The COBRA rules apply differently to stock and asset deals.

**Question: **How do the COBRA M&A rules apply to a stock deal vs. an asset deal?

This is a two part response.

Compliance Team Answer:

Part I: Stock Deal

In a stock sale, if the selling group ceases to provide any group health plan to any employee (and the termination of the seller’s plan was in connection with the sale), the buyer’s group health plan is liable for COBRA coverage.  This means that the buyer’s group health plan has the obligation to make COBRA continuation coverage available to all M&A qualified beneficiaries with respect to that stock sale.

M&A qualified beneficiaries are defined to mean a COBRA participant whose qualifying event occurred prior to or in connection with the sale.  This includes:

1. COBRA participants already receiving COBRA coverage with seller’s plan before the sale; and

2. Individuals who lose coverage under seller’s plan (i.e., experience a COBRA qualifying event) in connection with the sale.

3. The buyer’s plan has the obligation to begin offering COBRA to the M&A qualified beneficiaries beginning on the later of a) the date the seller ceases to provide any group health plan to any employee, or b) the date of the stock sale.

Regulations:

Treas. Reg. §54.4980B-9, Q/A-4:

**Q-. 4. . ** Who is an M&A qualified beneficiary?

**A-4. **(a) Asset sales: In the case of an asset sale, an individual is an M&A qualified beneficiary if the individual is a qualified beneficiary whose qualifying event occurred prior to or in connection with the sale and who is, or whose qualifying event occurred in connection with, a covered employee whose last employment prior to the qualifying event was associated with the assets being sold.

(b) Stock sales: In the case of a stock sale, an individual is an M&A qualified beneficiary if the individual is a qualified beneficiary whose qualifying event occurred prior to or in connection with the sale and who is, or whose qualifying event occurred in connection with, a covered employee whose last employment prior to the qualifying event was with the acquired organization.

(c) In the case of a qualified beneficiary who has experienced more than one qualifying event with respect to her or his current right to COBRA continuation coverage, the qualifying event referred to in paragraphs (a) and (b) of this Q&A-4 is the first qualifying event.

Treas. Reg. §54.4980B-9, Q/A-8:

**Q-. 8. . ** Which group health plan has the obligation to make COBRA continuation coverage available to M&A qualified beneficiaries in a business reorganization?

**A-8. **…

(b)(1) In the case of a stock sale, if the selling group ceases to provide any group health plan to any employee in connection with the sale, a group health plan maintained by the buying group has the obligation to make COBRA continuation coverage available to M&A qualified beneficiaries with respect to that stock sale. A group health plan of the buying group has this obligation beginning on the later of the following two dates and continuing as long as the buying group continues to maintain a group health plan (but subject to the rules in §54.4980B-7, relating to the duration of COBRA continuation coverage)—

(i) The date the selling group ceases to provide any group health plan to any employee; or

(ii) The date of the stock sale.

(2) The determination of whether the selling group’s cessation of providing any group health plan to any employee is in connection with the stock sale is based on all of the relevant facts and circumstances. A group health plan of the buying group does not, as a result of the stock sale, have an obligation to make COBRA continuation coverage available to those qualified beneficiaries of the selling group who are not M&A qualified beneficiaries with respect to that sale.

Part II: Asset Deal

Buying Group Obligated to Provide COBRA:

In an asset sale, a group health plan of the buying group will be obligated to make COBRA coverage available to “M&A qualified beneficiaries” if:

• The seller ceases to provide any group health plan to any employee;

1. The cessation occurs in connection with the sale; and

2. The buying group continues the business operations associated with the assets purchased without interruption or substantial change.

An “M&A qualified beneficiary” is defined to mean a COBRA qualified beneficiary whose qualifying event occurred prior to or in connection with the asset sale.  This includes those QBs already receiving COBRA before the sale under a plan of the seller (as a consequence of employment associated with the assets of the entity being sold), and those QBs who experience their QE in connection with the asset sale.

The buying group is referred to as a “successor employer.”  The successor employer has the obligation to make COBRA available to all M&A qualified beneficiaries with respect to that asset sale.  This obligation arises as of the later of (a) the date that the selling group ceases to provide any group health plan to any employee, or (b) the date of the asset sale.

Selling Group Obligated to Provide COBRA:

If the selling group maintains any group health plan after the sale, then a group health plan maintained by the selling group will remain liable for providing COBRA to the M&A qualified beneficiaries with respect to the sale.

Contractual Shifting of Liability

These are the general default rules that apply in an asset sale where the seller terminates its group health plan.  As a general matter, the buyer and seller may contractually allocate the responsibility to make COBRA coverage available to M&A qualified beneficiaries in a different manner under the terms of the purchase and sale agreement.

