A Lexis Practice Advisor
®
Practice Note by
Gabriel S. Marinaro, Katten Muchin Rosenman LLP
COBRA Considerations in Corporate
Transactions
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Gabriel S. Marinaro
This practice note provides an overview of who has the obligation to make Consolidated Budget Reconciliation
Act of 1985 (COBRA) coverage available to aected qualied beneciaries in the context of an employer’s stock
or asset sale. (Treasury Regulation section 54.4980B-9.)
Many of the terms used in this practice note are dened in COBRA Compliance and Enforcement. The specic
areas covered by this practice note are the following:
● What Is a “Stock Sale” for These Purposes?
● What Is an “Asset Sale” for These Purposes?
● What Are the General COBRA Responsibilities in Stock or Asset Sales?
● Can the Parties Allocate COBRA Responsibilities in the Purchase Agreement?
● What Is the Eect of the Seller Terminating Its Group Health Plan upon or After the Sale?
What Is a “stock sale” for these PurPoses?
For purposes of these COBRA requirements, a “stock sale” is the transfer of stock in a corporation that causes
the corporation to become a dierent employer or member of a dierent employer (the term “employer” includes
all members of a controlled group of companies, [as dened under Internal Revenue Code section 414]). A
stock sale for these purposes also includes a transaction involving interests in a non-corporate entity (such as
membership interests in an LLC). The following terms are often used to describe the parties involved in a stock
sale:
● “Selling group” is the controlled group of companies, or the group of trades or businesses under common
control, of which an employer ceases to be a member as a result of the stock sale.
● “Acquired organization” is the company that ceases to be a member of the selling group as a result of the
stock sale.
● “Buying group” is the controlled group of companies, or the group of trades or businesses under common
control, of which the acquired organization becomes a member as a result of the stock sale.
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COBRA Considerations in Corporate Transactions
What Is an “asset sale” for these PurPoses?
For purposes of these COBRA requirements, an “asset sale” is the transfer of substantial assets, such as a plan
or division, or substantially all the assets of a trade or business. The following terms are often used to describe
the parties involved in an asset sale:
● “Selling group” is the controlled group of companies, or the group of trades or businesses under common
control, that includes the company or other trade or business that is selling the assets.
● “Buying group” is the controlled group of companies, or the group of trades or businesses under common
control, that includes the company or other trade or business that is buying the assets.
What are the General coBra resPonsIBIlItIes In stock or asset sales?
In a stock or asset sale, so long as the selling group maintains a group health plan after the sale, the plan has
the obligation to make COBRA continuation coverage available to the seller’s qualied beneciaries with respect
to that sale (commonly referred to as M&A qualied beneciaries). A group health plan for the buying group
does not, as a result of a stock sale or an asset sale, have an obligation to make COBRA continuation coverage
available to those qualied beneciaries of the selling group who are not M&A qualied beneciaries with respect
to that sale.
Who Is Considered an M&A Qualied Beneciary in a Stock Sale?
In the case of a stock sale, an individual is a M&A qualied beneciary if the individual’s qualifying event (QE)
occurred prior to or in connection with the stock sale, and who is a covered employee (or a covered spouse or
dependent child of such an employee) whose last employment prior to the QE was with the acquired organization.
A covered employee who continues to be employed by the acquired organization after the sale does not
experience a termination of employment as a result of the stock sale. Therefore, the sale is not a QE for the
covered employee, or the covered employee’s spouse or dependent children, regardless of whether group health
plan coverage is provided after the sale, and neither the covered employee, nor the covered employee’s spouse
or dependent children, becomes a qualied beneciary as a result of the stock sale.
Who Is Considered an M&A Qualied Beneciary in an Asset Sale?
In the case of an asset sale, an individual is an M&A qualied beneciary if the individual’s QE occurred prior to
or in connection with the asset sale, and who is a covered employee (or a covered spouse or dependent child of
such an employee) whose last employment prior to the QE event was associated with the assets being sold.
