A former employee’s failed attempt to call COBRA coverage a “privately paid” policy, rather than an ERISA plan, in order to maintain state-law claims against a group health insurer offers a chance to remind employers about importance of knowing the legal status of their benefit plans.
In the case, the individual sued the insurer for state-law claims related to a benefits dispute. The insurer asked a magistrate judge to rule that the claims are preempted by ERISA because they “relate to” an employee benefit plan. However, the individual contended that he “privately paid for COBRA coverage” and as such, his claims involved that “individual” policy and had nothing to do with the ERISA plan.
The judge didn’t buy that argument based upon the evidence the insurer provided that the plan met ERISA standards.
First, the ERISA statute says that an “employee benefit plan” is established or maintained by an employer for the purpose of providing, through the purchase of insurance, medical care to plan participants or their beneficiaries. And according to the 9th U.S. Circuit Court of Appeals, such a plan can be created without a “formal intentional plan adoption” if, “from the surrounding circumstances a reasonable person can ascertain the intended benefits, a class of beneficiaries, the source of financing, and procedures for receiving benefits.”
What helped the insurer here was that it provided evidence — particularly plan document language and plan procedures — that satisfied those criteria.
But there is a “safe harbor” regulation that exempts plans that would otherwise be ERISA plans from ERISA’s reach, the judge noted. Under the safe harbor, four criteria must be satisfied:
- no contributions are made by an employer or employee organization;
- participation is completely voluntary for employees or members;
- the sole functions of the employer or employee organization are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues check-offs and to remit them to the insurer; and
- the employer receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues check-offs.
Here, the insurer sufficiently explained how the employer’s involvement with the plan was more extensive, and therefore, the third criterion was not met. So the judge found that the plan is not subject to the safe harbor.
Next, the judge noted how COBRA’s rules and 9th Circuit precedent provide that an individual who has COBRA “continuation coverage” is one who “continue[s] to participate in the employer’s ERISA plan by paying the premiums himself.” Accordingly, the judge held that the “self-paid” COBRA coverage “does not somehow change the fact that the Policy constitutes an employee welfare benefit plan within the meaning of ERISA.”
So the judge ruled that the state-law claims should be dismissed due to ERISA preemption; his recommendation was approved by a federal district court in subsequent proceedings.
The key lessons here:
- Employers that provide benefits to employees — and seek ERISA protection — should be clear on the ERISA status of their plans based on the aforementioned criteria. This helps ward off state-law claims that relate to administering such plans.
- COBRA is a part of ERISA, and beyond the issue of ERISA preemption, this also means that ERISA’s rules — like claims and appeals and reporting and disclosure — apply to COBRA coverage. So employers and administrators should review their procedures to ensure they are providing ERISA-required disclosures to COBRA qualified beneficiaries.
The case is Peterson v. Time Ins. Co., 2012 WL 705048 (D. Mont., Feb. 15, 2012) and 2012 WL 704727 (D. Mont., March 5, 2012).
More on this case and other COBRA issues can be found in Mandated Health Benefits — The COBRA Guide, published by Thompson Publishing Group.