Benefits and Compensation

Common Control Means COBRA’s Small Employer Exception Does Not Apply

Here’s a reminder that for COBRA compliance purposes, small employers must count their employee population differently if they are under common control. Recently, an employer was sued for providing just three, rather than 18, months of COBRA coverage. Because it had a workforce of fewer than 20 employees, the employer tried to fend off those claims by arguing that it met COBRA’s small employer exception. However, it was part of a controlled group with a combined workforce population exceeding the exception’s threshold. Therefore, the exception did not apply, a federal district court in Ohio held. The case is Warnecke v. Nitrocision LLC, 2012 WL 5987429 (D. Idaho, Nov. 29, 2012).

Robert Warnecke resigned his job with Nitrocision LLC in March 2009. After the employment termination, he was offered COBRA coverage. Nitrocision provided three months of coverage, which was then terminated.

Warnecke and his wife sued Nitrocision and other related defendants for various claims, including an ERISA Section 502 claim to recover benefits. Here, they alleged that Nitrocision violated COBRA by terminating health coverage after three months, and they were entitled to 18 months of coverage. As a remedy, they sought almost $7,000 in damages. They petitioned the court for a ruling in their favor.

Nitrocision first argued that the Warneckes’ claim could not prevail due to COBRA’s small employer exception. Generally, a group health plan is not subject to COBRA if it is maintained by an employer that “normally employed” fewer than 20 employees during the preceding calendar year.

Although Nitrocision employed fewer than 20 employees, it jointly sponsored the group health plan with TruTech and another company, Channel Blend — all of which were under common control. When combined, the three companies exceeded the 20-employee threshold. Nitrocision argued that it should not be grouped with those companies in determining whether it falls within the exception. However, case law was cited  holding that when two or more businesses are under common control, each is considered to be a single employer of all employees in the group. Therefore, the court held that the exception did not apply.

The case also raised potential estoppel issues, related to the fact the employer’s argument that no violation occurred because the qualified beneficiaries agreed to only three months of coverage on the COBRA election form, and coverage was properly terminated after they paid three months of premiums. Questions were raised about the legal validity of such an agreement, and whether the argument is barred under estoppel because the qualified beneficiaries only paid three premiums based on the employer’s representations about the length of the coverage period.

More details on this case appears in Mandated Health Benefits — the COBRA Guide; go to http://www.hrcomplianceexpert.com.