In the case of an asset sale, the sale is a QE for a covered employee whose employment immediately before
the sale was associated with the purchased assets, and for the employee’s spouse or dependent children who
are covered under a group health plan for the selling group immediately before the sale. An asset sale will not be
treated as a QE where (1) the buying group is a “successor employer” (see below) and the covered employee
is employed by the buying group immediately after the sale, or (2) the covered employee (or the spouse or any
dependent child of the covered employee) does not lose coverage under a group health plan of the selling group
after the sale.
Unless exception (1) or (2) in the preceding paragraph applies, a covered employee will experience a termination
of employment with the selling group as a result of the asset sale, regardless of whether the employee is
employed by the buying group or whether the employee’s employment is associated with the purchased assets
after the sale. Following such termination, the covered employee and the employee’s spouse and dependent
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COBRA Considerations in Corporate Transactions
children who lose coverage under the selling group’s plan are M&A qualied beneciaries, and must be oered
COBRA coverage under the selling group’s group health plan (but, see below for certain exceptions to this
general rule).
can the PartIes allocate coBra resPonsIBIlItIes In the Purchase
aGreement?
In a stock or asset sale, the buyer and seller are permitted to allocate COBRA responsibility to make COBRA
continuation coverage available to M&A qualied beneciaries. However, if the party assigned this responsibility
under the terms of the purchase agreement fails to perform, the party that has the obligation under the default
statutory provisions to make the COBRA coverage available to M&A qualied beneciaries continues to have that
obligation.
What Is the effect of the seller termInatInG Its GrouP health Plan uPon
or after the sale?
In the case of a stock sale, if the selling group ceases to provide any group health plan to any employee in
connection with the sale, a group health plan maintained by the buying group has the obligation to make COBRA
continuation coverage available to M&A qualied beneciaries. A buyer’s group health plan has the obligation
beginning on the later of the following two dates, and continuing as long as the buying group continues to
maintain a group health plan (within the maximum duration limits for COBRA continuation coverage):
● The date the selling group ceases to provide any group health plan to any employee
● The date of the stock sale
In the case of an asset sale, if the selling group ceases to provide any group health plan to any employee in
connection with the sale, and if the buying group continues the business operations associated with the assets
purchased from the selling group without interruption or substantial change, then the buying group is considered a
successor employer to the selling group in connection with that asset sale.
A buying group does not fail to be a successor employer in the case of an asset sale merely because the asset
sale takes place in connection with a bankruptcy proceeding. If the buying group is a successor employer,
its group health plan has the obligation to make COBRA continuation coverage available to M&A qualied
beneciaries. The plan has this obligation beginning on the later of the following two dates and continuing as long
as the buying group continues to maintain a group health plan (within the maximum duration limits for COBRA
continuation coverage):
● The date the selling group ceases to provide any group health plan to any employee
● The date of the asset sale
In both the stock sale and asset sale contexts, the determination of whether the selling group’s cessation of
providing any group health plan to any employee is in connection with the sale is based on all of the relevant facts
and circumstances.
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COBRA Considerations in Corporate Transactions
Gabriel S. Marinaro
Special Counsel, Katten Muchin Rosenman LLP
Gabriel Marinaro serves as special counsel in the Employee Benets and Executive Compensation group. His practice focuses on
all aspects of employee benets and executive compensation. He regularly counsels publicly traded and privately held companies,
tax-exempt organizations, and governmental entities on a variety of employee benets and executive compensation matters. Gabe
regularly advises both employers and executives on a wide range of executive compensation matters, including drafting employment
agreements, equity compensation arrangements, severance agreements and bonus plans. Gabe provides guidance on nonqualied
deferred compensation plans both for for-prot companies and tax-exempt clients. Gabe regularly drafts nonqualied deferred
compensation arrangements, including supplemental executive retirement plans, and change in control agreements. Additionally, Gabe
advises employers and executives on issues under Code Sections 409A, 457(f), 457A, 162(m), 280G and 83 regarding compensation
arrangements for executives.
Gabe assists both publicly traded and privately held companies with equity compensation matters, including drafting equity incentive
plans, securities lings, award agreements, and other documentation surrounding the implementation of an equity incentive plan and
the underlying awards. Gabe also has drafted and advised on prots interests plans and unit appreciation rights plans for limited liability
companies.
