Question: What are the main health and welfare plan considerations for employers that are going out of business? 

Short Answer: In a business wind-down situation, the primary concern for employees is access to major medical benefits.  Employers should be clear in communication materials that COBRA will not be an option once the organization no longer has active covered employees and the plan terminates.  The company should also take into account other items such as the FSA, the welfare benefits such as life and disability, and the need to file a final Form 5500 post-termination. 

Employers that have reached the end of the line and are in the process of winding down the business will have to balance many competing concerns, emotions, and impending deadlines as the unpleasant but necessary work to complete the process plays out.  Among those immediate issues facing the organization as the business closes is the need to address the company’s health and welfare benefits. 

The Primary Consideration: No COBRA Rights Available 

In most situations where employees voluntarily or involuntarily terminate employment, they experience a COBRA qualifying event and are presented the option to continue coverage through the employer’s group health plan via the COBRA election notice.  However, COBRA rights apply only as continuation coverage for a plan that is currently in effect.  COBRA provides the same plan coverage and benefits as is available to non-COBRA participants.  In other words, the underlying plan for active, eligible employees must exist for a COBRA qualified beneficiary to have continuation coverage rights. 

In most situations, the plan will terminate in a wind-down situation once it no longer has any employees in active coverage.  Upon plan termination, there are no COBRA rights for any individuals because there is no longer an underlying plan (through that employer, any other member of the employer’s controlled group, or any successor employer) under which to continue coverage. 

Employees are often caught off guard when they learn that COBRA will not be available upon a business closure.  This makes the inapplicability of COBRA the highest priority health plan-related employee communication item in a wind-down situation. 

State Mini-COBRA Rights Also Not Available 
In addition to federal COBRA, fully insured health plans may also have access to state mini-COBRA rights (e.g., Cal-COBRA in California) depending the state in which the policy is sitused.  However, as with federal COBRA, once the plan terminates there will no longer be any state mini-COBRA continuation coverage available.  There are no state mini-COBRA rights for existing COBRA participants or those terminated at the time of the closing once the employer ceases to offer the fully insured plan for active employees. 

Exception: COBRA M&A Qualified Beneficiaries in Event of Last-Minute Acquisition 
Employers that are in the process of winding down the organization will in some cases be thrown a lifeline to continue operations in some form through a buyer that intends to purchase the company’s stock or assets.   

While the specific rules vary slightly depending on whether such a transaction is a stock or asset deal, the general rule is that “M&A qualified beneficiaries” will be able to continue coverage through COBRA under the buyer’s plan after the seller’s plan terminates.  M&A qualified beneficiaries include COBRA participants already receiving COBRA coverage with the seller’s plan before the deal (i.e., existing COBRA qualified beneficiaries), as well as individuals who lose coverage under the seller’s plan in connection with the deal (i.e., seller’s employees who do not continue employment upon the acquisition buy the buyer).  

If the buyer is purchasing the assets of the company, the buyer must be considered a “successor employer” to be required to assume the COBRA obligations for the M&A qualified beneficiaries.  To qualify as a “successor employer,” the buyer must—among other requirements—be continuing the business operations associated with the assets without interruption or substantial change.  This asset acquisition COBRA obligation for buyers applies even in connection with certain bankruptcies.  

For more details:  

• Newfront COBRA for Employers Guide 

• Newfront M&A for H&W Benefits Guide 

• COBRA M&A Rules for Stock and Asset Deals 

When Health Coverage Ends: Coverage Typically Continues Through End of Month (But Confirm!) 

Where the employer’s health benefits are fully insured, most carriers will agree to continue the plan’s coverage through the end of the month in which the plan terminates.  For example, if the plan terminated on June 12, most carriers would continue coverage through June 30 (even if the business operations cease as of June 12).  

A few key considerations on this point: 

• This is generally conditioned on ensuring the employer fully pays the premium for the final month.  That may be problematic in some situations where the employer is short on funds and/or unable to take the employee-share of the premium for the second half of the month because the business winds down prior to that payroll period. 

• Insurance carriers are not always consistent on this point.  Employers in a wind-down situation should always confirm that the carrier will accommodate coverage through the end of the month following closure before communicating to employees.  

• Non-health carriers for welfare benefits such as life, disability, and AD&D are more likely to terminate coverage immediately (i.e., mid-month) upon the employer ceasing operations. 

Where some or all the plan’s health benefits are self-insured, employers will need to coordinate with the plan’s third-party administrator (TPA) to confirm the specifics of the coverage end-date and run-out period.  It is likely that the TPA will agree to continue administration through the end of the month in the same manner as a typical fully insured plan, but employers will need to confirm that point prior to communicating with employees.  

