Your client just sold her business and half of her staff lost their jobs. Is she obligated to offer COBRA continuation coverage to those former employees? Perhaps.

When an employee loses their job, they may become eligible for COBRA. COBRA is the Consolidated Omnibus Budget Reconciliation Act, which gives certain former employees and their dependents access to continuing group health coverage under certain circumstances. There are three qualifying elements:

• Plan coverage: If an employer had 20 or more employees on at least 50 percent of the typical work days in the previous calendar year, and that employer offers a group health plan, then that group health plan is subject to COBRA. Each part-time employee counts as a fraction of an employee, depending upon the number of hours that employee works in a week.
• Qualified beneficiary: Anyone who was covered by the group health plan on the day before a qualifying event, including an employee or an employee’s spouse or dependent child, is a qualified beneficiary. In some cases, retired employees may be qualified, as well as their spouses and children.
• Qualifying event: Certain events that would cause a person to lose their health coverage count as qualifying events that would trigger COBRA eligibility, such as termination of employment or reduction in hours.

Often, in a merger and acquisition situation, some of the employees lose their jobs or have to reduce their hours. But which employer is responsible for offering COBRA health coverage? The buyer or the seller? Let’s look at a few different scenarios to answer that question.

The Contract Rules

If you have a business client who is thinking of either selling their business or acquiring another one, they will probably want to know how to figure out their responsibilities in regard to COBRA. If the client comes to you before finalizing their M&A plans, fantastic!

Advise your client to talk to an attorney about including COBRA language in the M&A contract. The two parties are always free to negotiate COBRA responsibilities as part of the sale, and whatever the contract says, goes.

If the Contract Is Silent on COBRA Responsibility

Perhaps your client comes to you after the M&A deal has already been negotiated, or chose not to include COBRA language in the contract for some other reason. If the M&A contract does not spell out which party will take responsibility for covering COBRA benefits, IRS guidelines assign responsibility.

The Seller Maintains a Group Health Plan After the Sale

As long as the seller is still offering a group health plan at all, then that group health plan is obligated to offer COBRA continuation coverage to any qualified beneficiary who lost their health coverage as a result of the M&A.

The Seller Does Not Maintain a Group Health Plan After the Sale

In mergers and acquisitions, there are two possible types of sales: stock sales and asset sales. If the seller stops offering a group health plan, and that decision is a result of the sale, the IRS has two different sets of rules for assigning COBRA responsibility based on the type of sale.

Stock Sale

The buyer’s group health plan must offer COBRA continuation coverage to any M&A qualified beneficiaries when the seller stops offering group health insurance after a stock sale. The buyer’s responsibility begins on the date of the sale, or the date the seller stops offering their group plan, whichever comes last. So even if the seller doesn’t cancel their group health plan until after the sale, the buyer will still pick up responsibility.

Asset Sale

In the case of an asset sale, the buyer becomes a successor employer to the selling group and their group insurance plan must offer COBRA coverage to qualified employees when ALL of the following conditions are met:

• The seller stops offering a group health plan to any employees connected with the sale.
• The buyer continues the same business operations that go along with the assets they purchased.
• Those business operations continue without interruption or substantial change.

If all three of these conditions are met, it doesn’t matter whether or not the asset sale was related to a bankruptcy claim. When another company purchases those assets, the buyer becomes the successor employer.

A Word of Warning

Even if both the buyer and seller agree to COBRA coverage responsibility in their contract, sometimes one of the parties fails to follow through. For example, let’s say Company A wants to acquire Company B. A purchases a chunk B’s business in a stock sale but insists that B must be responsible for COBRA continuation coverage. B agrees, and they write those terms into the M&A contract.

Three months later, B takes a big financial hit. They decide to sell off the rest of the business, and they stop offering their group health plan. At this point, A would assume COBRA responsibility, even though they have a contract that says otherwise.

If any of your business clients are considering an M&A deal, or they’ve already entered one, you can be a knowledgeable resource for them in regard to COBRA responsibility. Use this opportunity to show off your industry expertise and add value to your client relationship. And if you need more information on COBRA continuation coverage, check out Zywave’s COBRA content in Broker Briefcase.