Can the Buyer in an Asset Sale Ever Have COBRA Obligations as a Result of the Sale?
The question raised by this blog post can be answered with one sentence:
The buyer in an asset sale will be obligated to make COBRA continuation coverage available to M&A qualified beneficiaries with respect to that asset sale if the buyer is a successor employer.
Although this is an accurate statement and succinct answer, for this sentence to have any meaning both “successor employer” and “M&A qualified beneficiary” must be defined.
The buyer in an asset sale is a “successor employer” if (1) the seller ceases to provide any group health plan to any employee; (2) the cessation occurs in connection with the sale; and (3) the buyer continues the business operations associated with the assets purchased without interruption or substantial change. In these situations, it is the buyer’s plan (assuming buyer sponsors a health plan) that must offer COBRA coverage to any M&A beneficiary. The definition of successor employer is fairly straight forward, and the IRS provides little clarification, only adding that the determination of whether a cessation of a plan is in connection with a sale should be based on all the facts and circumstances.
The buyer must be aware that although they might not have COBRA obligations at the time of sale, obligations might arise at a later date. Buyers can be subject to this “springing liability” when the seller maintains a group health plan immediately after the sale, but terminates all group health plans at a later date. As long as the cessation of the health plan is in connection with the sale, the buyer will have COBRA obligations towards all M&A qualified beneficiaries. If it is determined that the buyer in an asset sale is a successor employer, then the buyer’s COBRA obligations to M&A qualified beneficiaries will begin on the later of the date that the selling group ceases to provide any group health plan to any employee, or the date of the asset sale.
For example, assume that Selling Co. sold substantially all of its assets to Buying Inc., but continued to provide health care coverage for a small number of employees after the sale. Under these facts, Buying Inc. would not be a successor employer and would have no COBRA obligations as a result of the sale. However, if at a later date Selling Co. has been sufficiently wound up and terminates its health plan, then COBRA obligations could spring to Buying Inc. At this later date, Buying Inc. would be a successor employer if it continued the business operations associated with the assets purchased, and therefore would have to provide COBRA continuation coverage for all M&A qualified beneficiaries.
An individual is an M&A qualified beneficiary if: (1) the individual is a qualified beneficiary under COBRA; (2) whose qualifying event occurred prior to or in connection with the sale; and (3) who is (or, for a spouse or dependent, whose qualifying event occurred in connection with) a covered employee whose last employment prior to the qualifying event was associated with the assets being sold. This definition is not as straight forward, and will need some unpacking.
A “qualified beneficiary” is a defined term under COBRA, and includes individuals that lose employer health coverage due to “qualifying events,” such as an employee’s termination of employment or divorce from a covered employee. In addition to the standard COBRA qualifying events, the asset sale itself can be a qualifying event. The sale will be a qualifying event for a covered employee whose employment before the sale was associated with the purchased assets, unless (1) the buying group is a successor employer; and (2) the covered employee is employed by the buying group immediately after the sale. The following example illustrates these nuances.
Assume that prior to an asset sale, Selling Co. had 50 employees, all of whom were enrolled in health coverage under the Selling Co. plan, and the plan was providing COBRA continuation coverage for 1 former employee. Selling Co. sells substantially all of its assets to Buying Inc., Selling Co. terminates all of its health plans at the time of the sale, and Buying Inc. continues the business operations with 40 of the 50 former Selling Co. employees.
In this example, Buying Inc. is a successor employer and is obligated to make COBRA continuation coverage available to all M&A qualified beneficiaries. The former employee receiving COBRA continuation coverage from Selling Co. immediately before the sale is an M&A qualified beneficiary. This former employee was a qualified beneficiary (as evidenced by already being on COBRA continuation coverage) whose qualifying event occurred prior to the sale, and immediately before his qualifying event, his employment with Selling Co. was in connection with the assets sold in the asset sale. The 10 employees that were terminated in connection with the sale are also M&A qualified beneficiaries. For these employees, the asset sale was a qualifying event. In contrast, the 40 employees that were employed by Buying Inc. directly after the sale did not lose coverage under the Selling Co. plan due to a qualifying event. The asset sale was not a qualifying event for them because Buying Inc. is a successor employer, and they were all employed by Buying Inc. immediately after the sale. These 40 employees are not qualified beneficiaries, and therefore not M&A qualified beneficiaries. As a result of this asset sale, Buying Inc. is obligated to make COBRA continuation coverage available for the 1 former employee and the 10 employees that were not hired by Buying Inc.
If Buying Inc. was not a successor employer in this example, the COBRA responsibility would not only fall on Selling Co. for the 1 individual already on COBRA and the 10 not hired by Buying Inc., but Selling Co. would also have to offer COBRA to the 40 employees fired by Buying Inc.
Buyers and sellers may contract to allocate COBRA responsibility to the party who does not have it under the COBRA regulations, and if the party with the COBRA responsibility fulfils its COBRA obligations under the contract, the other party has no responsibility. However, if the party fails to fulfil its COBRA obligation under the contract, the responsibility legally goes back to the party who had the obligation under the COBRA regulations.