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.