Non-M&A Qualified Beneficiaries

[Guest LDH1]

What, if any, adverse federal income tax consequences do you think would result if the fomer employer (i.e., the acquired) continued providing health coverage to non-M&A Qualified Beneficiaries (i.e., those employees that continue on with the new employer) until the acquirer can get a health plan up and running?

[KIP KRAUS]

LDH1:

Let me see if I have this right. Company A was sold to Company B. Company A employees are now working for company B?

If Company A was sold, how can they maintain a group health contract? I can only assume that they did not sell the entire company.

Has Company A considered that there may be a COBRA event? If there is, they can offer COBRA on whatever premium contribution they wish to charge the former employees within the limits of COBRA, i.e. require the normal in-service contributions to the former employees.

I can’t imagine that any group insurer will allow non-employees to be covered under a group contract unless it is under COPBRA.

[Guest LDH1]

As the subject title indicates, there is no COBRA event. Obviously, it is only a sub being sold and the parent is continuing its self-funded plan. Does anyone think the former employees can still avail themselves of Code Section 106? Do you think PLR 9612008 extends this far? Do you think the employer still gets a deduction for the cost of providing health benefits to these former employees? Any thoughts are appreciated.

[KIP KRAUS]

It wasn't obvious to me. However, I guess my question would be why would an employer who provides code section 106 medical benefits to non-employees be able to take a tax deduction for providing medical benefits to non-employees? I'm not a tax specialist, but the code does specifically reference benefits provided to employees. Unless the plan document provides for such payments in the event of a sale of a portion of the business, I'd say the employer is not eligible for a tax deduction. As to the tax effects to the former employees, I have no guess, because there is no employer employee relationship that seems to be a personal income tax question.

By the way, I'm not sure that there is no COBRA event. If I'm not mistaken a seller retains the liability for COBRA, even if the purchasing company hires the seller's employees.

By the way, there may be a COBRA event.

Why not contact your accounting firm. I'm sure they can clear this up.

[Guest LDH1]

Read the new proposed COBRA regulations; the employees who continue on with the acquirer are not M&A Qualified Beneficiaries. If there was a COBRA event, there would be no problem. Code Section 106 has been enterpreted to apply to certain non-employees in the past (e.g., retirees and laid-off employees (pre-COBRA, in the later case)), so there is at least an argument that it might apply under these facts, too. Also, there may be a legitimate argument that the expense is still a business expense related to the sale of the sub. Thanks for you input, and would like to hear what anyone has to say about this matter.

[KIP KRAUS]

I have read the new proposed rules related to Mergers and Acquisitions, but not knowing the details of the sale puts me at a disadvantage. There could have been a qualifying event related to the M&A QBs. However, it looks as though you have researched this thoroughly.

That being said, I agree with your observation that Sec 106 applies in many cases with regard to retirees and layoffs. It often times is applied in cases of involuntary downsizings as well. However, I still would argue that in such cases, in order for Sec 106 benefits to be qualified they would have had to been previously accounted for in a plan document.

Where are you CPAs out there that always have the tax answers? Feel free to step up any time.

[Kirk Maldonado]

I think that people are going astray because they are thinking of the persons who are receiving the coverage are non-employees. I think that they are more appropriately characterized as former employees. That changes the analysis (and result) dramatically.

[Guest LDH1]

So, as former employees (and non-M&A Qualified Beneficiaries), do you think it is acceptable for the former employer to provide health coverage under its self-funded plan without any adverse tax consequences? Your comment seemed to indicate and affirmative answer.

[Linda]

A problem I used to worry about with this sort of arrangement was whether a multiple employer welfare arrangement was created. However, a few months ago the DOL published some Q&As on MEWAs that allow a seller to continue to cover its former employees without creating a MEWA.

[Guest LDH1]

Linda, I am familiar with the questions and aswers. Don't they just provide a safe harbor from the penalty for failure to file Form M-1? DOL isn't exactly saying you don't have a MEWA. Isn't there still some risk that a state may say you are subject to regulations? However, I agree, this does give me more comfort than I had prior to the issuance of the Q&As.