Buyer Assuming COBRA Obligation

[Guest jkwok]

If Buyer and Seller contractually agree that Buyer will assume the COBRA obligation in an asset deal (and Seller continues to maintain a group health plan), is Buyer obligated to provide the COBRA beneficiaries the EXACT coverage offered under Seller's plan or does Buyer satisfy the COBRA obligation by providing the same coverage Buyer offers its active employees? Also, does Buyer have to provide credit for deductibles and other limits?

[mroberts]

A lot of this is going to be determined in the agreement itself. Since we don't have a copy of it, we can only make assumptions.

As far as whether or not EXACT coverage has to be offered, the answer is no, unless otherwise stated in the agreement. If companies change their medical benefits, then COBRA employees get offered the same benefits as the active employees. As far as credits for deductibles and limits, it would make sense that these should transfer over to the new carrier as well. A lot of times, the old carrier forwards this information on to the new carrier, which updates its systems with the info. The other way to handle it is to allow employees to submit past EOBs indicating how much of the deductible and limit they have met so far in the calendar year.

[RTK]

Have you read 54.4980B-9? Generally, under Q&A 6, a qualifying event occurs in an asset sale unless (1) buyer is successor employer and employee is immediately employed by buyer or (2) employee does not lose coverage under seller's plan after the sale. "Lose coverage" for this purpose has general COBRA meaning - cease to covered under same terms and conditions.

Assuming there is qualifying event (with seller responsible for COBRA), Q&A 7 permits seller's cobra obligation to be allocated to buyer (with seller secondarily liable). Assuming your deal follows this pattern, although not specifically stated in Q&A 7, since the buyer is providing the coverage seller is obligated to provide, it would seem to follow that the coverage provided by buyer should be the same (or substantially the same?) as the coverage provided by the seller (at least initially). Unfortunately, I have not seen much discussion on this issue.

[Locust]

I have this question currently.

My thinking is to similar to RTK's. I think that the COBRA responsibilities allocated to the Buyer have to be the same responsibilities that the Seller would have had if the contract had not the allocated the responsibilities to the Seller.

For example, assume Buyer has no plan or only a minimal plan (say with a $5000 max. benefit) (B Plan) , and that the Seller has a plan after the transaction that is similar to the plan that covered the former employees of the Seller (S Plan). I don't think you could argue that Buyer's coverage of Seller's employees under B Plan meets Seller's COBRA obligations.

If Buyer were allocated all of the COBRA responsibilities in this situation, I think Buyer would responsible for the COBRA notices, administration, and COBRA coverage under Seller's plan or similar plan.

On the other hand I am aware that in many of these transactions, the responsibility is allocated to the Buyer and that the Buyer simply provides COBRA coverage under the Buyer's plan, without any analysis of the similarities between the Buyer's and Seller's plans.

Further, maybe it doesn't make much difference except where the Buyer's and Seller's plans are significantly different.

This is by no means clear under the regulations and I have not been able to find any guidance. Your comments would be appreciated.