COBRA Considerations in Mergers & Acquisitions
When an organization makes the decision to reorganize, such as participating in a merger or acquisition, certain employees can have their job status negatively impacted through terminations and reductions in hours. These employment changes often trigger the requirement to offer COBRA continuation coverage, creating questions as to which party involved in the business reorganization must handle the COBRA obligations. COBRA has clear regulations detailing who must be offered COBRA and which organization is responsible for making the offer.
To Whom Should COBRA Be Offered?
In a merger or acquisition scenario, “M&A qualified beneficiaries” have the legal right to COBRA continuation coverage. The structure of the merger or acquisition as stock or asset sale determines whether an individual is an M&A qualified beneficiary. Please note that individuals must experience a COBRA qualifying event, such as termination of employment, to be M&A beneficiaries.
Stock Sale
In the event of a stock sale, qualified beneficiaries are individuals whose last employment was associated with the acquired business entity and:
- Whose COBRA qualifying event occurred prior to the sale; or
- Whose COBRA qualifying event occurs “in connection with the sale.
Individuals who continue employment with the acquired organization after the stock sale have not experienced a COBRA qualifying event, as their employment has not terminated, and should not be offered COBRA.
Asset Sale
In the event of an asset sale, qualified beneficiaries are individuals whose last employment was in connection with the acquired assets and:
- Whose COBRA qualifying event occurred prior to the sale; or
- Whose COBRA qualifying event occurs “in connection with the sale.
Employees of the seller who are employed by the buyer immediately after the asset sale are not M&A qualified beneficiaries if the buyer is a “successor employer” (described below).
Which Group, Seller or Buyer, Must Offer COBRA?
The structure of the merger or acquisition as a stock or asset sale determines which group, the seller or the buyer, has the responsibility to offer COBRA to the M&A qualified beneficiaries. The standard COBRA rules for each situation are discussed below.
In the event of a stock sale the following should be considered:
- If the seller continues to maintain any group health plan after the sale, the seller must cover the M&A qualified beneficiaries under the seller’s plan.
- If the seller ceases to maintain any group health plan “in connection with the sale,” the buyer must cover the M&A qualified beneficiaries under the buyer’s plan. The buyer’s obligation to offer COBRA begins the later of:
- The date the seller ceases to provide any group health plan; or
- The date of the stock sale.
In the event of an asset sale the following should be considered:
- If the seller continues to maintain any group health plan after the sale, the seller must cover the M&A qualified beneficiaries under the seller’s plan.
- The buyer is required to make COBRA available to M&A qualified beneficiaries if the buyer is considered a “successor employer.”
- The buyer is a successor employer if:
- The seller ceases to provide any group health plan to any employee;
- The cessation of the group health plan(s) is “in connection with the sale;” and
- The buyer continues the business operations associated with the assets purchased from the selling group without interruption or substantial change.
- The buyer’s obligation to offer COBRA begins the later of:
- The date the seller ceases to provide any group health plan; or
- The date of the asset sale.
- The buyer is a successor employer if:
The above are the “default” rules allocating COBRA responsibility in a merger or acquisition. The parties to the merger or acquisition can contractually agree to allocate the responsibility to offer COBRA to either party.
Key Takeaways:
Organizations engaged in a business reorganization would be well-served to be aware of potential COBRA obligations that arise as result of transaction. During a reorganization, unless otherwise contractually defined, these COBRA rules would apply to employees who are affected by the change.
The information provided is a summary of laws and regulations relating to employee benefit plan compliance. This information should not be construed as legal advice. In all cases, employers should consult with their own legal counsel.