Often times, administrators of self-insured plans make decision based on particular circumstances. "When in doubt, err on the side of helping out the covered participant." But doing so can create other problems for the plan. Consider the decision in Clarcor, Inc. v. Madison Nat. Life Ins. Co., recently decided in the District Court for the Middle District of Tennessee.
This is a fight between the employer-sponsor of a medical plan and its stop-loss carrier about significant medical expenses incurred by an employee on short-term disability leave. The employee in question had originally left full-time employment to go on FMLA leave but when she did not return from that leave, the employer-sponsor decided to place her on short-term disability leave and gave her an additional 6 months of coverage under the plan. She was not offered COBRA until after the 6-month leave expired. The stop-loss carrier refused to reimburse the expenses incurred during the disability leave, arguing that the employee’s move to short-term disability, without electing COBRA, made her ineligible under the terms of the plan. The court, noting that the employer continued to ignore the plain language of the plan—under which coverage ended when the FMLA leave ended— concluded that the termination of FMLA leave was the COBRA qualifying event and therefore the employer’s much-later offer of COBRA was not timely and claims should not have been covered by the plan and were thus not eligible for stop-loss reimbursement.
Undoubtedly, the employer did what they did to help out the employee. But in doing so, ignored the actual terms of its plan. In the end, the plan paid the benefits and could not be reimbursed from the stop-loss coverage. So plan administrators should be careful about making decisions to "help people out." Making a benefits determination that exceeds plan terms, or ignores plan terms, can potentially subject a plan sponsors to claims that it is administering the plan in a discriminatory manner. It can also give rise to claims that the plan is being administered contrary to its terms, which is itself a potential breach of fiduciary duty.
But in this instance, it result in the plan sponsor being shut out of stop-loss reimbursement. Stop loss carriers will not reimburse plans for claims it covers that it should not have been covered under the plan terms. So when considering whether to be "generous" with plan interpretations (like expanding eligibility to someone who is not otherwise eligible) consider the potential repercussions. Plan sponsors and plan administrators are cautioned to stick to plan terms and not look for ways to bend the rules to help participants out. The results can be very costly.