Question: Can an employer deny COBRA coverage if the employee is terminated for theft?

Answer: The term “gross misconduct” is not specifically defined in COBRA or in regulations under COBRA. Therefore, whether a terminated employee has engaged in “gross misconduct” that will justify a plan in not offering COBRA to that former employee and his or her family members will depend on the specific facts and circumstances. Generally, it can be assumed that being fired for most ordinary reasons, such as excessive absences or generally poor performance, does not amount to “gross misconduct.” In order to qualify for the exception, the conduct must not simply be “misconduct.”  It has to be “gross.”

While individual employers decide what gross misconduct is, the courts are getting into the decision too.

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.

In some of the court decisions, the themes are similar:

  • Gross misconduct is an intentional, deliberate, extreme and outrageous that can be “reckless or in deliberate indifference to an employer’s interests.”  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.”
  • The employer has the burden of establishing proof that 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.
  • 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.

In your client’s case of considering denying an employee COBRA continuation coverage, here is what we recommend:

  1. Review the facts and circumstances leading up to the termination.  If the theft is being prosecuted, then that would probably automatically be considered “gross misconduct”.  If it is small theft, the client might want to consider the potential impacts of denying COBRA rights.  Is the burden of proving the denial worth not offering a benefit that the terminated employee may not take/be able to afford anyway?
  2. In all cases, document the acts leading to the termination and how they impacted the business.
  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.