During the past year, we have encountered a number of situations where employers have allowed current and former employees to remain on their group medical insurance plans well past the date that they should have been placed on COBRA. In some situations, the employee retired and the employer was trying to bridge them to Medicare eligibility. In others, an employee suffered a serious injury or illness, and the employer never changed their medical plan status out of compassion for their financial situation. Even if these moves are motivated by an attempt to assist workers, they raise serious financial risks for the employer.
Most group medical insurance plans limit participation outside of COBRA to active employees. Active employees are generally defined as those who are actually working, or in some cases, employees on limited leaves of absence such as FMLA leave. For self-insured employers, the same restrictions apply to stop loss coverage. When the employer allows these persons to remain on the plan after they cease being active employees, the insurer likely will never know the difference. However, if the employee or former employee suffers a catastrophic health incident, the insurer may ask questions about their work status at the time of onset of the condition.
In these situations, the employer has basically promised coverage to the employee. If the insurance carrier subsequently refuses to pay claims, the employer may have to cover such expenses out of pocket. We have seen several situations where these payouts have exceeded $200,000. As a result, employers should be diligent about issuing COBRA notice as soon as the employee ceases to be an eligible active participant under the medical plan. This can include retirements, negotiated departures, layoffs, medical or Workers’ Compensation leaves.
If the employer wants to assist an employee with medical plan expenses, it can look into helping pay for COBRA coverage. For self-insured plans, rules covering employer subsidy of premiums can be trickier to navigate. While the chances of an employee or former employee incurring medical costs that are declined by the carrier may be small, the potential amount of such claims makes prompt issuance of COBRA notice a prudent risk management strategy.