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What You Need to Know: COBRA Liability in Mergers and Acquisitions

By Natalie Withers  

The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires certain group health plans to make continuation coverage available to certain individuals who would otherwise lose group health plan coverage due to a qualifying event. Employers who go through business reorganizations, such as mergers and acquisitions (M&A), will need to know whether COBRA continuation coverage must be offered and whether the group health plan of the seller or buyer must  provide COBRA continuation coverage.

General Rules
Under IRS regulations, if the seller and buyer negotiated their COBRA liability by contract as part of the sale, then the contract will determine who has an obligation to offer COBRA coverage.

If the employer who is contractually responsible for providing COBRA coverage fails to perform or if the contract is silent on COBRA coverage obligations, then the seller’s group health plan has the duty to offer COBRA coverage as long as the seller maintains a group health plan post-sale.

If the seller doesn’t maintain a group health plan post-sale, then the answer depends on whether it’s a stock sale or an asset sale.

In a stock sale, if the seller doesn’t maintain a group health plan post-sale, then the buyer is responsible for offering COBRA coverage.

In an asset sale, if the seller doesn’t maintain a group health plan post-sale and the group health plan’s termination is connected with the asset sale, then the buyer is responsible for offering COBRA coverage if the buyer continues business operations associated with the assets purchased without interruption or substantial change.

For more information, review the IRS regulations’ Q&As and examples that illustrate these general rules, including a COBRA Liability in M&A Flow Chart to help determine the right path for your business.

Article provided by our partnership with United Benefit Advisors. 

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