Sale of Subsidiary - Transitioning health coverage

[Guest FAQ]

Employees of parent A and subsidiary B participate in the same self-insured group health plan. A has hundreds of employees, while B has about 75. B will be sold in a stock deal next month to a financial buyer that does not have its own health plan. There is concern that the buyer will not have sufficient time to establish a new, fully insured plan for B employees as of closing.

What is the best way to prevent B's employees (about 75) from having an interruption in coverage?

If A and B continue to cosponsor the plan for the remainder of the year, wouldn't that make the plan a MEWA? If so, they would like to avoid such temporary complexities.

The plan states that coverage terminates on the date the employee ceases to be eligible for the plan (rather than the end of the month). Would it be possible to amend the plan (with consent of the stop-loss carrier) to provide coverage through the end of the month for B employees only, without triggering MEWA status? That would give a few extra weeks to get the plan in place.

I suppose COBRA is an option, but it would be a hassle to have everyone elect COBRA for a short time period.

Thanks in advance for any thoughts.

[Guest FAQ]

Update -- I found a few things on post-transaction "Accidental MEWAs," including an article by Mark Wincek at 6 Benefits Law Journal 293 (1993) titled "DOL's MEWA Booklet: 'Accidental MEWA' Trap Widens," and some relief from the reporting requirements.

On the reporting front, the instructions to Form M-1 note that there are are exceptions that eliminate the need to file a form M-1 with the DOL if, among other things, there is a common control interest between the employers of at least 25% "at any time during the plan year." Thus, if there is residual ownership of at least 25%, there would be no need to file an M-1. Also, if the plan provides coverage to employees of 2+ employers due to an MorA transaction and the transaction occurred for a purpose other than avoiding Form M-1 Filing (I can see going to our corporate guys to do a transaction so we can avoid filing a form!), then no M-1 is required as long as the arrangement is "temporary in nature" (i.e. doesn't extend beyond the end of the plan year following the plan year in which the change in control occurs).

However, avoiding the M-1 filing does not mean avoiding MEWA status, and states could still attempt to regulate the plan.

Wincek's article suggests a strategy that may work in the short term. He notes that former employees of the selling entity can be covered under the seller's plan without triggering MEWA status. This would enable pre-closing employees of the subsidiary to remain on the seller's plan (indefinitely I suppose) without creating a MEWA, though employees hired by the buyer after closing would be out of luck. That should only be a temporary problem, however, as the new health plan would be up and running soon after closing.

I'd still be interested in any real-world experience involving welfare plan transitions in transactions involving the sale of a subsidiary to a buyer without its own welfare plans.

[Guest Harry O]

We typically allow the selling company to remain a participating employer for up to 6 months. No reason why a buyer can't get a medical plan up and running within that period.