Q-6: In the case of an asset sale, is the sale a qualifying event with
respect to a covered employee whose employment immediately before the sale
was associated with the purchased assets, or with respect to the spouse or
dependent children of such a covered employee who are covered under a group
health plan of the selling group immediately before the sale?
A-6: (a) Yes, unless --
(1) The buying group is a successor employer under paragraph (c) of Q & A-8
of this section or Q & A-2 of section 54.4980B-2, 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 (within the meaning of paragraph (c) in Q &
A-1 of section 54.4980B-4) under a group health plan of the selling group
after the sale.
(b) Unless the conditions in paragraph (a)(1) or (2) of this Q & A-6 are
satisfied, such a covered employee experiences a termination of employment
with the selling group as a result of the asset sale, regardless of whether
the covered employee is employed by the buying group or whether the covered
employee's employment is associated with the purchased assets after the sale.
Accordingly, the covered employee, and the spouse and dependent children of
the covered employee who lose coverage under a plan of the selling group in
connection with the sale, are M&A qualified beneficiaries in connection with
the sale.
Q-7: In a business reorganization, are the buying group and the selling group
permitted to allocate by contract the responsibility to make COBRA
continuation coverage available to M&A qualified beneficiaries?
A-7: Yes. Nothing in this section prohibits a selling group and a buying
group from allocating to one or the other of the parties in a purchase
agreement the responsibility to provide the coverage required under sections
54.4980B-1 through 54.4980B-10. However, if and to the extent that the party
assigned this responsibility under the terms of the contract fails to
perform, the party who has the obligation under Q & A-8 of this section to
make COBRA continuation coverage available to M&A qualified beneficiaries
continues to have that obligation.
Q-8: Which group health plan has the obligation to make COBRA continuation
coverage available to M&A qualified beneficiaries in a business
reorganization?
A-8: (a) In the case of a business reorganization (whether a stock sale or an
asset sale), so long as the selling group maintains a group health plan after
the sale, a group health plan maintained by the selling group has the
obligation to make COBRA continuation coverage available to M&A qualified
beneficiaries with respect to that sale. This Q & A-8 prescribes rules for
cases in which the selling group ceases to provide any group health plan to
any employee in connection with the sale. Paragraph (b) of this Q & A-8
contains these rules for stock sales, and paragraph (c) of this Q & A-8
contains these rules for asset sales. Neither a stock sale nor an asset sale
has any effect on the COBRA continuation coverage requirements applicable to
any group health plan for any period before the sale.
(b)(1) 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 qualified beneficiaries with respect
to that stock sale. A group health plan of the buying group 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 (but
subject to the rules in section 54.4980B-7, relating to the duration of COBRA
continuation coverage) --
(i) The date the selling group ceases to provide any group health plan to any
employee; or
(ii) The date of the stock sale.
(2) The determination of whether the selling group's cessation of providing
any group health plan to any employee is in connection with the stock sale is
based on all of the relevant facts and circumstances. A group health plan of
the buying group does not, as a result of the stock sale, have an obligation
to make COBRA continuation coverage available to those qualified
beneficiaries of the selling group who are not M&A qualified beneficiaries
with respect to that sale.
(c)(1) 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 a successor employer to the selling group in
connection with that asset sale. If the buying group is a successor employer,
a group health plan maintained by the buying group has the obligation to make
COBRA continuation coverage available to M&A qualified beneficiaries with
respect to that asset sale. A group health plan of the buying group 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 (but
subject to the rules in section 54.4980B-7, relating to the duration of COBRA
continuation coverage) --
(i) The date the selling group ceases to provide any group health plan to any
employee; or
(ii) The date of the asset sale.
(2) The determination of whether the selling group's cessation of providing
any group health plan to any employee is in connection with the asset sale is
based on all of the relevant facts and circumstances. A group health plan of
the buying group does not, as a result of the asset sale, have an obligation
to make COBRA continuation coverage available to those qualified
beneficiaries of the selling group who are not M&A qualified beneficiaries
with respect to that sale.
(d) The rules of Q & A-1 through Q & A-7 of this section and this Q & A-8 are
illustrated by the following examples; in each example, each group health
plan is subject to COBRA:
Stock Sale Examples
Example 1. (i) Selling Group S consists of three corporations, A, B, and C.
