Business owners: are you aware that during a business reorganization, merger or acquisition, stock transfer, and/or asset sale, you may be required to offer continuous COBRA (Consolidated Omnibus Budget Reconciliation Act) medical coverage to qualified employees?

Recent IRS regulations provide that employees who are let go from a position or whose employment status changes as a result of a business reorganization may qualify for continued COBRA coverage under the law. M&A transactions, stock transfers, or asset sales could create an overlap in job tasks where not every employee is guaranteed a continued position after the dust settles from a reorganization, and, therefore, such business reorganizations are “qualifying events” under COBRA.

Under federal and state laws, a qualifying event legally obligates the reorganizing entity to provide COBRA coverage and all appropriate notifications to the affected employees who paid into a healthcare plan through their workplace during the qualifying period. If the reorganized group no longer maintains a healthcare plan after the sale, the “new” entity (“purchasing entity”) is legally required to provide COBRA coverage with all notice requirements if: 1) the purchasing entity maintains a group health plan, and 2) in the case of an asset sale, the purchasing entity is a successor employer, meaning they hired most of the same employees to work the same jobs when continuing business operations.

Businesses should also be aware that although the parties involved in an M&A transaction may assign responsibility for COBRA coverage among themselves within the contract, if the designated entity defaults on its obligation, the party legally required to provide continued insurance coverage under the COBRA statute will not be absolved of the contracted-away obligation.

The requirements on both the selling and purchasing side vary based on the type of business transaction occurring, as well as on its outcome. Please contact our office to discuss your particular situation.