COBRA: Termination of Group Health Plan

[Guest wwest]

Company A offers group health coverage to its employees. Company A's wholly owned subsidiary Company B has employees who are covered under a separate group health plan. Company X is purchasing substantially all of the assets of Company B and any of the transferring Company B employees will be covered under Company X's health plan, which has comparable features to Company B's group health plans. Company B's health plans will be terminating. What about the employees for Company B who are not going to transfer to Company X? Those employees will be have a qualifying event since they will be terminated, but Company B's health plan is terminating for everyone (no bankruptcy involved). Any duty to offer COBRA coverage? What about Company B employees who are already receiving COBRA benefits? Do they finish their statutory coverage periods? Does Company A have any liability for COBRA for this minor set of terminating Company B employees NOT transferring to Company X?

[Linda]

The parent company is responsible for COBRA. See Prop. Reg. 54.4980B-9 which deals with this situation. (The regs are not final but they give us the IRS interpretation of COBRA.) Check the preamble too -- the parent company will want to send COBRA notices to both the employees who don't get jobs with the buyer and the employees who do get jobs with the buyer. The regs permit the parties to contract for a different allocation of COBRA responsibilities, but if the buyer fails to perform, the responsiblity reverts to the seller.

[Guest wwest]

As you stated, the Proposed regulations address this issue. 54.4980B-9 Q/A-8

Asset Sale Examples:

Example 5 (i) Selling group S provides group health plan coverage to ees at each of its operating divisions. S sells the assets of one of its divisions to Buying Group P. Under the terms of the group health plan covering the ees at the division being sold, their coverage will end on the dates of the sale. P hires all but one of those ees, gives them the same positions that they had with S before the sale, and provides them with coverage under the group health plan. Immediately before the sale, there are two qualified beneficiaries receiving COBRA continuation coverage under a group health plan of S whose qualifying events occurred in connection with a covered ee whose last employment prior to the qualifying event was associated with the assets sold to P.

(ii) These two qualified beneficiaries are M&A qualified beneficiaries with respect to the asset sale to P. Under these facts, a group health plan of S retians the obligation to make COBRA continuation coverage available to these two M&A qualified beneficiaries. In addition, the one ee P does not hire as well as all of the ees P hire (and the spouses and dependent children of these ees) who were covered under a group health plan of S on the day before the sale are M&A qualified beneficiaries with respect to the sale. A group health plan of S also has the obligation to make COBRA continuation coverage available to these M&A qualified beneficiaries.

These facts are almost identical to the one presented. Please clarify. Under this example, S continues its group health plan. In the example that I presented, Company B ceases its group health coverage. But since Company A still offers it group health coverage, and Companies A and B are in the same controlled group, does this mean that no cessation of group health coverage occurs? Is it related to the similarly situated employee issue?

[Linda]

If the "selling group"(the controlled group of corps including the seller) has a group health plan after the sale, the selling roup is responsible for COBRA. See Prop. Reg. 54.4980B-9 Q&A-8(a). It doesn't have to be the same plan which covered the sub's employees before the sale.