Alternative Coverage Options: The Marketplace, Other Employers, and Medicare 

Even though COBRA generally will not be an option for employees once the company ceases to exist, there are multiple other potential avenues for employees to access health coverage.  

Exchange/Marketplace Individual Policy 
Most individuals in the U.S are eligible for individual coverage on the Exchange/Marketplace.  Upon loss of employer-sponsored major medical coverage when the plan terminates, employees will experience a special enrollment period to enroll in an individual policy on the Exchange.  Such individual policies are guaranteed issue and cannot impose pre-existing condition exclusions.  Depending on income levels, employees may also be eligible for subsidized coverage though the premium tax credit and/or cost-sharing reductions.  

• Where to Direct Employees: HealthCare.gov: The Marketplace in Your State 

Employer Coverage Through Spouse/Domestic Partner/Parent  
Upon termination of the plan, employees lose eligibility for coverage and therefore experience a HIPAA special enrollment event.  That event provides the right of the employee’s spouse, domestic partner, or parent to enroll the employee through their employer-sponsored group health plan coverage, if eligible, within 30 days of the event.  Accordingly, employers should also make employees aware that they may be able to join another company’s group health plan if they have an employed spouse/domestic partner, or (if they are under age 26) and their parent has health coverage available through the workplace.  

• Where to Direct Employees: DOL EBSA: HIPAA Special Enrollment Rights Fact Sheet 

Medicare for Age 65+ 
Upon losing employer-sponsored coverage, age 65+ employees will have an eight-month special enrollment period to enroll in Medicare.  The hospital coverage component of Medicare (Part A) will also be retroactive for six months (or, if sooner, to the point of the 65^th birthday) if the employee has any emergency expenses prior to completing the Medicare enrollment process.  

• Where to Direct Employees: Medicare.gov: When Can I Sign Up for Medicare? 

Avoiding Forfeitures: Health FSA and Dependent Care FSA Considerations 
The health FSA and dependent care FSA are components of an employer’s Section 125 cafeteria plan.  Section 125 (and its implementing regulations) imposes very strict requirements on the administration of cafeteria plans.  One of the most fundamental of these limitations is that all FSA elections are subject to the use-it-or-lose-it rule.  Upon termination of participation mid-year (in this case caused by plan termination), the rule requires forfeiture of any remaining unreimbursed funds after the end of the applicable run-out period. 

Accordingly, employers should communicate with employees that they can incur reimbursable expenses only through the date in which the FSA terminates.  Any remaining balance upon plan termination (plus any available run-out period) will be forfeited.  Employers should coordinate in advance with the FSA TPA to confirm the run-out period that will be available to submit claims (incurred pre-termination) after the plan is terminated.  

There is no option for employers to make exceptions to these rules in the plan termination context to refund employees for their unreimbursed FSA amounts.  Engaging in this practice would risk disqualifying the entire Section 125 cafeteria plan, potentially resulting in all elections becoming taxable to all employees.  For more details: 

• Newfront Section 125 Cafeteria Plan Guide 

• FSA Experience Gains from Forfeitures 

• When FSA Expenses Are Incurred 

 Plan Termination, SMM, and Final Form 5500 

There should be a plan amendment executed that is designed to formally terminate the ERISA health and welfare benefits, which are typically bundled through an umbrella mega wrap plan document encompassing all such H&W benefits.  That should also include an SMM informing employees of the plan termination, which can be the communication materials discussed throughout this post.  

A final (and likely short plan year) Form 5500 will be due seven months after plan termination and, if any, once all plan assets have been distributed and all liabilities have been satisfied.  This should be accompanied by a Summary Annual Report distributed to the former employees within two months after the filing.  Although preparing and filing a final Form 5500 can be a challenge once the company as plan sponsor ceases to exist, there are significant potential penalties that can arise for failure to file.  The DOL has in at least one case enforced these penalties against a business that went bankrupt and apparently was no longer in operation.  

Employers should take steps to identify the internal individual(s) who will take the responsibility for reviewing and signing the Form 5500 in the months following the business closure, as well as employee contact information records needed to distribute the SAR.  There should also be communication with the employer’s regular partner in completing Form 5500 filings (e.g., the broker/consultant) to ensure there will be an ongoing communication channel for as long as needed to complete the filing process.  Where necessary, there are technical Chapter 7 and Chapter 11 bankruptcy rules that hold the bankruptcy trustee responsible for ERISA plan administrator wind-down functions and costs.  

• For more details: Newfront ERISA for Employers Guide 

Template Employee Communication Materials 

Each company wind-down situation will have specific facts and circumstances that should be addressed to ensure employees are appropriately informed about the effect of the business closure on their health and welfare plan benefits.  The following is merely a template that employers can use as a starting point and modify as needed to fully communicate the relevant issues to the affected employees.  

