COBRA: Mergers and Acquisitions

What happens to beneficiaries who are enrolled in COBRA when a merger or acquisition occurs?  The Internal Revenue Service (IRS) has some rather thorough and complex guidelines that address COBRA issues when business reorganizations occur, including mergers and acquisitions. In an effort to simplify an otherwise complex situation, we can generally break down the guidance as follows:

  1. If the selling entity continues to maintain a group health plan after the sale has been completed, then the selling entity must continue to offer COBRA to qualified beneficiaries.

  2. If the selling entity terminates its group health plan in connection with the sale, then the buying entity must make COBRA available to qualified beneficiaries, assuming the buying entity has its own group health plan in place. If the selling entity terminates its group health plan and the buying entity does not have a group health plan in place, neither party has the obligation to offer COBRA.

  3. The buying and selling entities may also structure a contractual agreement which allocates the responsibility of making COBRA available to qualified beneficiaries. However, if the entity who is contractually assigned to provide COBRA fails to meet its responsibilities, then the entity that has the obligation to provide COBRA (according to bullets #1 and #2) assumes the liability for making COBRA available to qualified beneficiaries.

It should also be noted that the employment status of actively employed workers at the selling entity may be affected as a result of the merger or acquisition. For example, some employees at the selling entity may lose their job or experience a reduction in hours. To the extent a change in employment status results in a loss of coverage under the group health plan, then COBRA should be offered to those affected individuals. The same rules as outlined above would apply.
For more details, please refer to Reg § 54.4980B-9.

The materials contained within this communication are provided for informational purposes only and do not constitute legal or tax advice.