Benefits due diligence in mergers and acquisitions

Employer Playbook

Health benefits rarely decide whether a deal closes, but they decide whether the first year after closing goes smoothly. A short, early review prevents the surprises: orphaned COBRA obligations, a stop-loss contract that lapses, and a plan that cannot absorb new employees on day one.

Key takeaways

• In an acquisition, who owes COBRA to affected employees is set by federal regulation and can be reassigned in the purchase agreement. Settle it in writing before closing.
• Both companies may be one employer for ACA and nondiscrimination purposes, so a combined headcount can change filing and penalty exposure.
• Stop-loss, funding and plan year dates drive the timeline for combining plans.

COBRA in a stock sale and an asset sale

Treasury regulations (26 CFR 54.4980B-9) set the default rules. In a stock sale, the sale itself is not a COBRA qualifying event for employees who keep working. In an asset sale, the sale can be a qualifying event for employees who lose coverage, unless the buyer is a successor employer that hires them. The seller’s group health plan stays responsible for COBRA for those who lose coverage in connection with the sale as long as the seller group maintains any group health plan. If the seller group ends all its group health plans in connection with the sale, the obligation shifts to the buyer’s plan, in an asset sale only when the buyer is a successor employer. The parties can allocate the cost by contract, but if the party who agreed fails, the party obligated under the regulation stays liable. Put the allocation in the agreement.

ACA and nondiscrimination after closing

For the employer mandate and the nondiscrimination rules, entities under common ownership are generally treated as one employer. A combined company may cross the 50 full-time employee line, change its filing duties and require affordability testing for new groups. Ask the seller for hours and eligibility data for the prior year, ask whether it has received any IRS letters on penalties, and plan for the combined entity’s Forms 1094-C and 1095-C.

Funding, stop-loss and plan year

• For self-funded or level-funded plans, read the stop-loss contract for change-of-ownership clauses, deductible credits and how pending claims are handled
• Confirm claims runout terms and the liability for incurred-but-not-reported claims
• Compare plan years. A short plan year for flexible spending or cafeteria plans must follow rules (generally no longer than 12 months)
• Review any retiree medical promises, grandfathered status and wellness incentives
• If two unrelated employers will share one plan, check for multiple employer welfare arrangement filing requirements
• Limit protected health information shared before closing to what the deal needs

Questions we get

Should we merge plans on day one?

Rarely. Most buyers run both plans for the rest of the plan year, align benefits at the next open enrollment, and use a transition services agreement for payroll and administration.

Who tells employees what will happen?

The buyer, early. Employees care about their doctors and deductibles more than the deal. A clear message, even one saying “no change until January,” prevents resignations.

Do we need a benefits adviser at the diligence stage?

It helps, particularly for self-funded plans where one large claim or an expiring stop-loss contract can change the economics of the deal.

Sources: 26 CFR 54.4980B-9 (COBRA in business reorganizations); 26 CFR 54.4980H-1 (employer mandate aggregation rules); general checklists from benefits compliance practitioners. This is general information and not legal advice; involve deal counsel.

Buying or selling a company? Send us your renewal and plan documents and we will turn this checklist into a diligence list for your deal.