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More About COBRA: What is “Gross Misconduct?”

Posted in Welfare Plans

Frequently I get calls about offering COBRA coverage when an employee is terminated and an employer wants to deny coverage for "gross misconduct."  I have written about this before but the topic fascinates me because it is not what everyone thinks it is.  It’s not simply "misconduct."  It has to be "gross."

Prior to 1986, it was assumed that any time a worker lost or changed jobs, health benefits coverage was lost.  That changed with the passage of the provisions of The Consolidated Omnibus Budget Reconciliation Act (COBRA) that governed continuation rights for plan beneficiaries.  COBRA has been amended, with some of the most recent amendments going into effect in 2005.  Under COBRA, employees and their families that suffer certain defined qualifying events may be able to continue coverage under the employer’s group health plan except when an employee is terminated for “gross misconduct.”  Because the Act does not specifically define “gross misconduct,” it is left to judicial determination.  Unfortunately, this can create confusion over what is gross misconduct for COBRA purposes and what employers should do to deal with terminated employees for COBRA administration purposes.

So what is “gross misconduct” for COBRA purposes and how is it handled?

In Boudreaux v. Rice Palace, Inc., a district court was asked to consider a case where an employee was denied COBRA because of alleged “gross misconduct.”  The employer observed several instances where the employee had overmedicated to the point of becoming incoherent.  After several warnings, the employer determined that the employee represented a hazard to herself and other employees.  She was terminated denied the ability to elect COBRA coverage.  The Court ultimately determined that the employee’s termination was as a result of her deliberate violation of the employer’s standards and she showed carelessness or negligence to such a degree or recurrence as to show wrongful intent to cause harm, either to the employer or to other employees.

Three things are very important about this decision.  First, the court did not find that any “criminal” conduct was required to meet the “gross misconduct” definition.  Gross misconduct can be an intentional, deliberate, extreme and outrageous that “shocks the conscience.”  It can be “reckless or in deliberate indifference to an employer’s interests.”  Thus, employees that routinely engage in unauthorized activities that are contrary to the interests of the employer or jeopardize the safety of other employees could be engaging in “gross misconduct.”

Second, the employer has the burden of establishing the termination was for “gross misconduct.”  The presumption is that the termination was a qualifying event that entitles the employee to COBRA benefits.  If the employer intends for the termination to act as a bar to the general COBRA continuation rights of the employee, it is incumbent upon the employer to create a record of the activity alleged and prove, if challenged, how that conduct rose to the level of “gross misconduct” to justify denying COBRA right.  Then, the employer must establish that the gross misconduct was the actual basis for the termination. It must be the primary reason, not one of many.

Finally, the employee and potential COBRA beneficiaries have to be notified of the determination that COBRA is not being offered because of the termination for gross misconduct.  The general COBRA notice provisions require that after a quality event occurs, the employee and any covered dependents eligible for COBRA coverage be notified of their option to elect continuation coverage.  If that coverage is being denied, the employee and dependents must be notified of the decision and must also be given the right to appeal the determination by the plan administrator. The 2005 amendments to COBRA reference a “notice of unavailability of COBRA coverage” to be provided to plan participants in the event that COBRA coverage is not offered.  That notice is sent instead of the election form. The participants then have the ability to appeal the determination that coverage is not available.

So if an employer is considering denying an employee COBRA continuation coverage, three things must be considered:

1. Have a record of the acts or omissions giving rise to the termination and how these acts of omissions impacted the business
2. Have a record of how the termination decision was made that establishes that the termination was clearly made because of the gross misconduct
3. Provide a “Notice of Unavailability of COBRA Coverage” to the employee and covered dependents with the right to appeal advising them that coverage is being denied because of the termination for gross misconduct.

Based on the decision in Boudreaux, it looks like following these guidelines will increase the likelihood that the determination to deny COBRA continuation coverage will be upheld if challenged.