Mergers and Acquisitions – COBRA Continuation Coverage

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There are numerous implications for benefit plans as a result of a merger or acquisition (M&A). One question raised frequently by HR departments is, who is responsible for COBRA for the COBRA qualified beneficiaries?

In simplified terms, the COBRA M&A qualified beneficiaries consists of—

  • those qualified beneficiaries already receiving COBRA coverage before the sale under a plan of the seller as a consequence of employment associated with the assets or the entity being sold; and
  • those qualified beneficiaries who experience their qualifying event in connection with the sale.

Often during the M&A negotiations, the only due diligence done in regards to benefit plans is a quick check to make sure Forms 5500 have been filed (if applicable) and to make sure there are no outstanding lawsuits or audits. Therefore, when the purchase agreement is silent in regards to COBRA, or the agreement is not followed, one can look to the guidelines the IRS has established in the COBRA regulations as to which party is liable to provide COBRA continuation coverage in a business reorganization.

In general, unless the purchase agreement stipulates otherwise, if the selling group maintains a group health plan after the sale, then a group health plan maintained by the selling group must provide COBRA coverage to M&A qualified beneficiaries.

i.e. If the seller maintains any health coverage, even if the entity sold (or employees terminating) never participated in that particular coverage, then that health plan must be made available to M&A qualified beneficiaries

If no plan remains (e.g. the selling group ceased providing any group health plan) COBRA liability may shift to buyer if the sale is a stock sale, or it may also shift to the buyer if the sale is an asset sale and the buyer is a successor employer (which is a legal determination).

When in doubt, it is best to work with qualified counsel to ensure liability issues regarding COBRA continuation coverage in connection with a M&A are properly addressed.

Common Medicare entitlement (enrollment) COBRA mistake…are you making it too?



Medicare entitlement (i.e. eligible & enrolled) is only a COBRA qualifying event (QE) if it causes an employee to lose group health coverage (i.e. under 20 lives, or retiree plan). Otherwise, due to Medicare Secondary Payer (MSP) rules, Medicare entitlement is not a COBRA QE for the employee.

Likewise if the employee voluntarily drops group coverage because they enroll on Medicare and as a result, the dependents (e.g. spouse) then lose employer coverage, this also is not a COBRA QE for the dependents. Medicare entitlement didn’t “cause” the loss of eligibility, rather the employee deciding to drop the employer’s group coverage did.

In other words, when an employee drops their employer’s plan because they enrolled in Medicare, the spouse should not be offered COBRA coverage, but it happens all the time.

Although this is something often incorrectly administered, it is a potential MSP issue because it could be viewed as an incentive for the employee to drop the group plan in favor of Medicare (knowing the spouse will have continuation coverage).

Employees who are turning 65 may also need additional education, to allow them to make an informed decision when deciding whether to enroll on Medicare in lieu of their employer’s plan.

Don’t let it bite you!


If an employer is subject to COBRA (COBRA generally applies to all private-sector group health plans maintained by employers that have at least 20 employees on more than 50 percent of its typical business days in the previous calendar year) they must offer their employees (and enrolled dependents)  an opportunity to elect to continue the same health coverage they had on the date of the triggering event.

A health reimbursement arrangement (HRA) by definition is a “group health plan” and if the employee’s coverage consisted of the employer’s group health plan combined with an HRA plan, then the same combination must be offered under COBRA when they experience a COBRA qualifying event (e.g. termination of employment).

How do you determine the COBRA premium?

There is little guidance on the subject, but the IRS has stated the applicable premium can be calculated either on:

  • the basis of past cost, or
  • an actuarial basis

The applicable premium under an HRA may not be based on a qualified beneficiary’s reimbursement amounts available from the HRA. 

The IRS has not issued specific guidance on how to determine the applicable premium under either method. However, in my experience:

Basis of past cost: When there is history (i.e. not the first year for the HRA) the premium usually is based on past claims experience of participants and in general, it reflects the cost to the employer of administering the HRA.  It’s “blended” so it’s the same for all HRA qualified beneficiaries regardless of their account balance. For example, if the annual funding is $1,200 but employees only use $600 on average, the monthly COBRA premium is $50 (600/12) + the permitted 2% administrative fee.​

An actuarial basis: If it’s the first year the employer is offering the HRA, an actuarial method is used and an employer must make a reasonable determination as to what utilization is likely. What’s reasonable? That is a facts/circumstances determination, (e.g. how high is the deductible, is it a first dollar HRA) with the calculation best being left up to the experts (i.e. HRA Third Party Administrator (TPA), licensed actuary) and even then, there may be different logic on what utilization average is reasonable.  However for most, their TPA may be able to provide some general utilization trends based on similar plan designs as a benchmark to help make an estimate.

Example: Post-deductible HDHP compatible HRA, similar plan designs employees who participate in the HRA spend 30% of available HRA dollars. An annual $3,000 HRA contribution is provided.

  • $3,000 x 30% (.3) = $900
  • $900 ÷12 (months) = $75
  • $75 x 2% (COBRA admin fees) = $76.50

Regardless of what method used, the HRA premiums must be calculated in the same fashion as the existing COBRA rules (calculated each year, prior to the 12-month determination period and different HRA COBRA premiums may not be charged to different beneficiaries.)

There are penalties for failing to offer COBRA to HRA participants….don’t let it bite you!