If you have a clear case of gross misconduct--embezzlement for which employee has been terminated and arrested--and are denying COBRA rights under group health plan, any reason the gross misconduct exception would not also apply to bar COBRA continuaton under Health FSA where the employee has a positive balance under the plan? Seems in either case a termination due to gross misconduct is not technically a COBRA "qualifying event" so there would be no right to continued coverage and the Health FSA balance would be forfeited to the extent the individual had not incurred reimbursable medical expenses prior to termination.

I think I would agree. I don't believe are any special rules on this relating to FSA's, it's just a health plan and falls under the COBRA regs, so if it can be denied for the insurance, I don't see why it couldn't be denied for the FSA.