Theft was Gross Misconduct, but Inconsistencies May Make COBRA Ineligibility Less Clear

When an employee is terminated due to “gross misconduct,” the termination is not considered a qualifying event, and an employer does not have to offer Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage to the ex-employee (or his or her covered spouse or dependents). Neither the statute, legislative history, nor regulations specifically define the term “gross misconduct.”terminated

However, the courts have addressed gross misconduct, with some looking to state unemployment compensation laws for guidance. When considering whether to reject COBRA coverage on the basis of gross misconduct, employers and plan administrators should pay careful attention to standards developed by relevant courts.

An employer argued that COBRA coverage was not provided due to a qualified beneficiary’s gross misconduct. However, the former employee countered that the real reason behind his termination and the COBRA coverage denial was the high cost of his medical expenses.

In addition, the provision of 3 months of continuation coverage under a separation agreement was interpreted differently by both parties. Because such questions made the issue of COBRA ineligibility due to gross misconduct less clear, the court denied a request to rule in the former employee’s favor on a COBRA notice claim. The case is Culver v. United Commerce Centers, Inc., 2017 U.S. Dist. LEXIS 74541 (N.D. Texas May 16, 2017).

Facts of the Case

“Ollie” was an employee of United Commerce Centers, Inc. (UCC). In May 2013, he developed hepatitis C and cirrhosis of the liver. The plan paid more than $300,000 in in medical expenses over 2 years.

When UCC terminated Ollie’s employment, he and his wife sued UCC and the alleged health plan sponsors, New World International, Inc., and National Auto Parts, Inc. Ollie and his wife argued, among other things, that (1) UCC terminated Ollie’s employment to stop paying his medical expenses, (2) he was illegally denied COBRA coverage, (3) Ollie’s wife was not given notice of her COBRA rights on a timely basis, and (4) UCC forced Ollie into a separation agreement in which he released all legal claims. Ollie and his wife sought partial summary judgment.

UCC agreed that Ollie was not offered COBRA coverage, and his wife was not sent a COBRA notice, but noted the reasoning was due to Ollie’s gross misconduct, which made he and his wife both ineligible for COBRA coverage.

The court noted that theft would constitute gross misconduct that would deny Ollie and his wife COBRA protections. Ollie and his wife contended the theft allegation was false, and pointed to deposition testimony from UCC’s former health insurance broker that UCC’s president expressed frustration about the health plan and the costs of Ollie’s care in particular.

On the other hand, UCC filed an affidavit from UCC’s senior vice president stating that Ollie was fired for theft, and he admitted the wrongdoing. That affidavit also denied that New World International and National Auto Parts are plan sponsors.

Ollie and his wife submitted no evidence disproving the theft allegation; the court noted that they seemed to assert the defendants were estopped from denying COBRA coverage because UCC gave Ollie a COBRA notice and 3 months of coverage after his termination. However, the defendants stated that was based on a signed separation agreement.

The court held that summary judgment was improper at this time because genuine issues of material fact exist on whether (1) Ollie and his wife were entitled to COBRA notice, (2) the separation agreement bars the claim, (3) the defendants acted inconsistently with their current position on the reasons for termination and are therefore estopped, and (4) New World International and National Auto Parts are plan sponsors. Therefore, the partial summary judgment motion was denied.

Implications

COBRA provides that a termination of employment or reduction in hours that results in a loss of coverage is a qualifying event entitling a qualified beneficiary to up to 18 months of COBRA coverage. An employer has up to 30 days to notify a plan administrator of a qualifying event. In turn, the plan administrator has 14 days from the date of that notice to send a COBRA election notice. A plan administrator that fails to meet COBRA’s notice requirements may be subject to statutory penalties of up to $110 per day.

However, if an employee is terminated for gross misconduct, the termination is not considered a qualifying event, and an employer is not required to offer COBRA coverage to the ex-employee or any covered dependents.

Unfortunately, neither the Internal Revenue Service (IRS) nor the U.S. Department of Labor (DOL) has issued guidance on what constitutes gross misconduct. Therefore, courts have taken the lead in determining whether a termination of employment was due to gross misconduct. Given that the gross misconduct determination is based on the facts and circumstances, plan administrators considering whether to deny COBRA coverage should follow certain steps before making a final determination. These include:

  • Analyzing whether the conduct is in fact gross misconduct based on established federal and state legislative, regulatory, and legal principles.
  • Understanding that if the employee resigns, the employer will not likely be able to rely on gross misconduct to deny COBRA coverage and that if the gross misconduct determination is made after the termination of employment, the employer’s basis for denying COBRA coverage is weakened.
  • If a determination of gross misconduct is made, a notice informing the employee of that determination should be sent. This will mitigate the possibility of penalties if the determination is challenged and reversed because at least a notice was sent.
  • Giving the former employee the opportunity to have the gross misconduct determination reviewed.

Plan administrators should also keep detailed records on the gross misconduct determination and should consult with legal counsel and other plan advisers as needed.

Gwen Cofield is an editorial/communications professional with more than 20 years of experience in the for-profit, non-profit and government sectors.

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This post originally appeared on HR Daily Advisor
Author: Gwen Cofield