The Hot Potato: Who is Responsible for COBRA Coverage in an M&A Transaction?

There are a lot of moving parts in an M&A transaction. An issue that frequently comes up in the benefits area of the transaction is who is going to be responsible for the seller’s employees and other qualified beneficiaries who are eligible for health continuation coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”) as a result of the transaction? And what about qualified beneficiaries who are already receiving COBRA coverage under the seller’s health plan at the time of the transaction?


The parties can always provide in the purchase agreement which party has agreed to take on the responsibility for this group of qualified beneficiaries (called “M&A Qualified Beneficiaries”). COBRA coverage can be undesirable for employers and insurers due to the potential for higher claims and administration costs, so it is important to understand who bears the responsibility under COBRA and its regulations, in case the issue is not addressed in the purchase agreement, or to inform any negotiations regarding a transfer of responsibility to be included in the agreement.


The General Rule


The general rule is that the seller is responsible for providing COBRA coverage to M&A Qualified Beneficiaries to the extent that the seller maintains a group health plan. That includes such plan maintained by any entities that are in the same controlled group with the seller(the “Seller Group”). If the Seller Group ceases to maintain any group health plans, then the responsible party depends upon the type of transaction into which the parties are entering: a stock purchase or an asset purchase.


The Stock Purchase Rule


In a stock purchase, if the Seller Group ceases to maintain any group health plan after the sale, the buyer, including any entities that are in the same controlled group with the buyer (the “Buyer Group”),is responsible for the COBRA coverage of the M&A Qualified Beneficiaries.


The Asset Purchase Rule


In an asset purchase, if the Seller Group ceases to maintain any group health plan after the sale, no one is responsible for providing COBRA coverage, and COBRA will cease for those on COBRA at the time of termination of the group health plan, and those who lose group health coverage as a result of the transaction will not be offered COBRA. However,there is an exception to this rule if the purchaser of the assets is a successor employer, then the Buyer Group will be responsible for providing COBRA coverage.


The purchaser is a “successor employer” if the termination of the seller’s group health plan was (i) in connection with the transaction and (ii) the buyer continues the business operations associated with the assets purchase without interruption or substantial change.Also note that the obligation of the successor employer to provide COBRA coverage can be triggered after the sale has closed. The obligation begins on the later of (1) the date that the Seller Group ceases to provide any group health plan to any employee, or (2) the date of the asset sale. So if the Seller Group terminates its group health plan months after the transaction, but still in connection with the transaction, and the buyer otherwise meets the qualifications of a successor employer, then the obligation could “spring back” to the Buyer Group.


Prepare


Attention to COBRA obligations in an M&A transaction is very important, as uninsured medical costs can be significant, and an employer who is not prepared for these COBRA obligations may find themselves responsible for some potentially very expensive pay outs.


Once a buyer or seller determine that they will be responsible for COBRA coverage for M&A Qualified Beneficiaries, the following actions should be taken to prepare:

  • For fully-insured benefits, work with the insurer to make sure that the M&A Qualified Beneficiaries can be covered under the existing policy, and determine how it may affect the existing policy.

  • For self-insured benefits, review and amend plan documents, services and physician network agreements to ensure that coverage for the M&A Qualified Beneficiaries can be offered.

  • If coverage cannot be offered under existing policies or networks, explore other options such as new policies or self-insured coverage.

  • In the event of potential springing liability in an asset purchase, make preliminary inquiries so you are prepared for that eventuality.

This article is a general, high-level discussion of the COBRA rules in an M&A transaction, and the specific circumstances may complicate the outcome in a given situation. Legal counsel should be consulted to determine COBRA responsibility in an M&A transaction, and to discuss the required course of action and any options available.



© Boutwell Fay LLP 2018, All Rights Reserved.This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us.The information contained in this article is effective as of April 28, 2018.



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