A recent decision of the United States Court of Appeals for the Fifth Circuit stands as a harsh reminder that careful drafting of employee benefit plan documents can be essential to avoiding unanticipated liability. In LifeCare Hospitals v. Health Plus of Louisiana, No. 04-30422, 2005 U.S. App. LEXIS 14640 (5th Cir. July 20, 2005), the insurer of an employer-sponsored health care plan was required to pay more than $250,000 in medical claims on behalf of a former employee of the plan sponsor, even though the former employee arguably had failed to elect COBRA continuation coverage within sixty days of his termination of employment and receipt of COBRA election forms, because the plan document did not specify when the COBRA election period for the plan would end. The Fifth Circuit rejected the carrier’s argument that when the plan document fails to define the end of the election period, the election period is limited to the 60 day minimum period required under the statute.
The case arose when an employee of Custom-Bilt Cabinet & Supply Inc. was diagnosed with a seemingly terminal disorder. Approximately a week after the onset of the illness, the employee’s spouse met with Custom-Bilt personnel to inquire about the employee’s benefits, particularly his death benefits. Because of the focus on death benefits, the Custom-Bilt representatives inferred that the employee’s death was imminent. They told the employee’s spouse about the employee’s COBRA rights and gave her a COBRA election form. The employee was formally terminated from employment a few weeks later. Custom-Bilt subsequently notified Health Plus of the termination, and the former employee’s health insurance coverage as an active participant was terminated.
Several months later, Custom-Bilt received an inquiry about the former employee’s coverage from LifeCare Hospital, which had provided and was continuing to provide medical care to the employee. Realizing that the former employee was still alive, Custom-Bilt provided a written COBRA election notice and another election form to the former employee and his spouse. The former employee mailed his COBRA election form to Health Plus shortly thereafter, along with all the currently due monthly premiums. When Health Plus received the hospital’s medical claims, however, it denied coverage on the grounds that no timely COBRA election had been made.
The Court held that the employee’s COBRA election was timely, and therefore was effective retroactively to the date coverage as an active employee was lost, even assuming that the election was made more than sixty days after the later of the date employment terminated or the date the employee received notice of his COBRA election rights. The Court held that the statutory provisions defining participants’ notice and election rights do not provide for a “default” election period of sixty days when the plan document fails to specify the maximum length of the election period. To the contrary, the Court held that the language of COBRA merely requires a minimum election period of sixty (60) days, but does not mandate any outer boundary for the election period. Therefore, the court reasoned, if the plan document does not limit the election period, the participant can elect COBRA continuation, effective retroactively to the loss of active coverage, at any time within the maximum applicable statutory continuation coverage period. Thus, since the election was made within the eighteen (18) month period following the employee’s termination of employment, the Court held that the election was timely.
The decision in LifeCare Hospitals illustrates one potential scenario for unanticipated but avoidable benefit plan liability. The lesson of the Fifth Circuit’s decision is clear. The possibility of unintended benefit expenses can be reduced by reviewing plan documents not only for compliance with minimum statutory requirements, but also to determine whether the plan documents inadvertently provide participants with rights in addition to those the applicable statute requires.
Should you have any questions about the LifeCare Hospitals decision and its ramifications, please contact the Ogletree Deakins attorney with whom you normally work or the Client Services Department at 866-287-2576 or via e-mail at email@example.com.
Note: This article was published in the July 29, 2005 issue of the Benefits eAuthority.