Can Time Theft Rise To The Level Of “Gross Misconduct” Under COBRA? A Federal Court Says Yes

When an employee is terminated, employers generally assume they need to provide a COBRA election notice so the employee has the opportunity to continue health coverage. But there is one important exception: COBRA’s continuation coverage requirements do not apply if the employee is terminated for gross misconduct. The challenge, of course, is that neither COBRA nor its implementing regulations define what “gross misconduct” actually means. As a result, employers have been left to rely on court decisions for guidance, and those decisions have often been highly fact-specific.

A recent federal district court decision provides additional guidance by concluding that an employee’s intentional time theft constituted gross misconduct, relieving the employer of any obligation to offer COBRA continuation coverage.

Background

COBRA generally requires employers to offer continuation health coverage to covered employees and their qualified beneficiaries following certain qualifying events, including termination of employment. However, an employee whose employment is terminated due to gross misconduct does not experience a COBRA qualifying event. As a result, the employer has no obligation to provide a COBRA election notice or offer continuation coverage.

Despite the significance of this exception, Congress did not define “gross misconduct,” and the COBRA regulations likewise provide no definition. Consequently, courts have developed the standard through case law, often emphasizing that the exception should be applied cautiously because an incorrect determination may expose an employer to COBRA penalties and other liability.

The Court’s Decision

In Green v. Clement Auto Group, LLC, a federal district court in Missouri considered whether an employer properly denied COBRA coverage after terminating an employee for time theft. The employee had been approved for intermittent leave under the Family and Medical Leave Act but routinely clocked in before leaving work for medical appointments without recording leave. Although the employee admitted that he performed no work during the periods between clocking in and returning from his appointments, he nevertheless received compensation for those hours.

Surveying decisions from multiple jurisdictions, the court observed that gross misconduct generally requires conduct that is significantly more serious than poor performance, negligence, or isolated lapses in judgment. Instead, conduct must be intentional, willful, wanton, deliberate, reckless, or demonstrate deliberate indifference to the employer’s interests. Applying that standard, the court concluded that the employee’s intentional falsification of time records and receipt of pay for unworked hours constituted gross misconduct. The court held that the employer had no obligation to provide COBRA continuation coverage following the employee’s termination.

What This Means for Employers

Although this decision is not binding outside the federal district in which it was issued, it illustrates the type of conduct that courts may find sufficiently egregious to qualify as gross misconduct for COBRA purposes. The opinion reinforces that intentional dishonesty, particularly where an employee knowingly receives compensation for hours not worked, may satisfy the standard for gross misconduct.

At the same time, employers should continue to exercise caution before relying on the gross misconduct exception. Courts have historically interpreted the exception narrowly, and an incorrect determination may result in liability for failing to provide required COBRA notices and continuation coverage.

Before concluding that an employee was terminated for gross misconduct, employers should carefully evaluate:

• Whether the misconduct was intentional rather than merely negligent or inadvertent.
• Whether the employer has thoroughly documented the facts supporting the termination.
• Whether the evidence demonstrates deliberate misconduct rather than poor performance or misunderstanding of workplace policies.
• Whether the employer has consistently applied its disciplinary policies in similar situations.

Practical Considerations

For most involuntary terminations, the safest course remains providing a COBRA election notice. Employers should consider relying on the gross misconduct exception only when the facts clearly demonstrate intentional or egregious misconduct and the supporting evidence is well documented.

When employers believe the exception may apply, consulting legal counsel before withholding COBRA rights can help reduce the risk of later claims that continuation coverage was improperly denied.

Takeaways

While Green v. Clement Auto Group, LLC does not establish a nationwide rule, it offers useful insight into how courts may analyze the gross misconduct exception. The decision confirms that intentional time theft supported by substantial evidence may constitute gross misconduct sufficient to eliminate an employer’s COBRA obligations. Nevertheless, because the exception remains highly fact-specific and is construed narrowly, employers should proceed carefully and ensure that any decision to deny COBRA coverage is supported by thorough documentation and a well-developed factual record.

IRS Increases Affordability Percentage For Affordable Care Act.

The IRS has set the new Affordable Care Act (ACA) affordability percentage to 10.22% for 2027. This new affordability percentage is 0.26% higher than the current 2026 affordability percentage (i.e., 9.96%). (Rev. Proc. 2026-26 (July 27, 2026).)

While the Internal Revenue Code originally set the affordability threshold to 9.5%, the Internal Revenue Service (IRS) retains the authority to release an adjusted percentage each year. (See 26 U.S.C. section 36B(c)(2)(C)(i).) From 2015 to 2022, the IRS set an affordability percentage above 9.5%, going as high as 9.86% in 2019. For 2023, the IRS dropped the affordability percentage below 9.5% for the first time by setting it at 9.12%, then dropped it even lower to 8.39% for 2024. The affordability percentage increased to 9.02% for 2025 and 9.96% for 2026. The new 2027 affordability percentage of 10.22% is a new high.

Applicable large employers are advised to check whether their offers of employer-sponsored health coverage for 2027 are affordable using the 10.22% threshold. To determine whether an offer of health coverage is affordable, an employer must run an affordability calculation to determine whether an employee’s “Required Contribution” toward the premium for the lowest cost employee-only coverage exceeds or does not exceed 10.22% of the employee’s household income for the 2027 taxable year. Since employers typically do not know the total household income of each of their employees, the ACA provides three affordability safe harbor options an employer may adopt and apply on a reasonable and consistent basis:

1. Under the Form W-2 Safe Harbor, coverage is affordable if the employee’s Required Contribution is less than or equal to 10.22% of the employee’s wages reported in Box 1 of Form W-2.
2. Under the Rate of Pay Safe Harbor, coverage is affordable if the employee’s Required Contribution is less than or equal to 10.22% of the monthly wage amount for hourly employees (the hourly rate multiplied by 130 hours), or the monthly salary for salaried employees.
3. Under the Federal Poverty Line Safe Harbor, coverage is affordable if an employee’s Required Contribution does not exceed 10.22% of the Federal Poverty Line for a single individual.

Please note that there are additional factors, such as health flex contributions and cash in lieu, that can greatly impact the amount of an employee’s Required Contribution and the affordability calculation. For more information about how to run the affordability calculation and whether you need to revise the employer contribution to maintain affordable offers of health coverage, please reach out to us.