Employee Benefit Plan Review – From the Courts

January 2, 2020 | Norman L. Tolle | Employment & Labor | Insurance Coverage

In Absence of “Qualifying Event,” Employer Did Not Have to Send COBRA Notice to Employee, Sixth Circuit Concludes

The U.S. Court of Appeals for the Sixth Circuit, reversing a district court’s decision, has ruled that, in the absence of a change to the terms and conditions of the employee’s health insurance coverage, no “qualifying event” had occurred that obligated her employer to provide her with notification under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) regarding her opportunity to continue health benefits.

The Case

After the plaintiff began working for Steak N Shake (“SNS”) as an assistant manager, she enrolled herself and her husband in SNS’s health insurance plan, which was governed by the Employee Retirement Income Security Act of 1974 (“ERISA”), with coverage beginning on September 1, 2012.

The plan included medical, dental, and vision insurance, and cost the plaintiff approximately $230 in biweekly payroll deductions.

On May 25, 2013, the plaintiff fell at work and injured her right knee. She returned to work the next day, but asserted that her injury was too severe to permit her to continue working. Prior to leaving, she completed and signed a form asking to open a workers’ compensation claim and to receive a leave of absence due to her work injury.

On June 5, 2013, an SNS benefits specialist sent a letter to the plaintiff instructing her to complete paperwork so that SNS could process her absence under the Family and Medical Leave Act (“FMLA”). The letter stated that it was attaching health care provider forms “for your FMLA,” asked the plaintiff to return the letter within 15 days “so that your FMLA is processed accurately,” and noted that a “[f]ailure to return your paperwork may result in FMLA being denied.”

The plaintiff filled out and returned the FMLA certification of health care provider form to SNS, and SNS approved her leave of absence as FMLA leave (rather than any type of paid leave) for 12 weeks, from May 26, 2013 until August 19, 2013.

Beginning May 26, 2013, the plaintiff also began receiving workers’ compensation benefits in connection with her injury. Because the plaintiff was no longer receiving her normal salary and, therefore, was no longer paying premiums from her usual payroll deductions, SNS began deducting all required insurance contributions from her workers’ compensation checks. SNS continued to pay the plaintiff workers’ compensation until August 13, 2013.

On September 9, 2013, the plaintiff received an email from a benefits coordinator at SNS. The benefits coordinator indicated that $193.18 of the plaintiff’s insurance premiums had not been paid and that she would have to pay the premium to continue her insurance coverage.

On September 20, 2013, SNS notified the plaintiff by letter that her FMLA leave had expired on August 19, 2013, that she should contact SNS to discuss a reasonable accommodation, and that, if her employment was terminated, she would have the opportunity to continue health benefits under COBRA upon termination of her employment.

On October 3, 2013, having received no payment of the premiums from the plaintiff, SNS notified the plaintiff and her husband that their medical, dental, and vision benefits had been discontinued, effective August 14, 2013, due to the nonpayment of premiums. Several months later, on February 11, 2014, SNS terminated the plaintiff’s employment.

The plaintiff and her husband sued SNS. They alleged, among other things, that SNS had failed to notify them of their right to temporarily continue health benefit coverage under COBRA, in violation of that law. The plaintiff and her husband moved for summary judgment, arguing that her reduction in hours following her May 26, 2013 injury had been a “qualifying event” entitling them to COBRA notice at that time.

SNS also moved for summary judgment, arguing that there had been no “qualifying event” leading to a loss of insurance coverage that would have entitled the plaintiff and her husband to COBRA notice.

The U.S. District Court for the Southern District of Ohio determined that, as a matter of law, a qualifying event had occurred as a result of the reduction in the plaintiff’s work hours on May 26, 2013, the day after her injury; thus, it ruled, the plaintiff and her husband had been entitled to a notice of their rights to continuation coverage under COBRA. The district court awarded them damages of $2,549.20 in dental bills they incurred between February 12, 2014 and November 24, 2014; $50 per day in statutory damages from August 2, 2013 until the date they acquired new health insurance in January 2014; and reasonable attorneys’ fees.

SNS appealed to the Sixth Circuit.

The Sixth Circuit’s Decision

The circuit court reversed.

In its decision, the circuit court explained that, under COBRA, the plaintiff and her husband were entitled to receive notification of their right to continued health insurance benefits if there had been a “qualifying event.”

The Sixth Circuit then rejected the plaintiff’s contention that a qualifying event had occurred when SNS reduced her hours following her May 26, 2013 injury.

According to the circuit court, a reduction in hours alone was a not necessarily a qualifying event; it also had to lead to a loss of insurance coverage – which required that the plaintiff and her husband ceased to be covered “under the same terms and conditions as in effect immediately before the qualifying event.”

Here, the circuit court found, the terms and conditions of the insurance provided to the plaintiff and her husband had not changed after her hours had been reduced. The Sixth Circuit specifically found that altering the contribution method alone, as SNS did when it began deducting premiums from the plaintiff’s workers’ compensation checks, did not inherently change the “terms and conditions” of coverage. The circuit court found that it was the plaintiff’s failure to pay premium, not the FMLA leave or accompanying change in payment method, that resulted in the loss of coverage.

