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Seventh Circuit Court Of Appeals Decision Appears To Increase Employers’ COBRA Notification Requirements

On August 18, 2000, the U. S. Court of Appeals for the Seventh Circuit decided Bowerman v. Wal-Mart Stores Inc.

The Bowerman decision could be interpreted to increase materially an employer’s obligations to inform Qualified Beneficiaries about the details of their COBRA coverage and possible future active employee coverage, at least in certain situations.

Tamyra Bowerman terminated employment with Wal-Mart in July 1995 and was given a COBRA Qualifying Event Notice package. The package informed her that she did not need to pay her first COBRA premium until she received her first COBRA premium bill, which she received on August 23, 1995.

On August 20, 1995, Ms. Bowerman returned to work with Wal-Mart. Between the date of her July termination and her August 20, 1995 return, Ms. Bowerman discovered she was pregnant.

Rehired employees were immediately eligible for participation in Wal-Mart’s health plan. However, the plan contained a pre-existing exclusion provision that applied anew each time an employee was hired. (Note: This was before HIPAA changed the pre-existing condition rules.)

Therefore, when Ms. Bowerman returned to work on August 20, she immediately became covered by the plan, but was subject to the plan’s pre-existing condition exclusion with respect to her pregnancy.

Ms. Bowerman’s supervisor told her that she did not need to pay any COBRA premiums because she was once again covered by the Wal-Mart plan. No mention was made of the plan’s pre-existing condition exclusion. Ms. Bowerman did not pay any COBRA premiums.

When Ms. Bowerman’s health providers submitted pregnancy-related claims to the plan, they were denied by the plan because of the pre-existing condition exclusion.

Ms. Bowerman sued Wal-Mart claiming that Wal-Mart breached its fiduciary duties under ERISA by not specifically informing Ms. Bowerman that her failure to elect and pay for COBRA to "bridge-the-gap" between her July 1995 termination of employment and the expiration of the pre-existing condition exclusion period applicable to her on her rehire would leave her pregnancy-related expenses uncovered.

The Court agreed with Ms. Bowerman, finding that Wal-Mart was estopped from denying the pregnancy-related claims because no communication from Wal-Mart to Ms. Bowerman explained to her that "the pre-existing condition limitation period is not applicable to individuals who leave Wal-Mart’s employ for a short period, elect COBRA coverage, and pay the premium due for that coverage.

Merely informing Ms. Bowerman that she might be subject to that pre-existing condition limitation did not sufficiently inform her of the importance of maintaining COBRA coverage after her separation from Wal-mart in order to avoid a new pre-existing condition limitation when she was rehired".

Put another way, the Court appears to be imposing on employers an affirmative obligation to provide detailed information to Qualified Beneficiaries concerning the interaction of their COBRA benefits and any possible active employee benefits they could receive if they return to work with the employer.

The Court did stop short, however, of requiring "customized" Qualifying Event Notices for each and every Qualified Beneficiary based on his or her particular facts and circumstances, because the Court added that "the information the Plan should have provided to Ms. Bowerman would not have been information unique to her situation; rather, the information she needed would have been information relevant to all Plan participants who were rehired by Wal-Mart within a few weeks or months after leaving the company."

In light of the Bowerman decision, employers, and especially employers located in the Seventh Circuit, should consult with their ERISA counsel to determine whether there are any interactions between their COBRA benefits and their active employee benefits for rehires that should be the subject of written disclosures in their Qualifying Event Notices or other plan documents.

In addition, employers should discuss with their ERISA counsel whether the Bowerman decision should be read even more broadly to require more detailed disclosures of other COBRA-related information.