COBRA-Sale of Business Division

[Guest Benmark]

We recently sold a division of our company in June. Under the terms of a collaboration agreement, employees from that division maintain the same benefits, costs etc. through the end of the year (all of our insurance carriers were appraised of this and agreed to treat them as affiliates).

The management of the division that was sold plans to offer a comprehensive H & W plan to employees beginning Jan. 1, 2002. In a case such as this, is it required that we offer COBRA on Jan 1, 2002 to the individuals in the division that was sold? If not, why?

[Linda]

You said that a division was sold. Did you sell stock in a subsidiary or the assets of the division? If you sold assets of the division, the seller should offer COBRA to all of its former employees. If you sold stock in a subsidiary, the seller does not have to offer COBRA to those employees who continue to be employed by the subsidiary.

[Chaz]

Scenario: Seller is selling a division to Buyer in a stock sale. Buyer will not be able to provide health insurance for three months so, although COBRA is not required to be offered for continuing employees, Seller agrees to cover employees under Seller's self-insured plan for the three-month period. If an employee terminates employment (or a participant otherwise incurs a qualifying event) during the three-month period, is Seller required to offer the employee continuation coverage?

[Guest Mark Bongard]

Scenario: Seller is selling a division to Buyer in a stock sale. Buyer will not be able to provide health insurance for three months so, although COBRA is not required to be offered for continuing employees, Seller agrees to cover employees under Seller's self-insured plan for the three-month period. If an employee terminates employment (or a participant otherwise incurs a qualifying event) during the three-month period, is Seller required to offer the employee continuation coverage?

Yes, based on the facts presented, the Seller's group health plan would have to provide COBRA coverage for the employees of the sold division who incur qualifying events during the 3 month transition period. The COBRA regs define a "covered employee" to include former employees. 54.4980B-3, Q&A-2. Presumably, the termination of an employee's employment after the sale and before the expiration of 3 months would result in a loss of coverage under the plan of the Seller, which would be a qualifying event.

Perhaps of more concern is the issue of whether a plan covering employees of unrelated employees becomes a MEWA. The M-1 instructions for 2008 provide a filing exception for the following:

(2) In addition, in no event is reporting required by the administrator of an entity that would not constitute a MEWA or ECE but for the following circumstances:

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(ii) It provides coverage to the employees of two or more employers due to a change in control of businesses (such as a merger or acquisition) that occurs for a purpose other than avoiding Form M-1 filing and is temporary in nature (i.e., it does not extend beyond the end of the plan year following the plan year in which the change in control occurs).

Therefore, under your facts, at least there would not be any kind of M-1 filing requirement. Nonetheless, the arrangement could still be a MEWA for the 3 month period.

A possible way to finesse the MEWA issue is to delay transfer of employment from the first controlled group for the 3 months. In essence, the employees would be loaned to the Buyer, but that would entail a need for additional documentation and employment cost reimbursements.

The foregoing is just a few thoughts to get you going. I hope it is helpful.