Employee benefit plan operations, responsibilities, and liabilities should be part of the negotiated transaction. There is general guidance available for these circumstance and options available to the buyer and seller, which should be outlined along with other benefit plan decisions in the sale agreement. We recommend working with outside counsel to determine what is best for your specific circumstances.
With that said, the rules vary based on whether the transaction is a stock or asset sale. General guidance is discussed below for both scenarios.
In an asset purchase, the buyer usually purchases specific assets and certain agreed-upon liabilities of the seller. The employees of the seller are typically terminated from employment and rehired by the buyer. COBRA would be offered by the seller if the seller continues to maintain a group health plan, including the health FSA. This is true even if the employee is rehired by the buyer and eligible for the buyer's health insurance.
If a seller ceases to provide any group health plan and the buyer continues the business operations associated with the assets purchased without interruption or substantial change (aka successor employer), there is no obligation to offer COBRA to the employees who were immediately employed by the buyer after the sale because they are considered not to have experienced a COBRA triggering event.
However, IRS guidance provides two acceptable scenarios in which the health FSA coverage may continue for entities involved in an asset sale as an alternative to terminating the coverage and offering COBRA:
- Coverage under seller’s FSA with salary reductions under buyer: The seller may maintain the health FSA and the buyer either has an FSA or will create one at a designated point in time (e.g., end of the plan year). The seller and buyer may agree to have the transferred employees continue to participate for an agreed-upon period. The seller and buyer may also agree on how original salary reductions will continue as if made under the buyer’s plan.
- Coverage and salary reductions under buyer: The buyer agrees to cover the transferred employees under its health FSA for the rest of the plan year. After the asset sale, employee account balances are rolled over and all claims for reimbursement are submitted to the buyer’s FSA (even claims incurred prior to the sale but not yet paid). Then the transferred employees’ salary reductions continue for the remainder of the buyer’s plan year.
Note that under each scenario, no mid-year changes of election are permitted because eligibility is not lost as a result of the asset sale because the coverage continued. Consequently, existing FSA elections must remain for the remainder of the plan year unless there is some other qualifying event.
In a stock sale, a current employee of the seller who continues to be employed following the sale would not be offered COBRA coverage because they have not experienced a qualifying event.
Specific to the health FSA, IRS guidance provides that the buyer in a stock scenario could take advantage of the second option discussed above, available in asset sales. Another option would be for the buyer to arrange with the seller to offer COBRA-like coverage to transferred employees in order to avoid the use-or-lose rule (since COBRA is not required to be offered in a stock sale where there has been no termination of employment or other statutory COBRA trigger). Those not electing the COBRA-like coverage would still be able to submit claims for expenses incurred before the transaction during a run-out period.
Again, any decisions related to the FSA, COBRA, or health plan would need to be clearly outlined in the purchase agreement with corresponding amendments made to the Section 125 plan document and ERISA plan documents. Thus, due to the complexities inherent with mergers and acquisitions, the employers would want to work with outside counsel to ensure compliance.