Bankruptcy and COBRA- Please help with the rules

[Guest PALAWYER]

What are the rules with respect to COBRA and bankruptcy? Can a company who files chapter 11 terminate its welfare plan before filing to avoid COBRA obligations? What about situations where there is a liquidation and no one is left around to administer COBRA? Any help would be appreciated.

Thanks

[Larry M]

It is my understanding that neither COBRA nor HIPAA require an employer to maintain a group health plan for its employees. COBRA's continuation coverage is available only as long as the employer maintains the group health plan for its active employees.

Therefore, when the employer terminates its group plan, COBRA is not available to either active or terminated employees.

The employees MAY have a right for a conversion policy with the carrier if the group contract so provided.

[Guest]

If the plan sponsor goes out of business, there is no COBRA sponsor and unless the insurance company permits the individuals to convert their policy to individual policies there is no continuation. My wife had that happen to her when Cooper Metroplitan hospital in Philadelphia closed its doors.

On the flip side, when I worked at KPMG, I had a client that placed a claim for lifetime medical coverage against a company that went Chapter 11 and ultimately liquidated. We assisted in establishing a trust to hold the assets to provide the benefits.

[Guest]

A word of warning--retirees (but not current employees) do have COBRA rights in an employer bankruptcy situation, and there's a lookback period to take care of employers that terminate their plans prior to filing the bankruptcy petition. Also, in a Chapter 11 proceeding, if benefits are provided pursuant to a collective bargaining agreement, there are specific requirements that apply if the employer is going to try to set aside the collective bargaining agreement.

[Guest PALAWYER]

I thought retirees and current employees have rights- getting mixed responses- Regulations seem to add retirees as an addition to the definition of Qualified Beneficiary

[Guest]

There has to be a qualifying event. If a current employee is terminated, or has his/her hours reduced so that there's a loss of coverage, that's a qualifying event, and that event makes the employee eligible for COBRA. A Chapter 11 might or might not result in termination or reduction of hours. As to retirees, though, the bankruptcy filing itself constitutes the qualifying event if it results in a loss of coverage. I think the bottom line is that the employer will have to dispose of its COBRA obligations in the Chapter 11, which will mean treating them as liabilities and allocating resources to them(as permitted by the law and the court).

[Guest PALAWYER]

I have been told that current employees who lose coverage as a result of the bankruptcy filing (Chapter 11 reorganization results in a decision to eliminate health benefits for certain employees) get COBRA rights without any other qualifying event? Do you agree?

[Larry M]

Is it possible there is a "WARNA" action?

[from RIA -}

"...The Workers Adjustment and Retraining Notification Act of 1988 (WARNA) requires employers to give 60-days' notice of site closings or to compensate laid-off employees for 60-days' salary and benefits, including the cost of health insurance. However, the exclusive remedy for violation of WARNA is monetary damages. 67 Therefore, WARNA does not require an employer to provide laid-off employees with actual medical plan coverage if employees are laid off within the 60-day notice period. Rather, WARNA only obligates employers to pay the cost of the medical expenses incurred as if the employment loss had not occurred. 68

Assuming employees are laid off without notice, WARNA effectively requires an employer to self-insure medical benefits for 60 days. An employer may determine it is less costly to simply pay the COBRA premium for 60 days after announcing the site closing in such a situation. Presumably, the employer would not be required to pay any amount attributable to medical benefits if it can establish that all its medical plans would have terminated whether or not employees had been given 60 days' notice of the site closing.

67. 29 USCS 2104.

68. Local 217, Hotel & Restaurant Employees Union v MHM, Inc. (1992, CA2) 976 F2d 805 , 7 BNA IER Cas 1313 , 123 CCH LC"