Buying Group P consists of two corporations, D and E. P enters into a
contract to purchase all the stock of C from S effective July 1, 2002. Before
the sale of C, S maintains a single group health plan for the employees of A,
B, and C (and their families). P maintains a single group health plan for the
employees of D and E (and their families). Effective July 1, 2002, the
employees of C (and their families) become covered under P's plan. On June
30, 2002, there are 48 qualified beneficiaries receiving COBRA continuation
coverage under S's plan, 15 of whom are M&A qualified beneficiaries with
respect to the sale of C. (The other 33 qualified beneficiaries had
qualifying events in connection with a covered employee whose last employment
before the qualifying event was with either A or B.)
(ii) Under these facts, S's plan continues to have the obligation to make
COBRA continuation coverage available to the 15 M&A qualified beneficiaries
under S's plan after the sale of C to P. The employees who continue in
employment with C do not experience a qualifying event by virtue of P's
acquisition of C. If they experience a qualifying event after the sale, then
the group health plan of P has the obligation to make COBRA continuation
coverage available to them.
Example 2. (i) Selling Group S consists of three corporations, A, B, and C.
Each of A, B, and C maintains a group health plan for its employees (and
their families). Buying Group P consists of two corporations, D and E. P
enters into a contract to purchase all of the stock of C from S effective
July 1, 2002. As of June 30, 2002, there are 14 qualified beneficiaries
receiving COBRA continuation coverage under C's plan. C continues to employ
all of its employees and continues to maintain its group health plan after
being acquired by P on July 1, 2002.
(ii) Under these facts, C is an acquired organization and the 14 qualified
beneficiaries under C's plan are M&A qualified beneficiaries. A group health
plan of S (that is, either the plan maintained by A or the plan maintained by
B) has the obligation to make COBRA continuation coverage available to the 14
M&A qualified beneficiaries. S and P could negotiate to have C's plan
continue to make COBRA continuation coverage available to the 14 M&A
qualified beneficiaries. In such a case, neither A's plan nor B's plan would
make COBRA continuation coverage available to the 14 M&A qualified
beneficiaries unless C's plan failed to fulfill its contractual
responsibility to make COBRA continuation coverage available to the M&A
qualified beneficiaries. C's employees (and their spouses and dependent
children) do not experience a qualifying event in connection with P's
acquisition of C, and consequently no plan maintained by either P or S has
any obligation to make COBRA continuation coverage available to C's employees
(or their spouses or dependent children) in connection with the transfer of
stock in C from S to P.
Example 3. (i) The facts are the same as in Example 2, except that C ceases
to employ two employees on June 30, 2002, and those two employees never
become covered under P's plan.
(ii) Under these facts, the two employees experience a qualifying event on
June 30, 2002 because their termination of employment causes a loss of group
health coverage. A group health plan of S (that is, either the plan
maintained by A or the plan maintained by B) has the obligation to make COBRA
continuation coverage available to the two employees (and to any spouse or
dependent child of the two employees who loses coverage under C's plan in
connection with the termination of employment of the two employees) because
they are M&A qualified beneficiaries with respect to the sale of C.
Example 4. (i) Selling Group S consists of three corporations, A, B, and C.
Buying Group P consists of two corporations, D and E. P enters into a
contract to purchase all of the stock of C from S effective July 1, 2002.
Before the sale of C, S maintains a single group health plan for the
employees of A, B, and C (and their families). P maintains a single group
health plan for the employees of D and E (and their families). Effective July
1, 2002, the employees of C (and their families) become covered under P's
plan. On June 30, 2002, there are 25 qualified beneficiaries receiving COBRA
continuation coverage under S's plan, 20 of whom are M&A qualified
beneficiaries with respect to the sale of C. (The other five qualified
beneficiaries had qualifying events in connection with a covered employee
whose last employment before the qualifying event was with either A or B.) S
terminates its group health plan effective June 30, 2002 and begins to
liquidate the assets of A and B and to lay off the employees of A and B.
(ii) Under these facts, S ceases to provide a group health plan to any
employee in connection with the sale of C to P. Thus, beginning July 1, 2002
P's plan has the obligation to make COBRA continuation coverage available to
the 20 M&A qualified beneficiaries, but P is not obligated to make COBRA
continuation coverage available to the other 5 qualified beneficiaries with
respect to S's plan as of June 30, 2002 or to any of the employees of A or B
whose employment is terminated by S (or to any of those employees' spouses or
dependent children).