Reversing a district court ruling from last fall, the Sixth Circuit has held that a change in payment method for health plan premiums did not result in a loss of coverage that triggered a COBRA qualifying event and related COBRA notice requirements (Morehouse v. Steak N Shake, Inc., (6th Cir. Sept. 13, 2019); see Legal Update, COBRA Notice Penalties Awarded in FMLA/Leave of Absence Litigation).

Shortly after injuring her knee at work in May 2013, the employee in this case took a leave of absence from her job as a restaurant manager. Early on during the employee's leave, the employer instructed her to submit a doctor's certification so that her absence could be processed as an FMLA leave. The employee also received workers' compensation benefits during the first months of the leave. Because she was not receiving her normal salary at that point, the employer deducted required insurance premiums from her workers' compensation instead.

In August 2013:

A month later, the employer informed the employee that she:

The employee's health coverage was terminated in October due to nonpayment of premiums, retroactive to August. Her employment was terminated in February 2014, when her leave of absence formally ended.

The employee later sued the employer, asserting violations of COBRA and ERISA's fiduciary breach rules based on the employer's failure to provide a COBRA election notice (see Practice Notes, COBRA Overview and ERISA Litigation: Causes of Action Under ERISA Section 502, Standard Document, COBRA Election Notice, and ERISA Litigation Toolkit). The district court concluded that:

(See Practice Notes, ERISA Litigation: Penalties for Failing to Provide Documents and ERISA Litigation: Attorney's Fees.)

The employer timely appealed to the Sixth Circuit.

Reversing the district court, the Sixth Circuit concluded that no qualifying event occurred that triggered COBRA notice obligations on the employer's part. Under COBRA, the Sixth Circuit indicated, a qualifying event results when both:

Under COBRA's implementing regulations, a loss of coverage means ceasing to be covered under the same terms and conditions as in effect immediately prior to the qualifying event (26 C.F.R. § 54.4980B-4, Q/A-1(c)).

In ruling in the employer's favor, the Sixth Circuit relied on one of its earlier decisions to determine whether a loss of coverage had occurred. The earlier case involved an employee who:

The Sixth Circuit in that case held that no qualifying event occurred either due to the employee's FMLA leave or upon his termination, and the employer therefore was not required to furnish a COBRA notice.

In its earlier case, the Sixth Circuit also rejected the employee's argument that he was entitled to receive COBRA notice during or at the end of his FMLA (which occurred prior to his termination). In doing so, the court addressed regulations governing the interaction of COBRA and the FMLA under which a COBRA qualifying event occurs if (among other reasons) an employee would lose coverage in the absence of COBRA (26 C.F.R. § 54.4980B-10, Q/A-1(a); see Practice Note, COBRA Overview: FMLA). The Sixth Circuit in its earlier case held that the employee failed to satisfy this requirement because he would have remained covered under the plan, without COBRA coverage, as long as he paid his health coverage premiums. The Sixth Circuit now interpreted its earlier ruling as implicitly holding that it was the employee's failure to pay premiums that resulted in his loss of coverage – not the employee's FMLA leave or accompanying change in payment method.

The Sixth Circuit applied similar reasoning in the instant case. Specifically, the court held that altering a payment contribution method alone (as the employer in this case did when it started deducting health insurance premiums from the employee's workers' compensation checks) did not "inherently change the 'terms and conditions' of coverage" and did not cause a loss in coverage. As a result, because the employee did not stop being covered under the same terms and conditions when her premium payment method was changed, no COBRA qualifying event occurred that required COBRA notice.

As the Morehouse litigation indicates, the courts do not always agree regarding what constitutes a "loss of coverage" sufficient to be a qualifying event that triggers COBRA compliance obligations. Although an employer's plan documentation cannot foresee and address every fact pattern, this litigation should encourage employers to review their plans' terms governing the interaction of COBRA and leaves of absences – including under the FMLA.