Lugar de Noticias Haynes and Boone
In January, the Internal Revenue Service issued final regulations under the Consolidated Omnibus Reconciliation Act of 1985, as amended (“COBRA”) providing detailed guidance on COBRA liability in asset transfers and stock sales. The regulations are effective for all transactions that occur on or after January 1, 2002.
Under these regulations, the general rule is that the buyer and seller may allocate COBRA obligations by contract. However, when the contract is silent or the contract’s terms are not followed, the regulations will govern which party is liable to provide COBRA continuation coverage.
COBRA is triggered by a qualifying event with a loss of coverage, such as the termination of employment. The regulations apply to asset transfers and stock sales. A transfer of substantial assets, like a plant or division or substantially all of the assets of a trade or business is treated as an asset sale (“asset sale”). A stock sale is the transfer of stock in an entity so that the entity becomes a member of a different controlled group. For an asset sale, a qualifying event occurs when the transaction closes and the employees’ employment with the seller terminates and they lose coverage under the seller’s group health plan. In a stock sale, if the employment continues with the entity whose stock is sold, there is no qualifying event. Asset Sales
In an asset sale, the seller is required to offer COBRA coverage to any of its employees whose employment and coverage terminated in connection with the asset sale regardless of whether or not the buyer is providing group health plan coverage to the transferred employees. If the seller ceases to offer any group health plan within its controlled group in connection with the asset sale, the regulations provide the buyer may be responsible for offering COBRA continuation coverage in certain circumstances to the seller’s employees and dependents of such employees who experienced a qualifying event prior to or in connection with the sale (i.e., termination of employment) (the “M&A qualified beneficiaries”). The M&A qualified beneficiaries include employees and dependents who: (1) are on COBRA as of the date of the sale, (2) are entitled to elect COBRA at the time of the sale, (3) previously were improperly not given the right to elect COBRA (e.g., notification failure), (4) were improperly denied COBRA, (5) were denied group health plan coverage under circumstances where the denial was in violation of the law, or (6) were employed by the seller at the sale, provided for individual’s in (1) through (6) above, the employee’s last employment was with the business sold.
The buyer’s obligation to provide COBRA coverage to M&A qualified beneficiaries arises if: (1) the selling group terminates all of its group health plans in connection with the asset transfer, and (2) the buying group is a successor employer by continuing the business operations associated with the assets purchased from the selling group without interruption or substantial change. The buyer’s obligation to offer COBRA continuation coverage begins on the later of the following: (i) the date the selling group terminates its group health plan, or (ii) the date of the asset sale. The obligation to provide COBRA coverage to M&A qualified beneficiaries from an asset sale continues until the earlier of the expiration of each qualified beneficiary’s maximum coverage period under the statute or until the buying group ceases to maintain a group health plan. The asset transfer rules apply to purchases in connection with a bankruptcy proceeding under Title 11 of the United States Code. Whether the seller terminated all group health plans in connection with an asset transfer is based upon the facts and circumstances. Stock Sales
In a stock sale, there generally is not a qualifying event (i.e., a stock sale by itself does not cause a termination of employment); thus the seller may not have to offer COBRA to the employees transferred with the entity sold solely as the result of the stock sale. This rule applies even if the buyer does not offer group health plan coverage. In a stock sale, the M&A qualified beneficiaries are those employees and dependents of employees whose last employment was with the entity sold. Thus, the same group of M&A qualified beneficiaries were listed in (1) through (6) above for an asset sale will exist with a stock sale provided their last employment was with the entity whose stock was sold. The buyer is responsible for offering COBRA continuation coverage to M&A qualified beneficiaries in a stock sale if the selling group stops providing group health plan coverage to any employee in connection with the sale. The buying group’s obligation to provide COBRA to M&A qualified beneficiaries from the stock sale begins on the later of the following two dates: (i) the date the selling group terminates its group health plan, or (ii) the date of the stock sale. The obligation to provide COBRA to the M&A qualified beneficiaries from a stock sale continues until the earlier of the expiration the M&A qualified beneficiaries’ maximum COBRA coverage period or the termination of the buying group’s health plan. The determination of whether the selling group terminates all of its group health plan in connection with the business reorganization is based upon all of the relevant facts and circumstances. Impact
This means transaction documents will need to address (1) the allocation of COBRA obligations, (2) indemnification, (3) provide for either access to or the transfer of copies of seller’s group health plan records on COBRA for the 36-month period immediately preceding the transaction date, and (4) request new representations and covenants. Failure to obtain records or access to records could leave a buyer defending a suit for COBRA coverage with no records to aid in its defense.
If you have any questions about the new COBRA regulations, please contact one of the authors listed at the top of the page.