Keep in mind that business closures are often a surprising, disruptive, chaotic, and emotional period for employees.  These communications will likely be just one component of a series of materials to which employees will need to quickly read and react, and therefore they should remain concise and straightforward.  

Template employee communication:  

IMPORTANT NOTICE: TERMINATION OF [EMPLOYER] HEALTH AND WEFLARE PLAN BENEFITS  

This notice serves as a Summary of Material Modifications (“SMM”) to the [PLAN NAME] (“Plan”) that is effective as of [PLAN TERMINATION DATE].  You should review this information carefully, share it with your covered dependents, and keep it with your Summary Plan Description (“SPD”) for future reference.  In the event of a conflict between the official Plan Document and this SMM, the SPD, or any other communication related to the Plan’s termination, the official Plan Document will govern.  Contact [CONTACT INFORMATION] if you have any questions or to request a paper copy of this notice.  

Dear [EMPLOYER] Employees,  

The purpose of this notice is to inform you that the Plan will terminate on [PLAN TERMINATION DATE] as a result of the company winding down its operations.  We want to share this information with you, as well as some steps to secure alternative coverage that you and your family may consider taking at this time.  If you are currently covered under the Plan, your coverage will terminate as of the following dates: 

• [APPLICABLE BENEFITS SUCH AS LIFE, DISABILITY, AD&D, STD, LTD, HEALTH FSA, DEPENDENT CARE FSA]: [DATE OF PLAN TERMINATION] 

• [APPLICABLE BENEFITS SUCH AS MEDICAL, DENTAL, VISION]: [END OF THE MONTH FOLLOWING THE DATE OF PLAN TERMINATION] 

COBRA will not be available to continue coverage under any of the Plan’s health benefits because the Plan is terminating.  Please consider making any appointments with health care professionals or filling any important prescriptions prior to the loss of coverage to minimize the disruption to you and your family.  

The following are some options for health coverage after [DATE HEALTH COVERAGE ENDS]:  

1. Marketplace Individual Coverage: You can enroll in an individual policy pursuant to the Marketplace available in your state.  Your loss of coverage through the Plan is a special enrollment event that will allow you to enroll mid-year year. For more details: HealthCare.gov: The Marketplace in Your State

2. Other Employer-Sponsored Coverage: If your spouse, domestic partner, or parent has coverage available through their workplace, your loss of coverage through the Plan is a HIPAA special enrollment event that allows you to enroll in that other plan mid-year, if eligible.  For more details: DOL EBSA HIPAA Special Enrollment Rights Fact Sheet 

3. Medicare (Age 65+): If you are age 65 or older, your loss of coverage through the Plan is a special enrollment event that allows you to enroll in Medicare mid-year.  For more details: Medicare.gov: When Can I Sign Up for Medicare? 

If you participate in the health FSA or dependent care FSA, we encourage you to spend down your FSA balance before [DATE OF PLAN TERMINATION].  You will not be able to incur any claims (i.e., reimbursable expenses) after that date, and all eligible claims incurred prior to [DATE OF PLAN TERMINATION] must be submitted no later than [RUN-OUT PERIOD].  Pursuant to IRS requirements, any amount remaining in your FSA after that date will be forfeited.  

Please reach out to [CONTACT INFORMATION] with any questions you have about the Plan’s termination.   

Relevant Cites:  

Treas. Reg. §54.4980B-7: 

Q-1. How long must COBRA continuation coverage be made available to a qualified beneficiary? A-1. (a) Except for an interruption of coverage in connection with a waiver, as described in Q&A-4 of §54.4980B-6, COBRA continuation coverage that has been elected for a qualified beneficiary must extend for at least the period beginning on the date of the qualifying event and ending not before the earliest of the following dates— 

… 

(3) The date upon which the employer or employee organization ceases to provide any group health plan (including successor plans) to any employee; 

California Insurance Code §10128.57: 

(a) The continuation coverage provided pursuant to this article shall terminate at the first to occur of the following: 

… 

(7) The employer, or any successor employer or purchaser of the employer, ceases to provide any group benefit plan to his or her employees. 

11 USC §704(a)(11): 

(a) The trustee shall— 

… 

(11) if, at the time of the commencement of the case, the debtor (or any entity designated by the debtor) served as the administrator (as defined in section 3 of the Employee Retirement Income Security Act of 1974) of an employee benefit plan, continue to perform the obligations required of the administrator; 

11 USC §1106(a)(1): 

(a) A trustee shall— 

(1) perform the duties of the trustee, as specified in paragraphs (2), (5), (7), (8), (9), (10), (11), and (12) of section 704(a); 

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship.  Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).