Provision of Tax-Free Cobra Coverage to Acquired Employees via APA

[spartytax]

Company acquires sub of seller via an asset purchase transaction and decides to employ certain of the sub's employees following close of the transaction.  Buyer is an ALE.  There will be a lag time until Buyer gets plans in place for the acquired employees (it's putting separate plan in place for the acquired employees).  Buyer is considering paying for acquired employees' COBRA under Seller's plan on a tax-free basis.  Any thoughts as to whether this will work, or what issues it may raise?  What about the ACA concerns?  Thanks in advance.  

[Flyboyjohn]

This would be akin to new employer paying premiums for individual health insurance coverage which we know is a big no-no invoking the $100/day/person 4890D penalty.

Tell the Buyer to pay the acquired employees enough additional pay to keep them happy until the new insurance kicks in.

 

[Chaz]

I agree with Flyboyjohn's conclusion but not the analysis.  The Seller's plan is a group health plan not individual coverage so there is nothing in the ACA preventing Buyer from paying the premiums.  

What the parties need to be concerned about is whether this arrangement creates a Buyer-sponsored group health plan itself, which would require Buyer to offer COBRA upon the occurrence of a qualifying event.  For instance, if the employee terminates employment with Buyer while covered under Seller's plan, Buyer may have to extend coverage under Seller's plan for 18 months after the loss of coverage as a result of the termination.  (EBIA has a good summary of the issue and its uncertain application.)

Better for Buyer to pay additional after-tax compensation in the amount of the COBRA premiums for a specified period.  This amount can of course be grossed up to make the employee whole.

[spartytax]

Thanks to you both for this reply.  One offline suggestion I received is to have the Seller extend the coverage of its plan to these employees (and have such extension of coverage run contemporaneously with the COBRA period).  Buyer and Seller would simply enter into a reimbursement arrangement whereby Buyer would pay for the cost of coverage.  My concern is how this arrangement would affect Buyer's obligation to offer affordable coverage.  I guess one other option is an integrated HRA - but that seems like a hassle for a 7 month period.