Benefits Q&A: What COBRA Obligations Come with a Company Acquisition?

Benefits Q&A: What COBRA Obligations Come with a Company Acquisition?

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Q: Our company is in the process of being purchased by a larger company (I’ll call them Bigg Company). Some of our employees will transition into working for Bigg after the purchase is finalized, while others will not. What are our obligations, or Bigg’s obligations, to offer COBRA coverage to the employees who will not be working for them and will lose their health coverage as a result? Our health plan will be terminated as of the effective date of the purchase. Bigg says they don’t have to offer COBRA to the terminated employees. We’re located in Missouri, if that matters.

A: This issue is very complicated and will probably require you to work with your attorney, but I can provide some general guidance.

The first question is whether the employees who are losing coverage under your plan have a right to continuation coverage under federal or state law. Under federal COBRA, the answer is no because your plan is being terminated. Because you’re in Missouri – which applies continuation coverage rights that are identical to federal COBRA – there’s no right to continuation coverage under state law either. (If you were in a different state, such as Kansas, the employees might be entitled to continue their coverage through the carrier even though your plan is being terminated.)

As for Bigg’s COBRA obligations, that’s where it gets tricky. In general, COBRA imposes the obligation to provide continuation coverage on “successor employers.” Under the regulations, an employer is a successor employer in the event of “a consolidation, merger or similar restructuring of the employer” or if it is a “mere continuation of the employer.” A purchaser of substantial assets in an asset sale can also be a successor employer if it continues the business operations of the seller related to the purchased assets.

Ultimately, whether Bigg has to offer COBRA depends on how the acquisition of your company was or is structured. If they’re saying they don’t have to offer COBRA, then they may have designed the acquisition to avoid taking over COBRA obligations. This is an issue that could easily be overlooked in negotiations regarding the sale of a company. I recommend you discuss this with the individuals who negotiated the sale, review any contracts relating to the transaction, and consult an attorney if necessary.

By Julie Athey, J.D., Director of Compliance, The Miller Group

See also:

Helping Employees When Individual Coverage Is The Best Option
COBRA: Common Mistakes, Oversights and COVID Effects
Benefits Q&A: What If an Employee Accidentally Fails to Cancel Coverage?

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