Mergers & Acquisitions - How Corporate Works with COBRA

With the recent political turnover in the Whitehouse subsequent 8 years of the Obama administration, it would be reasonable to expect companies to have concerns about the political landscape, the economy and market volatility, and policy and regulatory uncertainties. 

Despite those concerns, however, there are signs that suggest corporations and private equity investors are poised to make more deals than ever before. The number of mergers and acquisitions in 2017 were up 12% compared to 2016, according to PcW​, and they are expected to rise even more significantly in 2018.  There are numerous factors that experts point to in why they expect to see an even higher increase in merger and acquisitions in 2018. A few of those reasons include:

• Technology Acquisition - Acquiring technology or a digital strategy is expected to be the largest driving factor for mergers and acquisitions (M&A) in 2018.
• Cash Reserves – Corporate cash reserves are up for the second year in a row and the primary intent for any corporations to grow their cash reserve is for M&A deals.
• New Tools - M&A technology tools are being developed and used to make reporting and integration more efficient and dramatically reduce conflicts and costs often prevalent in M&A deals.
• Convergence - Expectations for amplified convergence in 2018 include technology and financial industries, construction and energy companies, and healthcare and life sciences, among others.
• Divestitures - Change in strategy is expected to be the top reason for companies to divest businesses in 2018.

"Considering the annual increases in the number of mergers and acquisitions, and with that trend expecting to continue, it would seem more relevant than ever to be familiar with the various liability and compliance issues that could arise regarding COBRA..."

Considering the annual increases in the number of mergers and acquisitions, and with that trend expecting to continue, it would seem more relevant than ever to be familiar with the various liability and compliance issues that could arise regarding COBRA as organizations see restructuring. In 2001 the IRS issued final regulations on the Consolidated Omnibus Reconciliation Act that offered detailed guidance on COBRA liability in M&A transactions. These regulations emphasis that as a rule both parties, buyer and seller, should address potential COBRA liabilities when negotiating the business transaction and that final COBRA obligations should be included in the final contract. If the final agreement is void of COBRA obligations the IRS regulations take precedent.

COBRA Regulations & Business Reorganization 

The COBRA regulations categorized business reorganizations into two classes, asset sales and stock sales.  A stock sale is defined as transfer of stock in a corporation that causes the corporation to become a different employer or a member of a different employer. An asset sale is defined as a transfer of substantial assets, such as a plant or division of substantially all the assets of a trade or business. In both transaction types a M&A qualified beneficiary is referred to as any employee, spouse or a dependent child who experiences a qualifying event relating to the sale, or individuals who are already receiving COBRA coverage under the selling group’s health plan at the time of the sale. If there were no COBRA obligations negotiated in the final deal, then as previously mentioned, the regulations will enforce who is liable to offer COBRA, which is as follows:

• Whether a stock or asset sale, if the seller maintains a group health plan after the sale, the seller’s group health plan has the obligation to make coverage available to M&A qualified beneficiaries with respect to the sale.
• If seller ceases to maintain a group health plan in connection with the sale and the buyer maintains the business operations associated with the purchased assets, then the regulations impose liability on the buyer to provide coverage for the M&A qualified beneficiaries after the sale.

​To learn more about COBRA regulations and their role with business reorganizations and corporate mergers and acquisitions, contact our professional team in Denver, Colorado.  

Ultimately, the COBRA issues and responsibilities associated with a buy-sell transaction can be complex and complicated. Even though the COBRA regulations are designed to ensure that employees can elect COBRA during mergers and acquisitions, the best way to avoid any liability is for there to be pointed and binding COBRA obligations outlined in the final negotiations and contract of the deal.

Have more questions about the basics of Federal COBRA? We have the answers on how COBRA works!

About the Author

Grant Ameel graduated from Michigan State University with a degree in Political Science and a Minor in Economics. He has worked for over eight  years in a Human Resources capacity, specifically specializing in Federal labor laws. Having worked for small to medium sized privately owned companies, to working for some of the world’s largest employers such as Microsoft and Compass Group, Grant is CobraHelp’s resident expert on all things COBRA, FMLA, and employer compliance.