Generally, purchasers prefer to acquire businesses by purchasing the assets of the selling entity, rather than acquiring its stock. One of the advantages of an asset sale versus a stock sale is that the purchaser can avoid assuming most of the liabilities associated with the selling entity. However, many purchasers are unaware that they may be responsible for providing COBRA continuation coverage to employees of the selling entity as a “successor employer” under Treas. Reg. §54.4980B-9.
An asset sale is a qualifying event for any covered employees (and with respect to the spouse and dependent children of such employee) whose employment immediately before the sale was associated with the purchased assets, unless that employee is employed by the purchaser immediately after the sale or that employee does not lose coverage under the selling entity’s group health plan. Treas. Reg. §54.4980B-9 (Q-6). A “qualifying event” includes any event that causes a covered employee (or the spouse or dependent child of such covered employee) to lose coverage under a group health plan. Treas. Reg. §54.4980B-4 (Q-1). The qualifying event (or loss of health care coverage) gives rise to an obligation to provide each covered employee (for which a qualifying event has occurred) with the opportunity to elect to receive the same group health plan coverage that the employee had on the day before the qualifying event occurred. Treas. Reg. §54.4980B-5.
In the case of an asset sale, if the selling entity terminates its group health plan (i.e. because it sold all of its assets and no longer operates a business), then the purchaser is a successor employer if it continues the business operations associated with the purchased assets. Treas. Reg. §54.4980B-9(Q-8). If the purchaser is a successor employer, then the group health plan of the purchaser has the obligation to provide COBRA coverage to all Merger & Acquisition (M&A) qualified beneficiaries. Ibid. “M&A qualified beneficiaries” include all employees (or the spouse or dependent child of such employee) whose qualifying event occurred prior to, or in connection with, the asset sale and whose employment was associated with the assets sold. Treas. Reg. §54.4980B-9 (Q-4).
This can result in the purchaser being obligated to provide COBRA coverage for former employees of the selling entity that were terminated prior to the sale that are eligible for, or who have elected to receive, COBRA continuation coverage, even if the purchaser employed all of the seller’s employees that were current employees as of the date of the sale. While the purchaser and seller can allocate responsibility for providing COBRA continuation coverage contractually, if the seller ceases to have any employees following the sale, it may not be possible for the seller to maintain a group health plan following the sale. Therefore, the purchaser will ultimately be responsible for making COBRA continuation coverage available to the seller’s eligible employees (or former employees). This result can be particularly problematic for purchasers who are self-insured or partially self-insured. The potential costs associated with this COBRA continuation coverage obligation should be analyzed by purchasers as part of their normal due diligence process in evaluating any potential acquisition.
About the Author:
Chris D’Amico is a shareholder in Dean Mead’s Corporate and Tax department. He represents companies and business owners in all types of business and tax matters, including choice of entity, mergers and acquisitions, reorganizations, and other general business matters. In addition, Mr. D’Amico represents title and mortgage companies with respect to the formation and operation of “affiliated business arrangements”. He is Board Certified in Tax Law by The Florida Bar. He may be reached at email@example.com.