COBRA subsidy duties and business reorganizations
Following a business re-organization transaction, which party is responsible for sending the ARPA notices and offering subsidized COBRA coverage?
The American Rescue Plan Act’s (ARPA) federally funded, 100 percent “free” COBRA subsidy has generated much attention — and perhaps even more questions. Fortunately, although we still await further federal agency guidance to resolve lingering concerns, we can sort out many questions with already available published material. One such issue relates to subsidy responsibilities that surface in conjunction with a business reorganization.
Following a business re-organization transaction, which party is responsible for sending the ARPA notices and offering subsidized COBRA coverage?
Related: ARPA & COBRA obligations: We have only just begun
The short answer is that the party that’s responsible for offering COBRA following the transaction should provide the ARPA notices and fulfill subsidy access obligations. That said, pinpointing COBRA responsibility during a business reorganization requires careful advanced consideration of numerous fact-specific elements.
The general COBRA rule is that, unless the sales agreement specifies otherwise, COBRA duties remain with the seller to the extent that the seller continues to maintain any group health plan, including any plan sponsored by another entity inside the seller’s control group (if applicable). If the seller (and all the members of its controlled group) cease to offer any group health plan, then the obligation to offer COBRA shifts to the buyer (this phenomenon is sometimes referred to as “springing COBRA liability”). As a result, in a transaction scenario where the seller is responsible for COBRA, then the seller also shoulders the obligation to provide the ARPA notices and facilitate subsidy access.
In addition, applicable regulations notably distinguish stock and asset purchase transactions in the COBRA context.
Stock/equity transaction
In a stock/equity purchase, a qualifying event that triggers a right to elect COBRA does NOT occur for an individual that retains his or her job position (e.g. the person continues working at the “same desk”).
A qualifying event will NOT occur because, from a legal perspective, the individual is fully absorbed by the new entity and is actually considered an “ongoing employee” that never separated from the employer. This means that even if the incoming buyer failed to offer the “same-desk” worker any health coverage at all, the “loss of coverage” that coincides with the transaction does NOT relate to a termination (or hours reduction) because the stock/equity “buyer” has seamlessly absorbed the employer role. In other words, a termination has not occurred and so a COBRA qualifying event is NOT triggered. As is perhaps obvious, if COBRA is not triggered, neither is the subsidy.
Asset purchase transaction
In stark contrast, the analysis in an asset transaction requires a few more steps. First, the buyer must be a “successor” employer, which generally means the buyer is continuing the seller’s business without interruption or substantial change. If that is true, then a qualifying event DOES occur for anyone who continues working at the same-desk even if the incoming buyer extends a health coverage offer that avoids a loss of health coverage.
This is true because, from a legal perspective, a termination has technically occurred that “severs” the individual’s connection with the seller as an employee, and as a plan participant. As a result, in an asset purchase situation, officially dissolving the individual’s employment will trigger COBRA despite what might (in reality) be uninterrupted, ongoing health coverage availability.
Typically though, individuals in this situation seldom (if ever) take the seller’s COBRA offer if the incoming buyer extends health coverage. Why? Because the seller’s continuation coverage offer (at the full COBRA cost) is almost always substantially more expensive than other potentially available coverage. However, the new six-month ARPA-subsidy appears to dramatically change the equation (at least temporarily) in 2021. Buyers and sellers should therefore take a careful look to determine whether a business transaction spawns any AEIs during the subsidy period.
Is the AEI “blocked” from receiving a COBRA subsidy?
In most cases individuals experiencing a qualifying event would not generally hold AEI-eligibility if the buyer offers health coverage because gaining new employer-provided coverage eligibility automatically extinguishes subsidy entitlement. That means, even if COBRA is triggered following an asset transaction, FREE continuation health coverage is probably unavailable. However, it’s important to note that unusual exceptions could apply.
For example, if the successor employer treats the “same desk” individual as a “new hire” and imposes a waiting period, then the person is potentially an AEI and subsidy-eligible during his or her health coverage waiting period. Similarly, if the successor employer puts an individual into a variable-hour measurement period (as directed for certain employees under the Affordable Care Act), then the individual could also become AEI-eligible following the business reorganization transaction because actual group health plan eligibility will not attach during a variable hour employee’s initial measurement period.
There are additional nuances for determining which party is required to offer COBRA (and the accompanying subsidy). For example, as noted above, the seller and buyer can agree to different results in the purchase agreement. Existing guidance does not address whether the obligation to offer the subsidy can also be allocated by contract. However, presumably if the obligation to offer COBRA is allocated to the buyer or seller, then that party also absorbs the subsidy-related obligation to provide ARPA notices and facilitate subsidy access.
Employers continue expressing a great many other questions about COBRA and the ARPA subsidy. Unfortunately, formal guidance offering specific answers remains generally unavailable. Many key questions fall under the Treasury Department’s regulatory purview and so we anticipate the IRS will issue the next round of clarifying guidance. Stay tuned!
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