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Guest Article

Deloitte logo

(From the November 4, 2002 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks within the article have been added by BenefitsLink.)

Health Plan Participant Uses ERISA Sec. 510 to Keep Health Coverage That Would Have Been Lost Due to Corporate Transaction


The Ninth Circuit Court of Appeals has added another interesting chapter to ERISA jurisprudence. In Lessard v. Applied Risk Management, No. 01-15648 (9th Cir. October 3, 2002), the court held two companies violated ERISA section 510 when, pursuant to an asset purchase agreement, the buyer automatically hired the seller's active employees and provided them with health insurance coverage, but refused to provide coverage for the seller's employees on extended leaves of absence until they returned to work. In general, ERISA section 510 prohibits employers from interfering with a participant's rights under an ERISA plan.

Case Background

Briefly, Denise Lessard was an active employee of Applied Risk Management (ARM) until October 1996, when she took workers' compensation leave. While on leave, she remained a participant in ARM's group health plan until February 28, 1999. The plan was terminated on that date after ARM sold its assets to MMI Companies, Inc. (MMI), a subsidiary of Professional Risk Management (PRM).

Under the asset sale agreement, active ARM employees automatically were transferred to active employment with PRM/MMI and made participants in the PRM/MMI group health plan. However, transfer of certain ARM employees not actively at work on the day of the sale-- save for those on vacation or other short-term non-medical leave-- was delayed until they returned to active employment. As a result, Lessard and 5 other employees-- 1 (like Lessard) on workers' compensation leave, 2 on maternity leave, and 1 on leave to prepare for a bar exam-- were not automatically allowed to join the PRM/MMI group health plan.

The Lawsuit

Lessard, who probably will not return to full-time work in the near future, sued ARM and PRM/MMI under the Americans with Disabilities Act (ADA) and ERISA. The latter claim was based on ERISA section 510, which provides:

It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan, this title, ... or the Welfare and Pension Plans Disclosure Act, or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan, this title, or the Welfare and Pension Plans Disclosure Act.

A federal district court dismissed the ADA claim on procedural grounds, and ruled against Lessard on the ERISA claim because she failed to provide evidence that ARM and PRM/MMI terminated her health benefits in order to interfere with any protected rights under the group health plan. Lessard asked the Ninth Circuit Court of Appeals to review her ERISA section 510 claim.

The Ninth Circuit's Decision

The court of appeals reversed the district court's decision, holding "section 510 is violated when an employer selects for presumptive termination and denial of benefits specifically those employees presently on medical or disability leave." According to the court, ERISA section 510 would not have been implicated if all former ARM employees were treated the same with respect to benefits. The problem here, the court argued, was the decision to discriminate against those employees not actively at work on a specific day due to disability or other health-related reasons. (The court acknowledged that one of the six individuals in this group was on extended leave for non-health reasons, but its analysis was not affected by that fact.)

Additionally, the court brushed aside arguments that Lessard's benefits were terminated incident to a corporate reorganization. According to the court, "ARM acting alone would not have been permitted to terminate the benefits of a select group of employees-- most of whom were high-rate users of the Company's plan-- because those employees were on medical leave and to offer those employees reinstatement of benefits on the condition that they return to work." As such, the court concluded the same result achieved by way of a corporate transaction likewise was a section 510 violation.

No Good Deed Goes Unpunished

This decision effectively punishes ARM and PRM/MMI for what many observers might consider good corporate behavior. The law generally does not require employers to provide group health benefits to workers on extended leave. (However, employers must continue coverage for employees on FMLA leave.) Additionally, companies buying another's assets are not legally required to take on the seller's employees or provide them with uninterrupted health insurance coverage.

Ironically, if the transaction had been structured differently the Ninth Circuit probably would have reached a different conclusion. For example, the outcome may have been different if ARM simply terminated all employees (active and inactive) affected by the sale and let PRM/MMI decide to hire them or not on an individual basis. However, this arrangement would have been no better for Ms. Lessard, and probably would have been worse for other former ARM employees.


Deloitte logoThe information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances.

If you have questions or need additional information about this article and you do not have a Deloitte advisor, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094).

Human Capital Advisory Services, Deloitte LLP, 555 12th Street NW, Suite 500, Washington, DC 20004-1207.

Copyright 2002, Deloitte.


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