and welfare plans to comply with ERISA, IRC, ACA/PPACA, HIPAA, COBRA, ADA, GINA, and other related laws.
  • Guiding clients through the selection of plan service providers, along with negotiating service agreements with vendors to address plan compliance and operations, while leveraging data security experience to ensure plan data is safeguarded.
  • Counsels plan sponsors on day-to-day compliance and administrative issues affecting plans.
  • Assists in the design and drafting of benefit plan documents, including severance and fringe benefit plans.
  • Advises plan sponsors concerning employee benefit plan operation, administration and correcting errors in operation.

Joe speaks and writes regularly on current employee benefits and data privacy and cybersecurity topics and his work has been published in leading business and legal journals and media outlets, such as The Washington Post, Inside Counsel, Bloomberg, The National Law Journal, Financial Times, Business Insurance, HR Magazine and NPR, as well as the ABA Journal, The American Lawyer, Law360, Bender’s Labor and Employment Bulletin, the Australian Privacy Law Bulletin and the Privacy, and Data Security Law Journal.

Joe served as a judicial law clerk for the Honorable Laura Denvir Stith on the Missouri Court of Appeals.