In a merger/acquisition scenario, must the buyer or the seller offer COBRA to qualified beneficiaries?

Buyers and sellers in a transaction are generally free to negotiate COBRA liability (and health plan obligations generally) as they see fit. So, the two parties involved in the transaction could agree to whatever they want with respect to COBRA and the employee benefit plans of the selling entity—they could even set it up with the understanding that the purchasing company will take on all COBRA obligations. Any agreement should be clearly described in the written purchase agreement. If it is, then that would control with respect to COBRA obligations. If it’s not spelled out in the agreement, then the default COBRA rules apply.

Before going into the default COBRA rules, though, we strongly suggest that entities entering into a transaction to buy/sell a company (or a division of a company) engage outside counsel to assist with the situation. An acquisition is a complicated matter, and the COBRA obligations can be large. As such, we think it’s worth getting legal advice when the situation necessitates.

As for the default rules, those generally turn on whether the acquisition involves a stock or an asset sale.

Asset Sale

In asset sales, employment is typically terminated and the buyer has to rehire employees. If the seller continues to maintain a health plan for employees, a terminated employee of the seller should be offered COBRA by the seller regardless of whether the employee is rehired by the buyer or if they are eligible for the buyer's health insurance.

For asset sales, COBRA responsibility hinges on whether the seller maintains any group health plan after the sale. If they do, then the seller is responsible for offering and maintaining COBRA coverage for any COBRA beneficiaries. Thus, if the seller continues to maintain a group health plan following the sale (e.g. seller owns multiple entities) the seller's plan would have COBRA liability for those employees terminated in connection with the sale and also for current COBRA participants.

On the other hand, if the seller ceases to provide any group health plan, the buyer continues the business operations associated with the assets purchased without interruption or substantial change, and the employees continue to be employed immediately after the sale by the buyer, then there would be no qualifying event and COBRA would not be offered. However, any employees who have been terminated/not rehired or any present COBRA participants under the seller's COBRA plan would be eligible to continue coverage through the buyer's COBRA plan. The buyer has the obligation to offer COBRA by the later of the date of the asset sale or the date the seller ceases to provide any group health plan to any employee.

Importantly, the determination of whether the seller’s group plan was terminated “in connection with” the asset sale is based on all of the relevant facts and circumstances. Thus, even if the actual plan termination occurs after the actual sale date, the termination can still be considered “in connection with” the sale (assuming the facts and circumstances support it).

Stock Sale

In stock sales, 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. However, if an employee is terminated and loses coverage as a result of the sale, then the seller should offer COBRA to such employees.

If the seller ceases to provide any group health plan to any employee as a result of the sale, then any terminated employees and any present COBRA participants under the seller's plan would be eligible to continue coverage through the buyer's plan.

Ultimately, the COBRA rules seem to be designed to ensure that employees have the opportunity to elect COBRA even when there is a merger or acquisition. So employers who find themselves involved in a merger or acquisition should work with their counsel and the other party to the transaction to ensure that the COBRA rules are adhered to.