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COBRA in Asset Sale


Guest Philip

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Guest Philip

Q&A-6 states that in an asset sale, "the sale" is the qualifying event. What if the employee doesn't actually terminate employment until later? The buyer is buying the operating assets and hiring the employees at these locations. Some headquarters employees will continue to be employed by the seller for several months to wind things up. The seller has terminated its health plan, and the HQ employees are claiming that buyer must offer COBRA to them as of the date of the sale, even though they have not terminated employment yet. The statute says that "termination" is the qualifying events. Are the regs just sloppy language? Any thoughts?

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Example 8 under the new proposed Treasury regulation at § 54.4980B-9, Q/A-6 deal with substantially similar fact situation. I think the answer kind of ducks the question of who the M&A qualified beneficiaries are (in particular whether the employees retained by the seller for winding up purposes would be included). However, it seems to contemplate that the buyer will have the obligation to cover these folks. (I assume the example applies to you because it seems that the seller in your case would qualify as a successor employer in the sense of continuing the business of the sold assets without substantial change or interruption.) As to whether the IRS has the statutory authority to create this rule when the law says the qualifying event is the termination, there's probably an argument they don't. However, they might tie into the anticipation of a qualifying event rule to justify the result (even though under that principle, the COBRA entitlement wouldn't be effective until the subsequent termination actually occurs.) Note, these are only proposed regulations at this point. Compliance with them does, however, constitute good faith compliance with a reasonable interpretation of the Code. They aren't necessarily binding in a court case, of course.

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