Who’s Responsible for COBRA During a Merger or Acquisition?
When organizations go through a merger or acquisition, it is important to understand who is liable for offering employees and qualified beneficiaries COBRA coverage. This includes current COBRA qualified beneficiaries, employees who are being terminated in association with the merger or acquisition, and in some cases, employees who are being included in the merger or acquisition.
In order to understand who has the liability to offer or maintain COBRA coverage, the employer(s) should first review the business Sale Agreement between the buyer and seller to see if it addresses which employer will have the COBRA liability after the business transaction. If the Sale Agreement addresses this, the employer(s) will need to abide by the Sale Agreement.
If the Sale Agreement does not address who will have the obligation to offer COBRA after the business transaction, the standard rules of COBRA liability should be followed. Ultimately, if there is any question as to whose liability it is to offer COBRA, employers may wish to seek a legal opinion.
The following summarizes the standard rules of COBRA liability.
| Individuals already on COBRA PRIOR to the sale |
Employees terminated |
Employees hired by the Buyer as part of the sale. |
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Seller maintains a group health plan(s) after the sale. - Stock Sale NOTE: If Seller discontinues plan, liability may spring to Buyer. |
Seller is responsible for maintaining COBRA coverage | Seller is responsible for offering COBRA coverage | Employees have not experienced a COBRA qualifying event (No COBRA coverage is available) |
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Seller maintains a group health plan(s) after the sale. - Asset Sale NOTE: If seller discontinues plan, liability may spring to Buyer. |
Seller is responsible for maintaining COBRA coverage | Seller is responsible for offering COBRA coverage | Seller is responsible for offering COBRA coverage |
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Seller does not maintain a group health plan after the sale. - Asset Sale where Buyer is a successor employer |
Buyer is responsible for maintaining COBRA coverage | Buyer is responsible for offering COBRA coverage | Employees have not experienced a COBRA qualifying event (No COBRA coverage is available) |
| Seller does not maintain a group health plan after the sale. - Asset Sale where Buyer is NOT a successor employer |
COBRA coverage ends | No COBRA coverage is available | No COBRA coverage is available |
Springing COBRA Obligation
COBRA liability may transfer or “spring” from seller to buyer after the transaction has occurred (up to three years later)i.
Springing COBRA obligations can occur in the case of:
- An asset sale when the buyer is a successor employer
- A stock sale
- A merger
It does not apply in the case of an asset sale when the buyer is not a successor employer.
If at the time of a business transaction the selling group maintains a group health plan and COBRA liability, but later they terminate the plan offerings, the COBRA obligation will “spring” to the group health plans of the buyer. This can occur anytime within the maximum coverage period for any qualified beneficiary.
In addition, the springing COBRA obligation can occur in the case where the buying group does not immediately offer a group health plan, but later establishes one prior to the end of the maximum COBRA continuation period for the qualified beneficiaries (in case of a successor employer).
i The Buyer is a “successor employer” when (1) the Seller ceases to provide any group health plan in connection with the sale, and (2) the Buyer “continues the business operations associated with the assets purchased…without interruption or substantial change.
Controlled Groups or Affiliated Service Groups
There are considerations that employers should keep in mind regarding COBRA liability in the cases of mergers or acquisitions if one or both companies are part of a controlled group (parent/subsidiary or brother-sister arrangement) or an affiliated service group (ASG). Controlled groups and ASGs have an impact on where COBRA liability could reside.
If a company being sold was part of a controlled group or ASG prior to the sale, the “Selling Group” would include not just the company being sold, but all other companies that are part of the same controlled group or ASG. This applies even if the company being sold maintained benefits separated from the other employers within the Selling Group.
In the illustrations above, references to “Seller” includes the entire Selling Group. Therefore, if any company within the Selling Group maintains a group health plan after the sale, the Selling Group would retain the liability to offer COBRA, even if their benefits were maintained separately.
Consider this example:
Garden Company is the parent company of Zucchini Company. Garden Company and Zucchini Company each operate their own benefit plans independent of each other.
Zucchini Company is sold to a new owner, Vegetable Company. (This could be a stock sale or asset sale.)
After the sale, because Garden Company still operates their own plan, COBRA liability for Zucchini Company employees will default to the Garden Company plans and will not transfer to Vegetable Company. This is because Garden Company is part of the “selling group” and they continue to maintain a plan after the sale of Zucchini Company.
The parties may contractually allocate the responsibility to make coverage available under Vegetable Company if desired.
Small Group Exceptions
Employers who are eligible for the small group exception prior to a merger or acquisition may have to begin offering COBRA either immediately or after the business transaction, based on the type of business transaction. Differing factors include what type of business transaction they experience and what their new employee count is after the transaction.
The following summarizes various scenarios related to small employers.
Topics
| Stock Sale |
Asset Sale |
Merger | |
| Two small employers (each has under 20 employees), combined employee count under 20 | Buyer not subject to COBRA | Buyer not subject to COBRA | Resulting employer (new company as a result of the merger) not subject to COBRA |
| Two small employers (each has under 20 employees), combined employee count is 20 or more | Buyer subject to COBRA as of the date of the stock sale | Buyer not immediately subject to COBRA. Would be subject to COBRA based on standard counting principals* | Resulting employer subject to COBRA as of the date of the merger |
| Large employer (20+ employees) acquired by small employer (under 20 employees) | Buyer subject to COBRA as of the date of the stock sale | Buyer not immediately subject to COBRA. Would be subject to COBRA based on standard counting principals* | Resulting employer subject to COBRA as of the date of the merger |
| Small employer acquired by large employer | Buyer continues to be subject to COBRA. COBRA would now be available for qualifying events after the sale date to newly acquired employees covered under the COBRA-eligible plans. | Buyer continues to be subject to COBRA. COBRA would now be available for qualifying events after the sale date to newly acquired employees covered under the COBRA-eligible plans. | Resulting employer continues to be subject to COBRA. COBRA would now be available for qualifying events after the sale date to newly acquired employees covered under the COBRA-eligible plans. |
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Spinoff: Small employer is a spinoff from a large employer. After the spinoff, the “small employer” is not part of any controlled group and has under 20 employees. |
Guidance is not clear. Arguments can be made that new small employer had no prior employees. Arguments can also be made that there was a related parent company in the prior year. Seek advice of legal counsel. | Small employer exception would apply. No employees in prior year. | N/A |
*Standard counting principals means that the employer would look at their employee count on the average working day in the prior calendar year. In the case of an asset sale, employees of the seller are not considered until after the date of the sale. For example:
- If a Buyer with 15 employees acquires a company on April 1,2031 which had 7 employees - In 2032 they would be subject to COBRA as for more than half of the year, they had more than 20 employees.
- If a Buyer with 15 employees acquires a company on August 1, 2031 which had 7 employees - In 2032 they would NOT be subject to COBRA, as for more than half of the year, they had less than 20 employees.