A third-party administrator that poorly communicated a COBRA premium rate increase — which in any case was likely prohibited under COBRA’s rules — is being sued for ERISA benefits denial and state-law promissory estoppel claims. The TPA instituted the premium change but did not provide clear written notice of it as required under plan terms. It also retroactively readjusted a qualified beneficiary’s earlier payments to the higher amounts without informing him. This resulted in his account being in arrears and the premature termination of his COBRA coverage. The TPA’s discretionary actions led it to be deemed a “plan administrator” for purposes of the ERISA claim, despite contractual disclaimers to the contrary.
Facts of the Case
Following his termination of employment, Russell Barrett elected COBRA coverage. Mangrove Benefit Services, Inc. was the third-party administrator, and under its TPA agreement provided “administrative and ministerial services” and was restricted from exercising any “discretionary authority or control with respect to the Plans.”
Using Mangrove-provided payment coupons, Barrett paid COBRA premiums on a timely basis for 11 months. However, during this period, the plan changed insurers, which resulted in a premium increase. Apparently, no notice was provided, as required by plan terms, announcing the increase. Mangrove then applied it retroactively to Barrett’s premiums without his advance knowledge. This resulted in his account becoming in arrears, and as the parties disputed the premium change process, the ultimate termination of his COBRA coverage.
Barrett sued Mangrove under ERISA’s civil enforcement provisions, seeking to challenge the benefits denials, as well as for various state-law claims. The employer and insurer were also sued but settled and were dismissed from the case. The court first held that Mangrove took certain actions — such as communicating with and advising Barrett, collecting and reapportioning premiums, and terminating Barrett’s COBRA coverage “at the Plan’s option” — that meant it “exercised its effective control as plan administrator.” This was despite the fact that the TPA agreement specifically stated Mangrove did not fulfill that role. So Mangrove was deemed a proper party for the ERISA denial of benefits claim.
Next, the court concluded that Barrett did not receive an appropriate notice of a premium change, so his late payment was not grounds for termination for cause. However, the court denied summary judgment on the ERISA claim to resolve whether Mangrove’s actions also led it to be a plan fiduciary subject to fiduciary breach liability.
Passing along premium increases during the COBRA coverage period can be complicated due to COBRA’s premium payment rules. Generally, all plans must compute and fix the applicable COBRA premium for a 12-month determination period, which must be computed and fixed before the period begins. Most significantly, IRS COBRA regulations note very limited circumstances — a change in insurers is not listed among them — under which a group health plan could pass on any mid-year rate increases to qualified beneficiaries [irrespective of general plan terms regarding premium increases for covered individuals]. And even in the best of circumstances, retroactively applying premium increases is not as simple as it seems under COBRA.
The case, Barrett v. Microdynamics Corp., is explained in more detail in Mandated Health Benefits — the COBRA Guide, at hr.complianceexpert.com.