“Who has to pay for COBRA coverage?” is a question we often hear from transaction lawyers and their clients in a stock sale or an asset sale. COBRA requires some employers to provide certain participants and their beneficiaries with group health plan coverage after certain events occur that would otherwise end that coverage. Here is an overview of how the COBRA rules work in an acquisition.
Questions To Be Asked
- Is the transaction a stock sale or an asset sale?
- Who (if anyone) has had a COBRA qualifying event?
- If there was a COBRA qualifying event, which employer has to provide coverage?
Stock Sale Or Asset Sale?
The COBRA rules are different for stock sales versus asset sales. We’ll explain those differences in a moment.
M&A Qualified Beneficiaries
In either a stock sale or an asset sale, we identify the people who must be offered COBRA coverage – the “M&A qualified beneficiaries.” These people experienced a “qualifying event” before or in connection with the sale and are employees whose last employment prior to the qualifying event was associated with (or their qualifying event occurred in connection with) either the:
- Acquired organization in the case of a stock sale; or
- Assets being sold in the case of an asset sale.
Qualifying Event
We then look at whether the M&A qualified beneficiaries experienced a qualifying event. If not, no COBRA coverage has to be offered. In a stock sale, the sale itself is not a qualifying event if the employee continues to be employed by the acquired organization after the sale (even if the employee is no longer provided with group health plan). However, an asset sale is a qualifying event unless either (i) the buyer is a “successor employer” (see below) and the employee is hired by the buyer immediately after the sale, or (ii) the employee keeps their coverage under the seller’s group health plan after the sale. A “successor employer” is an employer in one of three categories:
- It continues the business operations associated with the purchased assets without interruption or substantial change;
- It results from a consolidation, merger or similar restructuring of the employer; or
- It is a “mere continuation” of the employer.
Who Is Responsible?
We next look at whether the buyer or seller must provide COBRA coverage. (Note: special rules apply if the seller and/or buyer are part of a controlled group.)
If the seller continues to maintain a group health plan, the seller must provide COBRA coverage to the M&A qualified beneficiaries. If the seller terminates its group health plan in connection with the sale, the result depends on whether the transaction was a stock sale or an asset sale. If it was:
- A stock sale, the buyer’s group health plan has to provide COBRA coverage.
- An asset sale, the buyer’s group health plan has to provide COBRA coverage only if the buyer continues the business operations associated with the assets without interruption or substantial change.
Can You Negotiate Your Way Out Of COBRA Responsibility?
The seller and the buyer can negotiate COBRA coverage responsibility. However, if the party responsible under the contract fails to perform, COBRA must be provided as described above.
What To Do?
Avoid unpleasant post-closing discussions by deciding in advance how COBRA will be handled and make it part of the purchase agreement. This article is a broad overview. If you’d like advice specific to your transaction, please contact us.