Observing that the plaintiff and her husband had not identified any other “term” or “condition” of coverage that changed when SNS altered the contribution method – for example, they did not contend that the amount of their premiums had changed – the Sixth Circuit concluded that they had suffered no “loss of coverage” and that no qualifying event had occurred that triggered a mandatory COBRA notification. [Morehouse v. Steak N Shake, No. 18-4186 (6th Cir. Sept. 13, 2019).] 

Eighth Circuit Upholds Administrator’s Decision to Pay Benefits to Domestic Partner

The U.S. Court of Appeals for the Eighth Circuit has reversed a district court decision and deferred to the decision by the administrator of group insurance plans governed by the Employee Retirement Income Security Act of 1974 (“ERISA”) to pay benefits to the employee’s domestic partner.


Terry Engle, an employee of Land O’Lakes, Inc., participated in the company’s group insurance plans, which were governed by ERISA. After he died, Unum Life Insurance Company of America paid Jaclyn Jones, the woman Mr. Engle’s mother Sharon Engle had identified as her son’s domestic partner, $266,000 under Land O’Lakes’ life and accidental death plans.

Thereafter, Ms. Engle opened an estate for her son, became its personal representative, and sued Land O’Lakes and Unum on behalf of the estate, seeking a declaratory judgment that Unum should have paid Mr. Engle’s estate rather than Ms. Jones.

The U.S. District Court for the Western District of Missouri held that Unum had adopted an unreasonable interpretation of the plans to support its decision to pay Ms. Jones rather than Mr. Engle’s estate.

The dispute reached the Eighth Circuit, where the parties disputed whether the term “spouse,” as used in the plan provisions that stated that Unum could pay benefits to a decedent’s estate or “spouse,” encompassed domestic partners.


The Eighth Circuit reversed.

In its decision, the circuit court noted that one provision of the plans relating to eligibility for life insurance coverage stated that “‘[s]pouse’ wherever used includes domestic partner[s],” and that Unum had decided that the term “spouse” included a domestic partner even in the plan provisions involving the payment of benefits.

The circuit court then pointed out that the district court’s job was to determine whether Unum’s interpretation of the plan was “reasonable.” According to the circuit court, it was reasonable for Unum to interpret the term “spouse” to include domestic partners for payment purposes, “even if that reading might not have resonated in days gone by.”

The Eighth Circuit also found that Unum’s decision that Ms. Jones was Mr. Engle’s domestic partner was reasonable notwithstanding that he had not designated her to Land O’Lakes as his domestic partner before he died.

Finally, the circuit court was not persuaded by Ms. Engle’s argument that her son “undoubtedly” would have wanted the insurance proceeds to go to his children via his estate, finding that to be “mere speculation.”

The Eighth Circuit said that if it had the authority to interpret the plans instead of Unum, it might have interpreted them as the district court had done. It concluded, however, that the plans expressly gave Unum authority to determine eligibility for benefits and the amount of any benefits, to resolve factual disputes, and to interpret and enforce plan provisions, and it remanded the case to the district court for judgment to be entered in favor of Land O’Lakes and Unum. [Engle v. Land O’Lakes, Inc., No. 18-2821 (8th Cir. Sept. 3, 2019).]

Tax Withholdings Reduced Lump Sum Settlement for Short-Term Disability Claim, District Court Rules

A federal district court in West Virginia has ruled that a lump-sum payment to settle an employee’s claim for short-term disability benefits under his employer’s benefit plan was subject to reduction by applicable tax withholdings.


The plaintiff in this case claimed that he was unable to work and brought an action seeking disability benefit payments under his employer’s benefit plan, which was governed by the Employee Retirement Income Security Act of 1974 (“ERISA”).

According to the plaintiff, the parties engaged in arm’s-length negotiations and agreed on a lump-sum payment to the plaintiff.

The plaintiff said, however, that when he received a draft of the settlement agreement, his counsel noticed that one of the terms of the settlement provided that the lump-sum payment would be reduced by any applicable tax withholdings.

The plaintiff’s counsel asserted that the parties had never considered or discussed a reduction in the lump-sum payment for tax withholdings. Unable to resolve the issue, the plaintiff filed a motion with the court asking it to order payment of the entire lump sum without any deductions.

In response, the plan and the claims administrator asserted that the settlement payment represented replacement wages for disability benefits sought by the plaintiff. As such, they argued, they were legally required to treat the settlement payment as wages and deduct withholdings.


The district court denied the plaintiff’s motion.

In its decision, the district court explained that the plan provided that a claimant could receive “ongoing income” if the claimant became disabled due to an illness or injury and was unable to work. The district court added that the plan then stated that short-term disability benefits were to be calculated as a percentage of the claimant’s pay based on the claimant’s term of employment; long-term disability benefits were calculated based on 50 percent of the claimant’s pay when combined with certain other sources of income.

