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Self-Insured Health Plans: No Stop-Loss Coverage for Ineligible Employee

A federal appeals court has ruled against a Wisconsin employer seeking reimbursement under a stop-loss-insurance policy purchased in connection with its self-insured health plan.

The facts of the case are simple and all-too-common. An employee took FMLA leave and continued to receive health coverage through the employer's plan during the leave. At the end of the FMLA leave, the employee was unable to return to work, so the employer approved a further non-FMLA leave and continued to provide the employee with coverage under the health plan. But the plan language did not allow for continued eligibility during a non-FMLA leave of absence. The plan would have allowed for COBRA coverage to begin at the end of the FMLA leave, but no COBRA notice was issued and no COBRA election was made. (The employer subsequently offered COBRA when the employee was unable to return to work following the non-FMLA leave.) The employee incurred large claims under the health plan after the FMLA leave ended.

The stop-loss insurer argued - and the court agreed - that it was not obligated to reimburse the employer for claims incurred by the employee after the FMLA leave ended, because the stop-loss policy limited coverage to claims incurred by individuals who were eligible under the terms of the self-insured health plan, and the plan language did not extend eligibility during non-FMLA leaves. And even though the employee could have elected COBRA at the end of the FMLA leave and continued coverage for up to 18 (or even 29) months, the court took a strict view and would not treat the coverage provided by the employer during the non-FMLA leave as equivalent to COBRA coverage.

The result in this case is not surprising, and it illustrates a very important consideration for self-insured health plans: If the employer extends coverage to an employee that is not expressly allowed under the plan's terms, the employer assumes the risk that it may be required to pay claims incurred by that employee without the benefit of stop-loss insurance. This issue commonly arises in situations like this one (non-FMLA leaves of absence) and in cases where a pre-65 retiree needs more than 18 months of COBRA coverage to bridge to Medicare.

But cases like this do not need to end badly for the employer. If the plan language is amended to provide the extended coverage and the stop-loss carrier agrees to that change, the situation would be different. For example, if the employer in this case had amended its plan to allow an employee to remain covered for up to 180 days during an approved non-FMLA leave of absence (and the stop-loss carrier agreed to that change), there would have been little question that the carrier was obligated to provide the coverage.

The learning, then, is not that employers with self-insured plans should never extend coverage in situations like this but rather that they should be sure to take appropriate steps (e.g., plan amendment and carrier approval) before doing so.


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Don Berner, the Labor Law, OSHA, & Immigration Law Guy
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Boyd Byers, the General Employment Law Guy
Jason Lacey Image
Jason Lacey, the Employee Benefits Guy
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