January 29, 2018
Question: An employee on unpaid Family Medical Leave Act (FMLA) leave has just notified us that she does not intend to return to work. She was covered under our major medical plan until her leave began. However, she opted to drop her coverage when she went on leave rather than continuing to pay the employee portion of the premium.
Our medical plan is subject to COBRA, but are we required to offer COBRA in this situation?
Answer: Yes, most likely. The IRS has provided detailed rules regarding the interaction of COBRA and the FMLA. Under these rules, a COBRA qualifying event occurs when:
- An employee (or the employee’s spouse or dependent child) is covered under a group health plan of the employer on the day before the first day of the FMLA leave (or becomes covered during the FMLA leave);
- The employee does not return to work at the end of the FMLA leave; and
- The employee (or spouse or dependent child) would, in the absence of COBRA coverage, lose coverage under the plan before the end of the COBRA maximum coverage period.
Because the rules confer COBRA rights based on whether a qualified beneficiary has coverage on the day before the FMLA leave begins, a qualifying event can occur at the end of the FMLA leave even if coverage was dropped or otherwise lost (for example, for failure to pay required premiums) during the leave.
In fact, the rules expressly provide that any lapse in coverage during an FMLA leave is irrelevant in determining whether or when a qualifying event has occurred.
Because your employee was covered under your major medical plan on the day before the first day of her FMLA leave, will not be returning to work at the end of her leave, and has already lost coverage under the plan, she has experienced a qualifying event and must be given an opportunity to elect COBRA.
Note that an exception would apply if, during her leave, the company eliminated plan coverage for the class of employees to which she would belong if not on leave. Also, as a general matter, if an employer terminates all of its group health plans, it would not have to offer COBRA because there is no continuation coverage available.
The COBRA maximum coverage period for employees on FMLA leave generally begins on the last day of the leave (the date of the qualifying event). If, as in your situation, the employee notifies the employer that he or she does not intend to return to work, the date of the employee’s notification generally will be the last day of the employee’s FMLA leave.
Keep in mind that the beginning of an FMLA leave is not a COBRA qualifying event. But employees who take other types of leave may experience a qualifying event when the leave begins (that is, a reduction of hours that causes a loss of coverage).
Question: Our bookkeeper retired two months ago, saying she wanted to spend more time with her grandchildren. She timely elected COBRA coverage under our company’s medical plan, and is current on her premium payments. Just this week, we discovered that she embezzled more than a million dollars’ worth of cash and property from our company during her ten years of employment. We would certainly have terminated her for gross misconduct if the embezzlement had been discovered while she was employed. We know that COBRA need not be offered to employees who are terminated for gross misconduct, so can we now retroactively terminate our bookkeeper’s COBRA coverage?
Answer: Probably not. You correctly note that COBRA coverage need not be offered if an employee is terminated due to his or her own gross misconduct, but your bookkeeper was not terminated due to gross misconduct; she voluntarily retired and elected COBRA before her misconduct was discovered.
As background, if a covered employee is terminated for gross misconduct, there is no COBRA qualifying event for the employee or any covered dependents. However, employers wishing to deny COBRA coverage because of gross misconduct should do so with great caution after consulting with legal counsel and any insurers (including stop-loss insurers).
COBRA contains no definition of “gross misconduct,” and while various courts have provided definitions, they haven’t agreed on a common standard. This means a less-than-clear legal standard must be applied to facts that are often hotly disputed. Therefore denial of COBRA coverage because of gross misconduct carries a higher-than-usual risk of litigation. Even if the employer wins, the expense of the lawsuit could easily negate any financial advantage gained from not having to provide COBRA.
But your company faces a different obstacle. While we would not expect much disagreement that embezzlement constitutes gross misconduct for COBRA purposes, your employee’s termination was not due to her gross misconduct. Instead, she voluntarily retired, was offered and elected COBRA, and her gross misconduct was discovered later. Courts have generally reasoned that an employer’s decision to deny COBRA based on gross misconduct should be evaluated based on evidence available to the employer at the time of the employee’s discharge.
The U.S. Supreme Court has rejected an employer’s use of after-acquired evidence to justify a termination of employment, and several (but not all) courts have similarly rejected the use of after-acquired evidence of gross misconduct in the COBRA context.
We think it is unlikely that a court would allow COBRA coverage to be terminated — either retroactively or going forward — when gross misconduct is discovered after an employee has elected COBRA.