Entity X owns 100% of entity Y. Y being bought by hospital and the entity will no longer exist. Is X responsible for Cobra for Y (asset purchase)

[Guest cjsmith]

This is an interesting situation:

A doctor group operating under entity X owns 100% ownership of entity Y, which includes less compensated staff members (set up this way in order to offer differing benefit packages between the highly compensated doctors of X vs. less-compensated staff of Y. Makes sense.

So, X is selling Y to a hospital in an asset purchase agreement. After the purchase, Y will essentially be out of business- it will no longer exist. Of course, X will.

My question: Since Y will not be a surviving entity, but X will, does Cobra apply (just in case Y employees decide they do not want to work for the hospital so they quit?) That is, would X be responsible to offer Cobra after the purchase even though entity Y will no longer be in existance?

I have looked everywhere for some insight into this situation, but cannot find answers. Any insight or suggestions are greatly appreciated!

THANKS!

[401 Chaos]

cjsmith,

Given the absence of other responses, I wanted to offer a few general thoughts off the top of my head with the benefit of any research or verification. COBRA does contain some special "merger and acquisition" rules so to the extent you have not reviewed those, I would urge you to study those rules in some detail. See Treas. Reg. § 54.4980B-9. As a general matter in an asset sale, my understanding is that the selling group generally retains responsibility for providing COBRA coverage to employees. In this case, Y's plan will end which would generally eliminate the COBRA responsibility of Y but the M&A rules look to the broader selling group--i.e., the controlled group to which Y belongs, if any, thus in this case I believe X will have an obligation to provide COBRA coverage to the Y employees assuming X continues some group health plan. (Note, it is possible under the COBRA M&A rules to negotiate around some of this if the hospital were to contractually accept responsibility but legally I think X has that obligation. Also note that it is possible for the COBRA obligation to shift to the Hospital (Buyer) here if the Selling group were to completely eliminate all group health plans.) Finally, note that I believe in some cases X (as part of the selling group) could have to provide COBRA coverage options to the Y employees (or former employees on COBRA) even if they end up working for the hospital and eligible for coverage under the hospital plan. That is to say, they Y employees would arguably experience a COBRA qualifying event because they (1) would have employment with Y terminated, and (2) would lose coverage under the Y plan.

Finally, it occurs to me there could be broader issues with the X and Y arrangement here if the groups were split up to provide discriminatory benefits. The ERISA rules, particularly for qualified pension plans, are generally applied on a controlled group basis and so would seem to treat employees of X and Y as working for one large employer for various nondiscrimination and coverage purposes.

[Guest cjsmith]

401 Chaos- Thank you for your insight.

I have since reviewed Treas. Reg. § 54.4980B-9 and the regulations concerning the "sale of substantial assets" does seem to apply. Therefore, responsibility would be on the seller. The only thing that seems like it may be an exception is that after the purchase entity Y will no longer exist. The regulations seems to describe when a business is sold to another owner, thus I think it is assumed that the business and name and everything will continue to exist (just under different ownership). However, since in my case the hospital is buying Y and it will no longer exist as a separate entity under its current name, is this an exception to Treas. Reg. § 54.4980B-9? It's hard to tell.

Does anyone have any clarification conerning this or any other general thoughts?

Thank you for your help!

[401 Chaos]

Unfortunately, the regulations are not always as clear as they might be on some of these issues but i guess my understanding has always been in asset deals the COBRA obligations would go on seller even if the subsidiary or division that held the assets being sold is dissolved. I think it is fairly common in asset deals for the entity holding the assets that are sold to disappear which is the reason the rules focus on the selling group (i.e., the entire controlled group containing the seller) and not just the seller itself (i.e., not just entity Y in this case).

[Guest cjsmith]

401 Chaos - Upon further look, I think you are correct. Thanks for you help!