374 / Which entity is responsible for providing COBRA continuation coverage following a business reorganization?

The parties to a business reorganization transaction generally are free to allocate responsibility for providing COBRA continuation coverage by contract even if the contract assigns the COBRA responsibility to a party other than the party to which it would be assigned under the final regulations. If the assigned party defaults on its responsibility to provide COBRA coverage and the other party would have had the responsibility under the final regulations, the responsibility will return to this other party.¹

For both sales of stock and sales of substantial assets, final regulations provide that a seller retains the obligation to provide COBRA continuation coverage to existing qualified beneficiaries provided that the seller continues to maintain a group health plan. In the event of a stock sale where a seller ceases to provide any group health plan to any employee in connection with the sale and therefore is not responsible for providing COBRA continuation coverage, final regulations provide that the buyer is responsible for providing COBRA continuation coverage to existing qualified beneficiaries. A group health plan of the buying group has this obligation beginning on the later of: (1) the date the selling group ceases to provide any group health plan to any employee; or (2) the date of the stock sale. The obligation continues as long as the buying group continues to maintain a group health plan.²

In the event of an asset sale where the seller ceases to provide any group health plan and the buyer continues the business operations associated with the assets purchased without interruption, the buyer is considered to be a successor employer to the seller. As a successor employer, the buyer is obligated to offer COBRA continuation coverage. Final regulations provide examples as to which party has the obligation to offer COBRA continuation coverage with respect to both asset sales and stock sales.³ For a discussion of the results when an employer stops contributing to a multiemployer health plan, see Q 375.

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1.     Treas. Reg. § 54.4980B-9, A-7.

2.     Treas. Reg. § 54.4980B-9, A-8(b)(1).