However, there will effectively be no other way to shift COBRA responsibility in an asset deal where the seller terminates its group health plan.  This is because where the seller ceases to offer any group health plan, the COBRA liability will spring to the buyer automatically and regardless of any contract provisions to the contrary.

Regulations:

Treas. Reg. §54.4980B-9, Q/A-4(a):

**Q-4. ** Who is an M&A qualified beneficiary?

**A-4. **(a) Asset sales: In the case of an asset sale, an individual is an M&A qualified beneficiary if the individual is a qualified beneficiary whose qualifying event occurred prior to or in connection with the sale and who is, or whose qualifying event occurred in connection with, a covered employee whose last employment prior to the qualifying event was associated with the assets being sold.

Treas. Reg. §54.4980B-9, Q/A-7:

**Q-7. ** In a business reorganization, are the buying group and the selling group permitted to allocate by contract the responsibility to make COBRA continuation coverage available to M&A qualified beneficiaries?

**A-7. **Yes. Nothing in this section prohibits a selling group and a buying group from allocating to one or the other of the parties in a purchase agreement the responsibility to provide the coverage required under §§54.4980B-1 through 54.4980B-10. However, if and to the extent that the party assigned this responsibility under the terms of the contract fails to perform, the party who has the obligation under Q&A-8 of this section to make COBRA continuation coverage available to M&A qualified beneficiaries continues to have that obligation.

Treas. Reg. §54.4980B-9, Q/A-8:

(a) In the case of a business reorganization (whether a stock sale or an asset sale), so long as the selling group maintains a group health plan after the sale, a group health plan maintained by the selling group has the obligation to make COBRA continuation coverage available to M&A qualified beneficiaries with respect to that sale. This Q&A-8 prescribes rules for cases in which the selling group ceases to provide any group health plan to any employee in connection with the sale. Paragraph (b) of this Q&A-8 contains these rules for stock sales, and paragraph (c) of this Q&A-8 contains these rules for asset sales. Neither a stock sale nor an asset sale has any effect on the COBRA continuation coverage requirements applicable to any group health plan for any period before the sale.

(c)(1) In the case of an asset sale, if the selling group ceases to provide any group health plan to any employee in connection with the sale and if the buying group continues the business operations associated with the assets purchased from the selling group without interruption or substantial change, then the buying group is a successor employer to the selling group in connection with that asset sale. A buying group does not fail to be a successor employer in connection with an asset sale merely because the asset sale takes place in connection with a proceeding in bankruptcy under Title 11 of the United States Code. If the buying group is a successor employer, a group health plan maintained by the buying group has the obligation to make COBRA continuation coverage available to M&A qualified beneficiaries with respect to that asset sale. A group health plan of the buying group has this obligation beginning on the later of the following two dates and continuing as long as the buying group continues to maintain a group health plan (but subject to the rules in §54.4980B-7, relating to the duration of COBRA continuation coverage)—

(i) The date the selling group ceases to provide any group health plan to any employee; or

(ii) The date of the asset sale.

(2) The determination of whether the selling group’s cessation of providing any group health plan to any employee is in connection with the asset sale is based on all of the relevant facts and circumstances. A group health plan of the buying group does not, as a result of the asset sale, have an obligation to make COBRA continuation coverage available to those qualified beneficiaries of the selling group who are not M&A qualified beneficiaries with respect to that sale.

Treas. Reg. §54.4980B-9, Q/A-8(d), Example 8:

_Example (8). _(i) Selling Group S provides group health plan coverage to employees at each of its operating divisions. S sells substantially all of the assets of all of its divisions to Buying Group P. P hires most of S’s employees on the date of the purchase of S’s assets, retains those employees in the same positions that they had with S before the purchase, and continues the business operations of those divisions without substantial change or interruption. P provides these employees with coverage under a group health plan. S continues to employ a few employees for the principal purpose of winding up the affairs of S in preparation for liquidation. S continues to provide coverage under a group health plan to these few remaining employees for several weeks after the date of the sale and then ceases to provide any group health plan to any employee.

(ii) Under these facts, the cessation by S to provide any group health plan to any employee is in connection with the asset sale to P. Because of this, and because P continued the business operations associated with those assets without substantial change or interruption, P is a successor employer to S with respect to the asset sale. Thus, a group health plan of P has the obligation to make COBRA continuation coverage available to M&A qualified beneficiaries with respect to the sale beginning on the date that S ceases to provide any group health plan to any employee. (A group health plan of S retains this obligation for the several weeks after the date of the sale until S ceases to provide any group health plan to any employee.)