The district court then ruled that, in light of this language and the plaintiff’s underlying claim in his complaint to collect disability benefits, the settlement “clearly” qualified as replacement wages for tax purposes. Moreover, the district court declared that even if the parties had not specifically discussed tax withholdings during their settlement negotiations, it was “of no consequence” to the legal obligation of the plan and the claims administrator to withhold those taxes. They were “required to make those withholdings despite any misunderstanding of the character of the settlement by [the p]aintiff,” the district court said.

The district court added that its conclusion that taxes had to be withheld from the settlement was supported by various provisions of the Internal Revenue Code (the “Code”). In particular, the district court pointed out that the Code broadly defines “wages” as “all remuneration . . . for services performed by an employee and his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash,” and mandates that “every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with tables or computational procedures prescribed by the Secretary.”

The district court further noted that a plan representative stated that “[n]o portion of the proposed [disability] benefit payment contemplated by the settlement agreement at issue was previously reported to the employee or the [Internal Revenue Service] as gross income to the employee.”

In light of these statutory requirements and the fact that the payment “clearly” represented replacement wages, the district court concluded that the plan and the claims administrator were required to withhold taxes. [Jordan v. AT&T Integrated Disability Service Center Disability Plan, No. 3:18-0094 (S.D. W.Va. Sept. 25, 2019).]

Hospital Authority’s Employee Benefit Plans Were Governmental Plans Not Subject to ERISA, District Court Decides

The U.S. District Court for the Middle District of North Carolina has ruled that employee benefit plans established and maintained by a hospital authority in North Carolina were not subject to the Employee Retirement Income Security Act of 1974 (ERISA) because the authority is a “political subdivision” whose employee benefit plans are exempt from ERISA’s coverage.


Former employees of The Charlotte-Mecklenburg Hospital Authority sued the Authority, alleging that the Authority had established and maintained three employee benefit plans – the Pension Plan of the Charlotte-Mecklenburg Hospital Authority, the Carolinas HealthCare System 401(k) Matched Savings Plan, and the Carolinas HealthCare System LiveWELL Health Plan (collectively, “the plans”) – that should have complied with ERISA. The plaintiffs sought a declaration that the plans were covered by ERISA and an order that they be brought into compliance with the law.

The Authority moved to dismiss the complaint, asserting that its plans were government plans not subject to ERISA.


The district court granted the Authority’s motion to dismiss.

In its decision, the district court explained that although ERISA generally applies to employee benefit plans, Congress exempted governmental plans from ERISA’s coverage. A governmental plan, the district court continued, is a “plan established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of the foregoing.”

The district court then ruled that the Authority’s plans were governmental plans because the Authority was a “political subdivision” within the meaning of ERISA.

For purposes of ERISA, the district court said, “political subdivisions” are entities either (1) created directly by the state, so as to constitute departments or administrative arms of the government, or (2) administered by individuals responsible to public officials or to the general electorate. The district court ruled that the Authority met both prongs of the test, even though it only had to meet one to be deemed a political subdivision.

The district court ruled that the Authority satisfied the first prong of the test because it had been created by the state of North Carolina through a delegation of its authority pursuant to the North Carolina Hospital Authority Act (“HAA”). In particular, the district court noted, the Authority, a non-profit healthcare conglomerate headquartered in Mecklenburg County, North Carolina, had been created in 1943 by the city of Charlotte pursuant to the HAA, which authorizes cities and counties to create hospital authorities “whenever a city council or a county board of commissioners finds and adopts a resolution finding that it is in the interest of the public health and welfare to create a hospital authority.”

The district court decided that the Authority also met the second prong of the test, which only requires a showing that public officials were authorized to appoint and remove a majority of an entity’s governing members.

As the district court pointed out, the Authority’s board of commissioners was appointed by the county chair (a county-level public official) from a list of nominees provided by the board and commissioners could be removed by the county chair for inefficiency, neglect of duty, or misconduct following notice and a hearing.

The district court said that there was no requirement that the entity consist of state officials or individuals appointed by state officials, so long as local government officials had appointment and removal power.

Simply put, the district court found that, by statute, the Authority was administered by a board of commissioners appointed by the chair of county commissioners – a public official with the statutory power to remove a commissioner for specified reasons. Therefore, it concluded, the Authority satisfied the second prong of the “political subdivision” test because it was administered by officials who were responsible to public officials.

In conclusion, the district court noted that the Authority had other powers beyond those of a private corporation that supported its conclusion that the Authority was a political subdivision. Among other things, the Authority had the power of eminent domain; could issue tax-exempt bonds; was not subject to tax on real property, personal property, or motor fuel or to federal or state income tax or the state franchise tax; and had to follow the open meetings laws and public records laws. [Shore v. Charlotte-Mecklenburg Hospital Authority, No. 1:18-CV-00961 (M.D.N.C. Aug. 30, 2019).]

Related Publications

Get legal updates and news delivered to your inbox