The COBRA Gross Misconduct Exception

Question: What is the gross misconduct exception to the COBRA qualifying event rules?

Short Answer: Employees do not experience a COBRA qualifying event if their loss of coverage is caused by a termination of employment that is by reason of the employee’s gross misconduct. However, because of the significant ambiguities and potential liabilities surrounding the exception, best practice is generally to offer COBRA even where there is an argument that the gross misconduct exception could apply.

General Rule: COBRA Maximum Coverage Period

COBRA qualifying events are a loss of coverage triggered by one of the prescribed COBRA triggering events.  The COBRA maximum coverage period for a qualifying event is generally determined by the type of triggering event that caused the loss of coverage, as follows:

18-Month Maximum Coverage Period:

  • Termination of employment

  • Reduction of hours

  • Failure to return from FMLA leave

29-Month Maximum Coverage Period:

  • Disability extension

36-Month Maximum Coverage Period:

  • Death of employee

  • Divorce or legal separation from employee (including removal in anticipation)

  • Loss of dependent status (typically child reaching age 26)

Note that the 18-month events can be extended by another 18 months under a fully insured policy sitused in California (for a total of 36 months) through Cal-COBRA, but only for medical coverage (not dental or vision).

For more details, see:

COBRA Exception: Gross Misconduct

Employees do not experience a COBRA qualifying event if their loss of coverage is caused by a termination of employment that is “by reason of the employee’s gross misconduct.” The gross misconduct exception applies only to a termination of employment triggering event.

The COBRA rules do not provide a definition of what qualifies as “gross misconduct” for purposes of this exception. The court cases that have addressed the issue have often come to an exceptionally restrictive interpretation of the term. In other words, it has proven very difficult for employers to rely on the gross misconduct exception to deny anoffer of COBRA.

Courts have often stated that the conduct must be so outrageous as to “shock the conscience” to qualify. Other common terms applied by courts include “willful,” “wanton,” “outrageous,” “reckless,” and “deliberate indifference.” However, even where those terms appear to be an appropriate description of the cause of termination, courts have still been reluctant to apply the gross misconduct exception.

Examples of cases where the court found the gross misconduct exception does not apply:

  • Employees allowed to voluntarily terminate in the face of allegations of embezzlement;

  • Employee falsified expense reports;

  • Employee failed to mix onion powder into ravioli sold by employer, and did not report the incident to the manager;

  • Employee assisted manager in stealing company property at manager’s discretion to take to manager’s new house;

  • Medical employee failed to complete referral for patient later discovered to have terminal cancer;

  • Nurse employee “mooned” another nurse employee in response to request to answer patient call lights;

  • Nurse employee left for the evening without checking on patient left in office to ensure no adverse reaction to anti inflammatory medication; and

  • Employee discussed starting a new competing company with co-workers and employer’s clients.

Best Practice: Avoid the Gross Misconduct Exception Generally

In light of the high litigation risk—and associated high cost—that comes with a COBRA gross misconduct denial, employers should generally offer COBRA whenever an employee loses coverage as a result of termination of employment absent the most outrageous possible forms of gross misconduct imaginable.

Failure to provide continuation rights under COBRA rights could give rise to a potential lawsuit from the affected qualified beneficiaries. Such litigation could result in the employer being held responsible for self-funding the expenses that would have been covered by the plan through COBRA if the insurance carrier (or stop-loss provider for a self-insured plan) refuses to cover the claims upon an eventual court finding of a COBRA qualifying event.

Furthermore, employers could be subject to an excise tax $100/day for failure to timely provide the COBRA election notice. That excise tax increases to $200/day if there is more than one affected individual for that qualifying event (e.g., spouse, child). Employers generally must self-report this excise tax liability on IRS Form 8928.

Given that former employees who elect COBRA must pay 102% of the cost of coverage, the standard risk/reward analysis is almost never going to favor denying COBRA based on a gross misconduct premise. That consideration would be viable only in the most extreme situations. Even then, in most cases the more prudent approach is to offer COBRA regardless.

