You’ve always treated your employees fairly, even when the relationship doesn’t work out and you have to let the employee go or when you’ve had to terminate employees due to downsizing. Often, you agree to continue the employee’s benefits for a few months during a severance period. You know how important it is to have good insurance coverage and you feel content knowing that you’ve given something “extra” as you ushered the employee out the door.
But will that feeling of contentment turn to shock and anger if the insurance carrier denies the former employee’s claim and then the claimant demands payment directly from you, the former employer?
Here’s the problem: all benefit plans, whether insurance-based or otherwise, have “eligibility” rules. The employee is eligible if he or she “regularly works 30 or more hours per week” or similar wording based on the employee’s active work schedule. Insurance policies typically don’t extend eligibility to “a former employee who used to work 30 or more hours per week,” except as required by COBRA. So, if you promise to continue benefits coverage after active employment ends, you risk having the insurance carrier deny the claim, with the former employee then looking to you to “self-insure” the payment, meaning it comes out of your pocket.
And if you have a self-insured group health plan, don’t feel like you’re immune from this type of claim because claims are paid from the employer’s general funds anyway and you can design your plan’s eligibility rules. That is true but most self-insured plans maintain reinsurance coverage with an insurance carrier, and that carrier may take the same approach in reimbursing excess claims, leaving the employer with a self-insured plan in the same position as one with an insurance policy.
You might think – “well, COBRA applies anyway, so what’s the big deal?” The big deal is that COBRA has notice and election time limits. If you don’t satisfy those rules, the insurance carrier (or reinsurance carrier) might argue that COBRA no longer applies, leading to the same bad result.
Although big-ticket group health claims come to mind right away, many employers’ promises of benefits after active employment extend to life or disability insurance, and those types of claims instantly can jump into six-figure liability amounts.
You won’t get caught in this situation if you plan properly. Negotiate with your insurance carrier to agree to extend eligibility to former employees during the period covered by a severance agreement. Include this clause directly in the insurance application where the form asks you to describe who is eligible for coverage. If you didn’t include this wording on the insurance application, then ask now to amend the eligibility provisions. If you sponsor a self-funded group health plan, include these provisions directly in your plan document. If your plan doesn’t have this clause now, you’ll have to amend the plan to include it. Make sure your reinsurance carrier agrees to the change before implementing it.
Importantly, don’t promise the benefit unless you’re certain the insurance carrier will cover the employee (and dependents). If the insurance carrier will not clearly agree to the extension of coverage, then don’t make the promise. Make a cash payment to the former employee instead of the benefit promise. Know the limits of your benefit plan’s eligibility rules and don’t promise what the plan isn’t designed to deliver.