COBRA's Gross Misconduct Exception / ARRA Subsidy Overlap

[401 Chaos]

A couple of questions related to COBRA's gross misconduct exception which I've seen discussed some in general on the board but have not been able to find definitive answers.

1. Realizing the lack of a clear definition of "gross misconduct" for COBRA purposes and other risks associated with denying COBRA coverage, assume a plan sponsor is determined not to provide COBRA and has fairly reasonable grounds for invoking gross misconduct, is there any legal obligation to notify the terminated participant that they are not being offered COBRA due to gross miscoduct? For example, by sending a modified notice of unavailability of coverage indicating that gross misconduct is being invoked? Although I certainly think it best practice and serves many useful purposes to provide participants some timely notice that they are not being offered COBRA, I am not aware of an actual legal requirement to notify the individual. An insurance carrier, however, has indicated that they called DOL (don't know who or where) and the DOL said the plan MUST inform the individual in writing that they are being denied COBRA due to gross misconduct.

2. What if the plan sponsor decides that relying on the gross misconduct exception is too risky even though they think they have clear grounds for gross misconduct. Are they legally required to deny eligibility for the ARRA COBRA subsidy even if they are willing to be more generous than COBRA requires and let the terminated individual elect COBRA without the subsidy?

Thanks.

[oriecat]

A COBRA workbook I got from a seminar addressed the notification as an ERISA issue, in that, you are denying benefits, therefore you have to let them know so they have appeal rights.

[GMK]

1. This DOL link:

http://www.dol.gov/ebsa/pdf/cobraemployer.pdf

says you need to provide a notice of unavailability of COBRA coverage (page 11).

I know it says within 14 days after receiving the request for coverage, and the person may not make the request. But does the employer want this person to come back a year from now with a "nobody told me I needed to request coverage" complaint to the DOL?

2. When in doubt whether the ARRA subsidy applies (and as far as I tell, the situation you describe is in doubt), submit the question to the DOL for their 15-day ruling.

[jpod]

401CHAOS: If the plan is insured, how, on the one hand, do you offer COBRA coverage, but tell your employee and DOL, on the other hand, that you felt he was fired for gross misconduct and therefore there is no subsidy? If there is no gross misconduct, there is no COBRA. Presumably the insurance policy follows COBRA and only COBRA, and does not say if there is gross misconduct the employer can offer continued coverage if it feels like it.

[401 Chaos]

jpod,

Thanks. What you raise is part of the reason for my question. My understanding is that the insurer has punted on the issue and basically said it is the employer's call and they will go along with either decision. They have apparently advised the employer that due to the uncertain nature of the gross misconduct exception they are willing to provide COBRA election even though there may be clear grounds for gross misconduct. I am not sure that is clearly the same as everybody making a determination that there is no gross misconduct so you have to give COBRA--instead it is a decision not to press on that or make a decision. Seems to me that as long as the insurer is on board with that decision, you might still run into a situation (albeit unlikely) where there could be an issue with the ARRA subsidy. I guess it's your thought that if a plan makes a decision to provide COBRA, then the gross misconduct issue is gone. I just worry that where before the government really had no concern with employers / insurers being more generous than they had to be they might strike a different tone when its the government's dime.

Oriecat,

Thanks for your response. I was thinking there had been some informal guidance suggesting that a denial due to gross misconduct was not subject to the appeals rules but I'll have to dig to find that.

GMK,

Thanks also. Just to be clear, we absolutely agree that the plan should give notice if COBRA is going to be denied but I was not aware that it was legally required. The EBIA manual I see suggests that a notice should be sent for the reasons you suggest as well but it does not seem to say it has to be sent. It seems to me the fact that the unavailability notice here is discussed in the context of a response for a request of coverage leaves the issue of whether it is legally required a bit up in the air. Again, I think plan is to send notice anyway so probably not a big deal but I just had never heard DOL say it was indeed legally required which is apparently what was said over the phone.

[Chaz]

2. When in doubt whether the ARRA subsidy applies (and as far as I tell, the situation you describe is in doubt), submit the question to the DOL for their 15-day ruling.

I agree. If the employee requests the subsidy, deny it and have the DOL make the call. They have said that they are going to rely heavily on the employer's determination as to whether a termination is involuntary and I think that will be the same with gross misconduct determinations.

[jpod]

Here is my take on the issue. If you don't deny cobra on willful misconduct grounds, the IRS will never in a million years challenge either the employee or the employer on the subsidy. Do you think that an agent doing an audit of the employer's 941s is somehow going to spot this issue in the first place, let alone undertake an investigation into why the employee was terminated?

On the other hand, if the employer does not wish to implement the subsidy, either out of spite or because of cash flow issues, do you really think there is any chance that the DOL is going to do anything other than rubber stamp the employee's appeal? When the DOL contacts the employer, the employer will have to say something like "we gave him COBRA because we weren't certain that his conduct was "gross misconduct," but we denied his subsidy because we felt certain that his conduct was gross misconduct." How far do you think that explanation will get you?

[401 Chaos]

jpod,

Thanks. I guess that I wouldn't envision explaining it quite that way but I don't disagree that it is an unusual position to have to take. I wouldn't at all mind the DOL deciding to give the subsidy in that case though--as others note, that puts the issue to rest in a way that should leave the employer in the clear. Thanks.

[GMK]

If the employer really would like to deny COBRA and the subsidy, one approach is to do just that. Then, apply for a DOL ruling on the denial of the subsidy because of termination due to gross misconduct.

If the DOL says the subsidy applies, then the misconduct wasn't gross enough, and the employer offers COBRA and the subsidy. If the DOL agrees that the subsidy does not apply, then either does COBRA.

In this case, as jpod points out, the denial of COBRA and the denial of the subsidy hinge on the same facts, and this would be a way to find out what the DOL thinks about it.

Might be a bit of work, of course, but you'll know the answer in a relatively short time.

[jpod]

GMK: All well and good except that the premise for this discussion is that the employer is nervous about denying COBRA and therefore won't deny it. Also, is it clear that the DOL will hear an appeal on the subsidy if the employer has refused to offer COBRA (or, stated differently, if the employee has not elected COBRA)? I didn't think the statutory rule requiring the appeal process was broad enough to encompass gross misconduct issues.

[GMK]

Good point, jpod. I think you're right. If there's no COBRA, then there's no subsidy denial to review (he said as he returned from the world of wishful thinking).

[Guest Sieve]

The reg relating to the required notice of unavailability of COBRA continuation coverage is at DOL Reg. Section 2590.606-4©. The regs contain no Model Notice of unavailability.