Benefits and Compensation

Short-lived Sale Option Did Not Negate COBRA Small-employer Exception

A former employee argued that her former employer, which employed fewer than 20 employees (and thus was exempt from COBRA) for eight months of the year, formed an affiliated service group with another employer and thus employed more than 20 employees for four months of that year. Thus, she contended the employer became subject to COBRA for the following year — when she had a qualifying event. In an unpublished opinion, the 4th U.S. Circuit Court of Appeals rejected the employee’s arguments and held that the employees of the combined employer group cannot be counted together for purposes of COBRA’s small-employer exception until after the business transaction actually combines the two employers.

In doing so, the court relied on the regulatory rule that an employer is exempt from COBRA if it employs fewer than 20 employees on at least 50 percent of its typical business days during the prior year. The case is Feamster v. Mountain State Blue Cross & Blue Shield, Inc., 2012 WL 6720915 (4th Cir., Dec. 28, 2012).

Background

Relational Management Services, LLC was formed in 2005 to operate a therapeutic boarding school. Highmark West Virginia, Inc. provided RMS with its group health plan.

In 2006, Solacium, through an affiliate entity, bought the assets of another school co-founded by RMS’ founder .On Sept. 1, 2007, Solacium and RMS entered into an agreement under which Solacium agreed to provide administrative services to RMS, and Solacium was given an option to purchase RMS’ assets at a future date. That agreement was short-lived and terminated on Jan. 1, 2008. Thereafter, Solacium had no involvement in the school’s operation or management.

RMS hired Sandra Feamster in September 2007. She, along with her husband, received health coverage through RMS’ group plan.

Feamster took a medical leave of absence in March 2008, and her health coverage ended on June 1, 2008. Feamster then sought COBRA coverage, but RMS did not provide such coverage because it had fewer than 20 employees. The Feamsters incurred hundreds of thousands of dollars in medical expenses and sued RMS, its group health insurer, and several other individuals and entities, alleging COBRA violations.

A federal district court ruled against the Feamsters, finding that: (1) RMS was a “small employer” in the 2007 calendar year, and thus was not obligated to provide COBRA coverage; and (2) even if it had found that RMS was an affiliated service group with Solacium, that group would have had more than 20 employees for only four months of the 2007 calendar year. That would have been insufficient to move it out of the “small employer” category for COBRA purposes. The appeals court affirmed the decision.

Implications

The controlled group concept applies in many aspects of employee benefits law, so most employee benefits administrators and practitioners are familiar with issues related to it. The problem is, as this case shows, sometimes it is not always clear whether employers are part of the same controlled group. It is particularly difficult to make this determination due to the affiliated service group rules, which are extremely complex.

Under COBRA, it is vitally important for employers that are part of a controlled group to ensure all employers within that group are complying with COBRA. COBRA’s penalties can be assessed against all controlled group members, even if only one of those members is liable for COBRA violations. Also, due to COBRA’s small-employer exception, applying the controlled group rules can cause employers that historically had not been subject to COBRA to become subject to that law.

More details on this case and COBRA’s small-employer exception rules can be found in Mandated Health Benefits — the COBRA Guide, at http://hrcomplianceexpert.com/heal.