What Happens to Employee Health Benefits After an Asset Sale?

In an asset sale, the seller's group health plan belongs to the seller's company, so it often ends at or soon after closing unless someone arranges otherwise. To keep employees covered without a gap, you generally need your own plan or another arrangement ready on day one. Questions under COBRA (the federal law on continuing group health coverage) need answers from counsel before closing. This is general information for buyers taking over a team in an asset purchase. Health plans are a specialist field, so build yours with a benefits advisor and employee benefits counsel.

Why can the seller's health plan end in an asset sale?

A group health plan is sponsored by an employer, and the insurance contract behind it is with that employer. In an asset sale, the buyer, often a new company formed for the deal, buys the business's assets, and the seller's company stays behind as a separate legal entity. Employees typically end their employment with the seller and start with the buyer. Once the seller has no employees, it often has no reason to keep paying for a plan, and the insurer's contract may not allow people who now work for someone else to stay on it.

A stock or membership interest sale works differently. The company that employs everyone and sponsors the plan is the company you bought, so the plan usually keeps running after closing. The insurer may still need to be told about the change in ownership, and your benefits advisor should confirm nothing in the contract changes at closing. The exception is when the company's employees were covered under a plan sponsored by the seller's parent or another affiliate. Then the stock sale can end their coverage too, so confirm which entity sponsors the plan. For how the same split affects your property and liability policies, see stock deal vs asset deal.

How do stock and asset sales differ for health benefits?

Treat this as a map for the conversation with counsel and your benefits advisor, not as an answer for your deal.

What options keep employees covered without a gap?

Buyers commonly look at a few routes. Which ones are available depends on the insurer, the state, the size of the group and your counsel's view.

Whether you must offer coverage at all can also depend on size. Under the Affordable Care Act (ACA), employers that average 50 or more full-time employees, counting full-time equivalents, can owe a federal payment if they do not offer qualifying coverage. Ask your benefits advisor how that applies to your new company.

• A new group plan for the buyer, effective at closing. A common route. Your benefits advisor shops plans, collects an employee census and submits applications so coverage starts the day employees join your payroll. Some buyers ask the seller's insurer to write the new plan to keep networks and doctors familiar.
• Taking over the seller's plan or contract. In some deals the insurer may agree to move the plan to the buyer. This takes the insurer's consent and counsel's review of plan documents.
• A short transition on the seller's plan. Some deals try to keep employees on the seller's plan for a few weeks under a transition services agreement. This raises eligibility and regulatory questions. For example, it may create a multiple employer welfare arrangement (MEWA), a shared plan covering more than one employer that carries its own state and federal rules. Do it only with counsel and the insurer's written agreement. See transition services agreements and insurance.
• A professional employer organization (PEO). Joining a PEO can give a small team access to the PEO's benefits quickly. It also changes how payroll and workers' comp work, so compare the full package. If the seller's benefits came through a PEO, they often end when the seller leaves it; see changing payroll providers without a workers' comp gap.
• Other arrangements. Your advisor may raise options such as reimbursement arrangements for individual coverage. These have their own rules and employee notice requirements.

What COBRA questions should I raise with counsel?

Federal COBRA lets employees and family members keep group health coverage for a period after certain events, at their own cost. It generally applies to private employers that had 20 or more employees on more than half of their typical business days in the prior calendar year (part-time workers count as fractions), and many states have their own continuation laws that can reach smaller employers. A Treasury regulation sets the rules for business sales, and its general framework is:

• Stock sale: employees who keep working for the acquired company do not have a qualifying event because of the sale.
• Asset sale: the sale is generally a qualifying event for employees tied to the sold assets, even if the buyer hires them. Two exceptions: the buyer is a "successor employer" and the employee works for the buyer right after the sale, or the employee never loses coverage under the seller's plan.
• People already on COBRA, or who lose coverage in the sale: if the seller's group keeps any group health plan, that plan generally owes them COBRA. If the seller's group ends all its plans because of the sale, the duty can shift to the buyer's plan. In an asset sale, that happens when the buyer continues the business without interruption or substantial change.
• The purchase agreement can assign COBRA duties, but if the party that agreed fails to perform, the party the regulation names still has the obligation.

Questions to bring to counsel: Is the seller's group keeping any health plan after closing? Are we a successor employer? Who is on COBRA today, and who will be? Does a state continuation law apply? What does the purchase agreement say, and is there an indemnity behind it?

How do I time it to avoid a coverage gap?

