According to PwC's Deals mid-year review and outlook report, mergers and acquisitions in 2022 decreased by nearly 17%, but unemployment rates are still wildly low. With this kind of continuous activity, we thought it would be a good time to revisit the complexities of COBRA during mergers and acquisitions. 

While mergers and acquistions may be a positive economic sign, they can create complicated health insurance situations for affected employers and their insurance brokers. As companies merge or acquire one another, insurance brokers will be called upon to answer questions about how to handle COBRA. If you’re not sure how to answer these types of questions, read on. You may also want to save this article and keep it handy for future reference. However, you should know that COBRA during mergers and acquisitions is a very complex topic. This article discusses the general rules in a very simplified manner. Each client’s situation is unique and will require careful consideration.   

Important issues which are beyond the scope of this article include:

• Is the sale a stock sale or an asset sale?
• Who are the buyer and the seller? Is the buyer or seller part of a controlled group? If so, what plans are offered by other controlled group members?
• Does a Qualifying Event occur when an employee continues employment with the buyer? Hint: this depends on whether there is a stock sale or an asset sale.
• Is the acquisition taking place in a bankruptcy setting?
• Under HIPAA, what information are we allowed to disclose during the due diligence period?

Now that you appreciate the complexity involved, let’s take a closer look at the basic COBRA M&A rules.

Basic COBRA Merger and Acquisition (M&A) Rules

As you’ve probably realized, the most important thing is to remember is that during mergers and acquisitions, there are always COBRA obligations. Below are some of the basic rules:

• In COBRA terms, an “M&A Qualified Beneficiary” is a qualified beneficiary whose qualifying event occurred prior to or in connection with the sale of the business. In other words, those people already on COBRA or those entitled to COBRA because they lost their job or experienced a reduction in hours because of the sale become M&A qualified beneficiaries.

• If the selling entity maintains a group health plan after the sale, then the group health plan of the seller must provide COBRA continuation to M&A qualified beneficiaries.

• If the seller ceases to maintain any group health plan in connection with the sale of the business, then the group health plan of the buying entity must provide COBRA coverage to the M&A qualified beneficiaries. This is true in a stock sale and an asset sale if the buyer is considered a successor employer following the asset sale.

• It is also true that the parties (the buying entity or the selling entity) may contractually agree as to whom is responsible for COBRA as a result of the transaction. This might be practical when the buyer and seller are from different locations and the plans have region specific provider networks. However, if the party that is contractually obligated to provide COBRA fails to perform, then the party obligated under the rules outlined above retains their original responsibility.

There’s no doubt that mergers, acquisitions and COBRA are all complex on their own. When added together, they ascend to the apex of complexity! But as an insurance broker, you can help by providing proactive information.

If you or your clients are going through mergers or acquisitions, remember to discuss and assign COBRA obligations as part of the contract. All too often, COBRA participants are overlooked in these situations, resulting in major headaches for both entities after the transaction is finalized.