While it is true that the COBRA risk profile generally is generally less advantageous to the plan than a standard active employee, any adverse effect on claims experience from the qualified beneficiary is likely significantly outweighed by the potential litigation expenses in a lawsuit challenging the application the gross misconduct exception.

Reminder: Voluntary or Involuntary Termination of Employment is a COBRA Triggering Event

Any voluntary or involuntary termination of employment that causes a loss of health coverage—other than a termination by reason of gross misconduct—is a COBRA qualifying event. Outside of the gross misconduct context, the facts surrounding the termination of employment (or reduction of hours) are irrelevant in determining whether a qualifying event has occurred.

For more details on COBRA generally, see our 2022 Newfront COBRA for Employers Guide.

Relevant Cites

Treas. Reg. §54.4980B-4:Q-1.  What is a qualifying event?A-1. ...(b) An event satisfies this paragraph (b) if the event is any of the following-
(1) The death of a covered employee;
(2) The termination (other than by reason of the employee's gross misconduct), or reduction of hours, of a covered employee's employment;
(3) The divorce or legal separation of a covered employee from the employee's spouse;
(4) A covered employee's becoming entitled to Medicare benefits under Title XVIII of the Social Security Act (42 U.S.C. 1395-1395ggg);
(5) A dependent child's ceasing to be a dependent child of a covered employee under the generally applicable requirements of the plan; or
(6) A proceeding in bankruptcy under Title 11 of the United States Code with respect to an employer from whose employment a covered employee retired at any time.
Q-. 2. .  Are the facts surrounding a termination of employment (such as whether it was voluntary or involuntary) relevant in determining whether the termination of employment is a qualifying event?A-2. Apart from facts constituting gross misconduct, the facts surrounding the termination or reduction of hours are irrelevant in determining whether a qualifying event has occurred. Thus, it does not matter whether the employee voluntarily terminated or was discharged. For example, a strike or a lockout is a termination or reduction of hours that constitutes a qualifying event if the strike or lockout results in a loss of coverage as described in paragraph (c) of Q&A-1 of this section. Similarly, a layoff that results in such a loss of coverage is a qualifying event.

Middlebrooks v. Godwin Corp. (E.D. Va. Feb. 7, 2012): In any event, and without formulating a precise definition of gross misconduct, the Court concludes that "gross misconduct" requires conduct substantially beyond mere negligence, carelessness, or obstinacy; and that Ms. Middlebrooks's conduct lacked sufficient indicia of willfulness, wantonness, outrageousness, recklessness, intention or deliberate indifference to constitute gross misconduct. For these reasons, the Court finds and concludes that Ms. Middlebrooks established a qualifying event that entitled her to receive COBRA Notices following her discharge from Godwin on October 30, 2008.

Mlsna v. Unitel Communs., 91 F.3d 876, 881 (7th Cir. 1996): There are at least two major problems with Unitel's claim that its objective evidence conclusively demonstrates that the district court erred in determining that Mlsna did not commit gross misconduct. First, most of the evidence submitted, even if construed as Unitel proposes, would go only to negligence or incompetence on Mlsna's part, not gross misconduct. As the district court noted, job incompetence alone does not constitute gross misconduct for COBRA purposes. While some of the evidence submitted--such as the claim that Mlsna submitted improper commission requests, particularly the one for Hans Herrmann--could arguably be viewed by a trier of fact as evidence of bad faith malfeasance amounting to gross misconduct, the district court's decision not to interpret the evidence in this light is not clearly erroneous. Second, much of Unitel's evidence of Mlsna's on-the-job errors was inconclusive regarding whether Mlsna had done anything improper or blameworthy, let alone committed gross misconduct.

