OLR Research Report

August 23, 2004




By: Janet L. Kaminski, Associate Legislative Attorney

You asked if a person is receiving continuing health care coverage through COBRA and his former employer is sold, does he continue COBRA coverage under the new company's plan.


The general rule is that the seller (the former employer) remains liable for existing COBRA beneficiaries, unless he ceases all health care plans.


The federal Consolidated Omnibus Budget Reconciliation Act (COBRA) amended the Employee Retirement Income Security Act of 1974 (ERISA). COBRA permits a beneficiary of an employer's group health plan to purchase coverage continuation when he might otherwise lose the benefit because of a “qualifying event,” such as employment termination. Small employers (those normally employing fewer than 20 employees) are exempt from COBRA requirements.

A COBRA beneficiary generally is eligible to continue coverage under the employer's group plan for a maximum of 18 months (or in some circumstances, 36 months). Coverage begins on the date of the qualifying event and terminates at the end of the maximum coverage period. It may terminate earlier if (1) the beneficiary does not pay premiums timely or (2) the employer stops maintaining a group health plan.

Federal regulations provide little guidance on the impact of a company sale or acquisition. According to Paul M. Hamburger, a COBRA expert, the general rule is that the seller retains liability for any pre-transaction qualifying events (i.e., existing COBRA beneficiaries). The exception is if the seller ceases all health care plans and the buyer has a plan. In this case, if the buyer is a “successor” under federal regulations, he will assume responsibility. A buyer is considered a successor if he continues the business operations associated with the purchase without interruption or substantial change and the seller ceases to provide any group health plan to any employee in connection with the sale (26 C.F.R. 54.4980B-9, Q&A-8).

The parties involved in the transaction may and often do negotiate COBRA responsibility. If they negotiate and allocate responsibility for existing and potential COBRA beneficiaries, they should document the result in the purchase agreement.

A COBRA beneficiary through an employer who is selling his company should contact the plan administrator for more information.