COBRA’s protection only arises upon the occurrence of a “qualifying event.” In other words, COBRA is triggered any time an employee or a dependent loses group health plan coverage. For COBRA to apply, there must be a loss of coverage caused by one of the specific statutory events: termination or reduction in hours of employment, divorce from a covered employee, death of a covered employee, cessation of a dependent child’s qualifying as a dependent child under the plan, an employee’s Medicare entitlement, and certain bankruptcy situations. If coverage is lost for any other reason, like a plan termination, that coverage loss does not trigger COBRA’s protections.
A qualified beneficiary had no legal claim to COBRA for an employer’s failure to provide an election notice because the plan had terminated 3 months before her qualifying event, a federal district court in Virginia ruled. The employer’s mishandling of plan assets led to the plan termination, and the court did rule that those actions breached the employer’s fiduciary duties under the Employee Retirement Income Security Act (ERISA). The case is Hammer v. Johnson Senior Center, Inc., Case No. 6:19-cv-00027 (W.D. Va., November 30, 2020).
Facts of the Case
James Dolan was an owner of Johnson Senior Center. Faith Hammer was an employee who participated in the company’s group health plan. When the company deducted her share of the premiums from her biweekly paycheck, it did not segregate those funds from its general operating accounts. Normally, Johnson would submit the full premium to the insurer, but when finances were “tight,” it would usually pay premiums on the last day of its 31-day grace period.
On September 21, 2018, Hammer began 6 weeks of medical leave. Johnson’s September premium payment was due September 1, 2018. After the premiums remained unpaid, the insurer sent the company an October 8, 2018, letter noting that the group health plan was terminated retroactive to October 2, 2018.
On October 11, 2018, Hammer was hospitalized and incurred more than $286,000 in unreimbursed medical expenses. Hammer’s employment with Johnson terminated on or about January 6, 2019. Johnson neither informed her that it failed to pay her premiums nor provided her with a COBRA notice or any other notice that her coverage had ever terminated.
Hammer sued Johnson, Dolan, and other company officers for ERISA claims. She was awarded summary judgment against Johnson and Dolan for various breach of fiduciary duty claims related to the mishandling of plan assets.
She also alleged that Dolan and Johnson violated COBRA by failing to provide her with an election notice upon her termination of employment. Here, however, the court noted that at the time of what would have been the qualifying event (Hammer’s termination of employment), Johnson employees had not been covered under the plan for more than 3 months due to the plan termination. Therefore, Hammer was not a qualified beneficiary at that time and was not entitled to a COBRA election notice, according to the court.
The court noted that “COBRA simply does not cover a situation” under which a qualifying event occurs when an employer’s plan lapses because of failure to pay plan premiums. Doing so “would lead to nonsensical results,” according to the court:
For example, continuation coverage under COBRA “must extend for at least the period beginning on the date of the qualifying event and ending not earlier than the earliest of” several dates, including “[t]he date on which the employer ceases to provide any group health plan to any employee.” If Anthem’s termination of Johnson’s plan had been a qualifying event, the continuation coverage that Hammer would have been entitled to obtain under COBRA could have ended on the same date that it began.
The court did find that Johnson and Dolan owed Hammer an ERISA fiduciary duty to notify Hammer of the plan termination. Yet, that error was a breach of their fiduciary duty of care—not a COBRA violation. Accordingly, the court denied Hammer’s COBRA claim.
As explained more in ¶1120 of the Guide, the key to proper COBRA administration is to determine the relevant “qualifying event,” which must be one of six listed events AND cause a qualified beneficiary to lose coverage under the plan terms. If coverage under a group health plan is modified or terminated such that a loss of coverage occurs, that loss of coverage on its own is not a qualifying event. Moreover, there could be an event (such as retirement) that does not cause a loss of coverage. In that case, such an event is not a “qualifying event” for COBRA purposes because it did not cause a loss of coverage.
This issue is further complicated because one must also understand what a “loss of coverage” is for COBRA purposes. As explained more fully in ¶1121, a loss of coverage means that an individual ceases to be covered under the same terms and conditions as in effect immediately before the qualifying event. This change can happen at any time during what would otherwise be the maximum COBRA period (generally 18, 29, or 36 months). Thus, even a deferred loss of coverage can be a “loss of coverage” for COBRA purposes.
The bottom line is: Do not assume that any loss of group health plan coverage triggers COBRA obligations. Look at the rules carefully, and then apply the COBRA rules where applicable.