Alternative Coverage Case Involving Premium Hike Raises COBRA Issues
| Date Posted: July 29, 2009 |
A Michigan federal district court denied a former employee's claim for subsidized COBRA coverage following 12 months of coverage at active rates. The claim was denied, even though the employer had mistakenly confirmed a lower premium for the COBRA coverage, because the employer's clear plan terms explained that terminated employees would get 12 months of continued coverage at active rates followed by 18 months of coverage at full cost. The case is Ten Harmsel v. Pfizer Inc., 2009 WL 1771377 (W.D. Mich., June 18, 2009).
Facts of the Case
Pfizer Inc. maintained a separation plan for its employees. The plan offered several benefit package options for employees upon their separation from employment, including a "fixed package" option under which health coverage could continue after termination of employment at an active employee rate for up to 12 months, followed by up to an additional 18 months of coverage at the full premium amount.
Jason Ten Harmsel was employed by Pfizer until his termination from employment in January 2007. Upon termination, Ten Harmsel selected the fixed package option under the separation plan.
Throughout 2007, Ten Harmsel paid the active employee rate of $44 per month. In November 2007, during annual enrollment, Pfizer confirmed Ten Harmsel's election to continue health coverage at the rate of $61 per month for 2008. The plan subsequently confirmed that his contribution amount for the 2009 plan year would be $61.
However, in April 2008, the plan terminated Ten Harmsel's health benefits and retroactively increased his monthly premiums from $61 to $1,047.80 per month. Ten Harmsel ultimately sued Pfizer for, among other things, wrongful termination of health plan benefits and sought an order requiring the plan to: (1) provide health coverage at the rate of $61 per month for all of 2008 and the first six months of 2009; (2) reimburse him for expenses incurred as a result of the coverage termination; and (3) reimburse him for his attorney's fees and costs.
In reaching its decision, the court determined that the plan was not ambiguous.
"The plain meaning of the Fixed Benefit option is that for the first twelve months after separation, the cost of medical coverage will be the same as the cost paid by active employees (i.e., the subsidized rate), and that after the first twelve months, medical coverage can be continued for an additional eighteen months at 100% full premium (i.e., the unsubsidized rate)," the court noted.
As of Jan. 1, 2008, Pfizer increased the active employee rate from $44 per month to $61 per month. Ten Harmsel's 12-month period of coverage at the active employee rate was scheduled to terminate on Jan. 9, 2008. Because he was subject to the increased active employee rate of $61 per month for the first nine days of January 2008, Pfizer was technically correct in sending him the annual enrollment forms for 2008 that set the $61 per month rate, even though its actions were "confusing or misleading," according to the court. However, such confusion did not alter the clear plan terms, the court found. Accordingly, it held that the premium increase was not arbitrary or capricious and ruled in Pfizer's favor.
Implications
When employers structure severance arrangements that include some form of continued health coverage, it is important to consider the COBRA implications. There are generally three ways to deal with continuing coverage after employment termination:
1) Choice Method -- provide a choice between COBRA coverage and the alternative severance deal;
2) Consecutive Coverage Method -- provide for continued coverage as if an individual remained active for a period of time and then add COBRA coverage for up to 18 months on to that alternative; or
3) Concurrent Coverage Method -- treat the alternative coverage as part of COBRA coverage (for example, charge active rates for the first 12 months of COBRA coverage and full COBRA rates for the remaining 6 months of COBRA coverage).
Regardless of the method followed, however, it is crucial that the terms of the deal be clearly communicated and in writing. As the Ten Harmsel case shows, if the deal is spelled out in writing and the terms are clear, a court will allow employers to follow the terms, even if an administrative error occurs.
A discussion on coordinating alternative coverage with COBRA coverage can be found in Mandated Health Benefits -- The COBRA Guide.
Facts of the Case
Pfizer Inc. maintained a separation plan for its employees. The plan offered several benefit package options for employees upon their separation from employment, including a "fixed package" option under which health coverage could continue after termination of employment at an active employee rate for up to 12 months, followed by up to an additional 18 months of coverage at the full premium amount.
Jason Ten Harmsel was employed by Pfizer until his termination from employment in January 2007. Upon termination, Ten Harmsel selected the fixed package option under the separation plan.
Throughout 2007, Ten Harmsel paid the active employee rate of $44 per month. In November 2007, during annual enrollment, Pfizer confirmed Ten Harmsel's election to continue health coverage at the rate of $61 per month for 2008. The plan subsequently confirmed that his contribution amount for the 2009 plan year would be $61.
However, in April 2008, the plan terminated Ten Harmsel's health benefits and retroactively increased his monthly premiums from $61 to $1,047.80 per month. Ten Harmsel ultimately sued Pfizer for, among other things, wrongful termination of health plan benefits and sought an order requiring the plan to: (1) provide health coverage at the rate of $61 per month for all of 2008 and the first six months of 2009; (2) reimburse him for expenses incurred as a result of the coverage termination; and (3) reimburse him for his attorney's fees and costs.
In reaching its decision, the court determined that the plan was not ambiguous.
"The plain meaning of the Fixed Benefit option is that for the first twelve months after separation, the cost of medical coverage will be the same as the cost paid by active employees (i.e., the subsidized rate), and that after the first twelve months, medical coverage can be continued for an additional eighteen months at 100% full premium (i.e., the unsubsidized rate)," the court noted.
As of Jan. 1, 2008, Pfizer increased the active employee rate from $44 per month to $61 per month. Ten Harmsel's 12-month period of coverage at the active employee rate was scheduled to terminate on Jan. 9, 2008. Because he was subject to the increased active employee rate of $61 per month for the first nine days of January 2008, Pfizer was technically correct in sending him the annual enrollment forms for 2008 that set the $61 per month rate, even though its actions were "confusing or misleading," according to the court. However, such confusion did not alter the clear plan terms, the court found. Accordingly, it held that the premium increase was not arbitrary or capricious and ruled in Pfizer's favor.
Implications
When employers structure severance arrangements that include some form of continued health coverage, it is important to consider the COBRA implications. There are generally three ways to deal with continuing coverage after employment termination:
1) Choice Method -- provide a choice between COBRA coverage and the alternative severance deal;
2) Consecutive Coverage Method -- provide for continued coverage as if an individual remained active for a period of time and then add COBRA coverage for up to 18 months on to that alternative; or
3) Concurrent Coverage Method -- treat the alternative coverage as part of COBRA coverage (for example, charge active rates for the first 12 months of COBRA coverage and full COBRA rates for the remaining 6 months of COBRA coverage).
Regardless of the method followed, however, it is crucial that the terms of the deal be clearly communicated and in writing. As the Ten Harmsel case shows, if the deal is spelled out in writing and the terms are clear, a court will allow employers to follow the terms, even if an administrative error occurs.
A discussion on coordinating alternative coverage with COBRA coverage can be found in Mandated Health Benefits -- The COBRA Guide.
 |
||||||||||||||||||
|
||||||||||||||||||
 |
||||||||||||||||||