1. At the letter of intent: ask for the plan summary, renewal date, monthly premiums, employer contribution, enrollment census and the list of people on COBRA.
2. Early in diligence: bring in a benefits advisor. Small group insurers usually need applications, a census and employer documents before an effective date, and some have participation and contribution rules. Ask the insurer three things. Will it waive any waiting period for employees joining at closing? Which effective dates does it allow? Some small group insurers start coverage only on the 1st of a month. What proof of employment does a newly formed buyer entity need?
3. When you set the closing date: ask the seller's insurer exactly when coverage ends. Some plans keep coverage through the end of the month in which employment ends; others end it on the day employment with the seller ends. Then set your plan's start date so there is no gap.
4. In the weeks before closing: plan employee communication, enrollment and payroll deductions with your payroll provider.
5. At closing: confirm the new plan is approved and in force, not just applied for, and that the first premium is paid.
6. After closing: handle COBRA notices as counsel directs and keep records. Deductibles and out-of-pocket totals usually reset on a new plan, so ask whether the insurer will credit amounts already met under the seller's plan.

A hypothetical example. A buyer plans to close an asset purchase of a 25-person services firm on the 15th of a month, with its new group plan starting on the 1st of the next month. Two weeks before closing, the benefits advisor asks the seller's insurer how coverage ends and learns that this plan ends coverage on the day employment with the seller ends, not at month end. Left alone, employees would have had no coverage from the 16th to the end of the month. The buyer moves closing to the last day of the month, so the old plan's end and the new plan's start line up. Plans differ, which is why the end date is a question for the seller's insurer, not an assumption. These dates are illustrative only.

What about dental, life, disability and retirement plans?

The same logic applies to every benefit the seller sponsored. Group dental, vision, life and disability plans are contracts with the seller's company, and each needs a replacement or transfer. Group life and disability policies sometimes give employees conversion or portability rights when coverage ends, and those rights often have short deadlines, so ask the seller's insurer for the notices. A retirement plan, such as a 401(k), raises separate questions about whether the plan is terminated, merged or continued, and who handles distributions and rollovers. That belongs with Employee Retirement Income Security Act (ERISA) counsel and the plan's administrator. Ask your benefits advisor whether any plan you will sponsor, typically a retirement plan, needs an ERISA fidelity bond. That bond protects the plan against theft by people who handle its money. It is different from fiduciary liability insurance.

How do benefit changes connect to my business insurance?

Benefit changes are one of the moments when employees feel the ownership change most, and that can lead to claims. Cuts, gaps or confusion around enrollment can become part of an employment claim, which is why ownership changes trigger employee claims recommends reviewing employment practices liability insurance (EPLI) at closing. Once your company sponsors a plan, you and the people who run it also take on duties as plan fiduciaries. Fiduciary liability insurance is a separate commercial policy that can respond to claims that a plan was mismanaged, subject to its terms; ask about it when you review employment practices liability and management coverage.

Morrow focuses on business property and casualty insurance, not health plans. Morrow can review your EPLI, fiduciary and other business policies around the transition. For the plan itself, work with a benefits advisor, and for COBRA and ERISA conclusions, your counsel. Keeping the team covered also supports retention, which key employees leaving after an acquisition covers.

Keep reading

• Why Ownership Changes Trigger Employee Claims (and How EPLI Responds)
• Transition Services Agreements and Insurance: Who Covers What
• Key Employees Leaving After an Acquisition: Insurance and Retention
• Stock Deal vs Asset Deal: Whose Insurance Responds to Old Claims?
• Changing Payroll Providers Without a Workers' Comp Gap
• All guides for new business owners

Frequently asked questions

Do employees lose their health insurance the day an asset sale closes?

Not necessarily on that day. Some plans keep coverage through the end of the month in which employment ends, and others end coverage on the day employment with the seller ends. Ask the seller's insurer for the exact end date and set your plan to start right after it.

If I hire all of the seller's employees, do they still get COBRA?

Possibly. Under the federal regulation, an asset sale is generally a COBRA qualifying event for employees tied to the sold assets even if the buyer hires them, with exceptions for successor employers and for employees who do not lose coverage. Your counsel should apply the rule to your deal.

Who handles COBRA for people already on the seller's COBRA?

If the seller's group keeps any group health plan after the sale, that plan generally stays responsible. If the seller's group ends all its plans in connection with the sale, the duty can pass to the buyer's plan in some cases. The purchase agreement can allocate it, but ask counsel how the regulation applies.

Can I keep the seller's health plan running for a few months after closing?

Sometimes, but it is not a simple extension. Employees of a different company on the seller's plan can raise eligibility and regulatory issues. Only do it with the insurer's written agreement and counsel's review.

Who should set up the new health plan for my team?

A benefits advisor, working with your benefits counsel. They can shop plans, collect the employee census and line up the start date. Morrow focuses on business insurance such as property, liability, workers' comp, EPLI and fiduciary coverage, and can review those policies around the transition.

References

• Treasury Regulation 26 CFR 54.4980B-9: Business reorganizations and employer withdrawals from multiemployer plans (via Cornell LII)
• U.S. Department of Labor, Employee Benefits Security Administration: An Employer's Guide to Group Health Continuation Coverage Under COBRA
• IRS: Employer Shared Responsibility Provisions

This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.