New v. Family Health Care, P.C., (D. Md. July 1, 2019): Within this Circuit, at least one court has broadly defined gross misconduct as behavior that "is so outrageous that it shocks the conscience." Zickafoose v. UB Servs., Inc., 23 F. Supp. 2d 652, 655 (S.D. W. Va. 1998). While another views it as amounting to "carelessness or negligence of such a degree or recurrence show an intentional and substantial disregard of the employer's interests or the employees [sic] duties and obligations to his employer." Bryant v. Food Lion Inc., 100 F. Supp. 2d 346, 376 (D.S.C. 2000), aff'd, 8 F. App'x 194 (4th Cir. 2001) (quoting Paris v. F. Korbel & Bros., Inc., 751 F. Supp. 834, 838 (N.D. Cal. 1990)). And yet another has determined that the conduct must be "substantially beyond mere negligence, carelessness, or obstinacy" and must include
"sufficient indicia of willfulness, wantonness, outrageousness, recklessness, intention or deliberate indifference." 
On this record viewed most favorably to New, the Court cannot find as a matter of law that New was terminated for gross misconduct. To be sure, New forgot about a patient and left for the day. Further, the evidence suggests, but does not conclusively establish, that New provided substandard medical care in failing to monitor the patient. But as soon as New learned of her mistake, she returned to the office. No evidence supports that New had been similarly derelict in the past, and fortunately, no harm came to the patient. The Court cannot conclude as a matter of law that New was fired for gross misconduct. New's termination is, therefore, a qualifying event, triggering COBRA's notice requirements.

Nero v. Univ. Hosps. Mgmt. Servs. Org (N.D. Ohio Oct. 12, 2006): The term "gross misconduct" is not defined in the statute, but has generally been understood to include misconduct that is "intentional, wanton, willful, deliberate, reckless or in deliberate indifference to an employer's interest." Collins v. Aggreko, Inc., 884 F. Supp. 450, 454 (D. Utah 1995). "It is misconduct beyond mere minor breaches of employee standards, but conduct that would be considered gross in nature." Id. In evaluating the case law, the court notes that conduct that amounts to a simple mistake or mere inattention to detail has been considered relatively benign....
This case is a close call because although Nero made some mistakes as an employee at UH, those mistakes had potentially serious consequences. UH, however, has not offered any evidence to suggest that Nero engaged in any intentional, wanton, willful, or deliberate misconduct. In fact, nothing in the record indicates that her behavior was the result of anything other than absentmindedness. Clearly, her performance was substandard. However, regardless of its consequences, a mistake is still a mistake. Otherwise, all mistakes in the medical field would constitute gross misconduct because such mistakes carry serious consequences with them. Thus, the filing of lab results in the wrong chart or the mislabeling of a blood sample, though having potentially serious consequences, does not constitute gross misconduct absent any evidence that the action was intentional, wanton, willful, or deliberate. Similarly, failing to follow through with a patient referral or a prescription refill does not constitute gross misconduct absent any evidence that it was anything more than a mistake.

Lloynd v. Hanover Foods Corp., 72 F. Supp. 2d 469, 479 (D. Del. 1999): Although the case law cited above does not make clear whether "gross negligence" constitutes "gross misconduct" for COBRA purposes, the court need not make that determination today. Rather, the court concludes only that Lloynd's failure to add onion powder to the ravioli on May 8, 1997 and her failure to recognize the problem and bring it to the attention of Sarah Albarran constitute at most ordinary negligence. These acts and omissions do not rise to the level of "gross misconduct" for COBRA purposes. The court need not characterize Lloynd's failure to obey Albarran's "order" to report the problem to Sanchez because the court has already found that no such "order" was given. Indeed, even if Albarran intended her comments to be a directive, the court concludes that Lloynd's failure to recognize it as such does not constitute "gross misconduct."

Because Lloynd was terminated for a reason other than "gross misconduct," she was entitled to elect continued health care coverage under COBRA. Accordingly, Hanover's failure to notify Lloynd of that right was a violation of 29 U.S.C. § 1166(a)(4) for which she may recover under 29 U.S.C. § 1132(a)(1).

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).

Brian Gilmore
The Author
Brian Gilmore

Lead Benefits Counsel, VP, Newfront

Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law.

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