FSA in sale of substantially all assets

[Guest FAQ]

Rev. Proc. 2002-32 provides options when a seller sells some of its assets to a buyer and seller continues to maintain an FSA. COBRA does not apply to the FSA in such case, because the FSA elections and coverage continue.

What is the COBRA rule if the seller sells substantially all assets, terminates its FSA, and 2002-32 does not apply? It seems that buyer would be required to offer COBRA to the seller M&A qualified beneficiaries, in accordance with §54.4980B-9 (since the seller’s FSA is a group health plan).

However, perhaps the limits on COBRA for FSA participants protect the buyer? Specifically, §54.4980B-2 Q/A-8(d) states that an FSA “is not obligated to make COBRA continuation coverage available for any subsequent plan year to any qualified beneficiary who experiences a qualifying event during that plan year.”

If the seller terminates the FSA as of the date of the transaction, wouldn't that end the plan year (a short plan year), thereby cutting off the right to COBRA under the buyer’s plan?

If not, and if the M&A beneficiaries can elect COBRA under buyer’s plan, then they could elect COBRA under buyer’s plan, pay one month of premiums, submit claims and collect the maximum under the buyer’s plan (even if they had already collected under seller’s plan), then drop COBRA with buyer a month later. This seems to be what the quoted language above was designed to prevent – a second year’s worth of reimbursements at little cost, but we cannot find comfort that the “plan year” exception for FSAs would apply in a mid-year asset sale situation. It's only a subsequent plan year as to the seller.

Bottom line question is can a buyer avoid offering COBRA under its FSA in an asset purchase?

Thanks in advance for any thoughts.

[J Simmons]

There is in federal case law a concept known as successor employer liability. IIRC, it arose in the context of the FLSA. However, there is some federal appellate case law that applies the concept to ERISA plan liability. It is generally must more difficult to escape this liability, even in the context of an asset purchase, than successor corporate liability under state law. Rather than risk it, when I advice asset purchasers I suggest that they insist that it be recognized in the negotiations with the seller and that the cost of the buyer providing the COBRA coverage be factored in the negotiation of the overall price. That's because the circumstances of the purchase usually prevent me from giving the purchaser a strong opinion with much certitude that a court would not find the purchaser to be a sucessor employer.